10-Q 1 d782211d10q.htm FORM 10-Q Form 10-Q
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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2014

Commission File Number: 001-34698 (Excel Trust, Inc.)

Commission File Number: 000-54962 (Excel Trust, L.P.)

 

 

EXCEL TRUST, INC.

EXCEL TRUST, L.P.

(Exact name of registrant as specified in its charter)

 

 

Excel Trust, Inc.   Maryland   27-1493212
   

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Excel Trust, L.P.   Delaware   27-1495445
   

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Excel Centre

17140 Bernardo Center Drive, Suite 300

San Diego, California 92128

(Address of principal executive office, including zip code)

(858) 613-1800

(Registrant’s telephone number, including area code)

 

 

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.

Excel Trust, Inc.    Yes  x    No  ¨

Excel Trust, L.P.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Excel Trust, Inc.    Yes  x    No  ¨

Excel Trust, L.P.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Excel Trust, Inc.:

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Excel Trust, L.P.:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Excel Trust, Inc.    Yes  ¨    No  x

Excel Trust, L.P.    Yes  ¨    No  x

Number of shares of Excel Trust, Inc. common stock outstanding as of November 5, 2014, $0.01 par value per share: 61,116,408 shares

 

 

 


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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended September 30, 2014 of Excel Trust, Inc., a Maryland corporation, and Excel Trust, L.P., a Delaware limited partnership of which Excel Trust, Inc. is the parent company and general partner. Unless stated otherwise or the context otherwise requires, all references in this report to “we,” “our,” “us” or “the Company” refer to Excel Trust, Inc., together with its controlled and consolidated subsidiaries, including Excel Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Excel Trust, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.

Excel Trust, Inc. is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of September 30, 2014, Excel Trust, Inc. owned an approximate 98.3% partnership interest in the Operating Partnership. The remaining 1.7% partnership interests are owned by non-affiliated investors and certain of our directors and executive officers. As the sole general partner of the Operating Partnership, Excel Trust, Inc. exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.

There are a few differences between Excel Trust, Inc. and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between Excel Trust, Inc. and the Operating Partnership in the context of how Excel Trust, Inc. and the Operating Partnership operate as an interrelated, consolidated company. Excel Trust, Inc. is a REIT, whose only material asset is the partnership interests it holds in the Operating Partnership. As a result, Excel Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by Excel Trust, Inc., which it is required to contribute to the Operating Partnership in exchange for operating partnership units (“OP units”), the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of OP units.

Non-controlling interests and stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Excel Trust, Inc. and those of Excel Trust, L.P. The partnership interests in the Operating Partnership that are not owned by Excel Trust, Inc. are accounted for as limited partners’ capital in the Operating Partnership’s financial statements and as non-controlling interests in Excel Trust, Inc.’s financial statements. The non-controlling interests in Excel Trust, L.P.’s financial statements include the interests of its joint venture partner AB Dothan, LLC. The non-controlling interests in Excel Trust, Inc.’s financial statements include the same non-controlling interests as Excel Trust, L.P., as well as the owners of limited partnership interests in the Operating Partnership, not including Excel Trust, Inc. The differences between stockholders’ equity, partners’ capital and non-controlling interests result from the differences in the equity issued at the Excel Trust, Inc. and Operating Partnership levels.

We believe combining the quarterly reports on Form 10-Q of Excel Trust, Inc. and the Operating Partnership into this single report results in the following benefits:

 

   

Combined reports better reflect how management and the analyst community view the business as a single operating unit;

 

   

Combined reports enhance investors’ understanding of Excel Trust, Inc. and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

 

   

Combined reports are more efficient for Excel Trust, Inc. and the Operating Partnership and result in savings in time, effort and expense; and

 

   

Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between Excel Trust, Inc. and the Operating Partnership, this report presents the following separate sections for each of Excel Trust, Inc. and the Operating Partnership:

 

   

condensed consolidated financial statements;

 

   

the following notes to the condensed consolidated financial statements:

 

   

Equity/Partners’ Capital;

 

   

Debt; and

 

   

Earnings per Share/Unit;

 

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Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations; and

 

   

Unregistered Sales of Equity Securities and Use of Proceeds.

This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of Excel Trust, Inc. and Excel Trust, L.P. in order to establish that the Chief Executive Officer and the Chief Financial Officer of Excel Trust, Inc. have made the requisite certifications and Excel Trust, Inc. and Excel Trust, L.P. are compliant with Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

 

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EXCEL TRUST, INC.

EXCEL TRUST, L.P.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2014

TABLE OF CONTENTS

 

PART I

  Financial Information   4
Item 1.   Financial Statements of Excel Trust, Inc.   4
  Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013   4
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)   5
  Condensed Consolidated Statements of Equity for the nine months ended September 30, 2014 and 2013 (unaudited)   6
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)   8
  Financial Statements of Excel Trust, L.P.  
  Condensed Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013   9
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013 (unaudited)   10
  Condensed Consolidated Statements of Capital for the nine months ended September 30, 2014 and 2013 (unaudited)   11
  Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013 (unaudited)   12
  Notes to Condensed Consolidated Financial Statements of Excel Trust, Inc. and Excel Trust, L.P. (unaudited)   13
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations   40
Item 3.   Quantitative and Qualitative Disclosures About Market Risk   56
Item 4.   Controls and Procedures   57
PART II   Other Information   58
Item 1.   Legal Proceedings   58
Item 1A.   Risk Factors   58
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds   58
Item 3.   Defaults Upon Senior Securities   58
Item 4.   Mine Safety Disclosures   58
Item 5.   Other Information   58
Item 6.   Exhibits   59
Signatures     60

 

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PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

     September 30, 2014
(unaudited)
    December 31,
2013
 

ASSETS:

    

Property:

    

Land

   $ 409,013      $ 380,366   

Buildings

     754,860        642,356   

Site improvements

     69,137        63,242   

Tenant improvements

     62,454        54,025   

Construction in progress

     26,697        7,576   

Less accumulated depreciation

     (83,008     (61,479
  

 

 

   

 

 

 

Property, net

     1,239,153        1,086,086   

Cash and cash equivalents

     6,143        3,245   

Restricted cash

     7,707        8,147   

Tenant receivables, net

     4,404        5,117   

Lease intangibles, net

     81,796        78,345   

Deferred rent receivable

     10,824        9,226   

Other assets

     36,022        20,135   

Investment in unconsolidated entities

     8,378        8,520   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,394,427      $ 1,218,821   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 160,837      $ 251,191   

Notes payable

     56,000        179,500   

Unsecured notes

     348,725        100,000   

Accounts payable and other liabilities

     40,821        21,700   

Lease intangibles, net

     36,260        28,114   

Dividends/distributions payable

     12,918        10,932   
  

 

 

   

 

 

 

Total liabilities(2)

     655,561        591,437   

Commitments and contingencies

    

Equity:

    

Stockholders’ equity

    

Preferred stock, 50,000,000 shares authorized

    

7.0% Series A cumulative convertible perpetual preferred stock, $50,000 liquidation preference ($25.00 per share), 1,330,975 and 2,000,000 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     31,746        47,703   

8.125% Series B cumulative redeemable preferred stock, $92,000 liquidation preference ($25.00 per share), 3,680,000 shares issued and outstanding at September 30, 2014 and December 31, 2013

     88,720        88,720   

Common stock, $.01 par value, 200,000,000 shares authorized; 61,116,408 and 48,381,365 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     610        482   

Additional paid-in capital

     606,040        478,541   

Retained Earnings

     —         —    

Accumulated other comprehensive loss

     (22     —    
  

 

 

   

 

 

 

Total stockholders’ equity

     727,094        615,446   

Non-controlling interests

     11,772        11,938   
  

 

 

   

 

 

 

Total equity

     738,866        627,384   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,394,427      $ 1,218,821   
  

 

 

   

 

 

 

  

 

(1) 

Excel Trust, Inc.’s consolidated total assets at September 30, 2014 and December 31, 2013 include $15,146 and $15,470, respectively, of assets (primarily real estate assets) of a variable interest entity (“VIE”) that can only be used to settle the liabilities of that VIE.

 

(2) 

Excel Trust, Inc.’s consolidated total liabilities at September 30, 2014 and December 31, 2013 include $232 and $220 of accounts payable and other liabilities of a VIE, respectively, that do not have recourse to Excel Trust, Inc.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Revenues:

    

Rental revenue

   $ 24,750      $ 23,556      $ 74,836      $ 67,685   

Tenant recoveries

     5,057        5,022        15,168        14,099   

Other income

     427        353        1,457        954   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     30,234        28,931        91,461        82,738   

Expenses:

    

Maintenance and repairs

     2,030        1,821        6,439        5,239   

Real estate taxes

     3,148        3,354        9,443        9,312   

Management fees

     496        698        1,533        1,331   

Other operating expenses

     1,632        1,845        4,978        4,707   

Change in fair value of contingent consideration

     —         (10 )     —         (1,568 )

General and administrative

     4,289        3,399        12,263        10,536   

Depreciation and amortization

     11,212        11,637        34,419        34,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,807        22,744        69,075        64,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,427        6,187        22,386        18,568   

Interest expense

     (6,387 )     (4,728 )     (17,357 )     (13,751 )

Interest income

     103        49        206        146   

Income (loss) from equity in unconsolidated entities

     75        12        240        (13 )

Changes in fair value of financial instruments and gain on OP unit redemption

     —         —         —         230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,218        1,520        5,475        5,180   

Income from discontinued operations before gain on sale of real estate assets

     —         345        —         481   

Gain on sale of real estate assets

     —         11,974        —         11,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —         12,319        —         12,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,218        13,839        5,475        17,635   

Net income attributable to non-controlling interests

     (70 )     (356 )     (227 )     (489 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

     1,148        13,483        5,248        17,146   

Preferred stock dividends

     (2,501 )     (2,744 )     (7,989 )     (8,232 )

Cost of redemption of preferred stock

     (1,477 )     —         (1,477 )     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ (2,830 )   $ 10,739      $ (4,218 )   $ 8,914   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations per share attributable to the common stockholders - basic and diluted

     (0.05 )     (0.03 )     (0.09 )     (0.08 )

Net (loss) income per share attributable to the common stockholders - basic and diluted

   $ (0.05 )   $ 0.22      $ (0.09 )   $ 0.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     60,389        47,497        52,293        46,674   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.175      $ 0.17      $ 0.525      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,218      $ 13,839      $ 5,475      $ 17,635   

Other comprehensive (loss) income:

    

Change in unrealized loss on interest rate swaps

     —         163        —         476   

Change in unrealized loss on investment in equity securities

     (22 )     —         (22 )     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,196        14,002        5,453        18,111   

Comprehensive income attributable to non-controlling interests

     (70 )     (359 )     (227 )     (500 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 1,126      $ 13,643      $ 5,226      $ 17,611   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)

 

    Series A
Preferred
Stock
    Series B
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2014

  $ 47,703      $ 88,720        48,381,365      $ 482      $ 460,431      $ 18,110      $ —       $ 615,446      $ 11,938      $ 627,384   

Reclassification of dividends, see Note 2

    —         —         —         —         18,110        (18,110     —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014, as corrected

    47,703       88,720        48,381,365        482        478,541        —         —         615,446        11,938        627,384   

Net proceeds from sale of common stock

    —          —          12,650,000        127        160,427        —          —          160,554        —          160,554   

Repurchase of common stock

    —          —          (105,775     (1     (1,406     —          —          (1,407     —          (1,407

Repurchase of preferred stock

    (15,957     —          —          —          (1,477     —          —          (17,434     —          (17,434

Forfeiture of restricted common stock awards

    —          —          (466,864     (4     4        —          —          —          —          —     

Issuance of restricted common stock awards

    —          —          657,682        6        (6     —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          3,117        —          —          3,117        —          3,117   

Common stock dividends

    —          —          —          —          (29,869     —          —          (29,869     —          (29,869

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (943     (943

Net income

    —          —          —          —          —          5,248        —          5,248        227        5,475   

Preferred stock dividends

    —          —          —          —          (2,741     (5,248     —          (7,989     —          (7,989

Change in unrealized loss on investment in equity securities

    —          —          —          —          —          —          (22     (22     —          (22

Adjustment for non-controlling interests

    —          —          —          —          (550     —          —          (550     550        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ 31,746      $ 88,720        61,116,408      $ 610      $ 606,040      $  —        $ (22 )   $ 727,094      $ 11,772      $ 738,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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    Series A
Preferred
Stock
    Series B
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Cumulative
(Deficit)
Retained
Earnings
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2013

  $ 47,703      $ 88,720        44,905,683      $ 448      $ 459,151      $ (1,414   $ (572   $ 594,036      $ 14,736      $ 608,772   

Net proceeds from sale of common stock

    —          —          3,211,928        32        40,695        —          —          40,727        —          40,727   

Issuance of restricted common stock awards

    —          —          33,088        —          —          —          —          —          —          —     

Redemption of OP units for common stock and cash

    —          —          22,074        —          279        —          —          279        (235     44   

Noncash amortization of share-based compensation

    —          —          —          —          1,713        —          —          1,713        —          1,713   

Common stock dividends, as corrected (see Note 2)

    —          —          —          —          (16,849     (7,500     —          (24,349     —          (24,349

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (990     (990

Net income

    —          —          —          —          —          17,146        —          17,146        489        17,635   

Preferred stock dividends, as corrected (see Note 2)

    —          —          —          —          —          (8,232     —          (8,232     —          (8,232

Change in unrealized loss on interest rate swaps

    —          —          —          —          —          —          465        465        11        476   

Adjustment for non-controlling interests

    —          —          —          —          (223     —          —          (223     223        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013, as corrected (see Note 2)

  $ 47,703      $ 88,720        48,172,773      $ 480      $ 484,766      $  —        $ (107   $ 621,562      $ 14,234      $ 635,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Nine Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2013
 

Cash flows from operating activities:

    

Net income

   $ 5,475      $ 17,635   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     34,419        35,306   

Changes in fair value of financial instruments and gain on OP unit redemption

     —          (230

Change in fair value of contingent consideration

     —          (1,568

Gain on sale of real estate assets

     —          (11,974

(Income) loss from equity in unconsolidated entities

     (240     13   

Deferred rent receivable

     (1,632     (2,913

Amortization of above- and below-market leases

     (136     205   

Amortization of deferred balances

     1,259        1,127   

Bad debt expense

     469        959   

Share-based compensation expense

     3,117        1,713   

Distributions from unconsolidated entities

     417        518   

Change in assets and liabilities (net of the effect of acquisitions):

    

Tenant and other receivables

     243        1,295   

Other assets

     (701     (1,289

Accounts payable and other liabilities

     9,014        2,198   
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,704        42,995   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property (including deposits for potential acquisition)

     (153,440     (121,175

Development of property and property improvements

     (22,598     (16,215

Investments in unconsolidated entities

     —          (106

Return of capital from unconsolidated entities

     —          139   

Disposition of real estate assets

     —          4,355   

Purchase of marketable securities

     (10,455     —     

Receipt of master lease payments

     507        384   

Capitalized leasing costs

     (835     (1,538

Restricted cash

     440        (3,439
  

 

 

   

 

 

 

Net cash used in investing activities

     (186,381     (137,595
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     160,908        41,098   

Common stock offering costs

     (316     —     

Repurchase of common stock

     (1,407     —     

Repurchase of preferred stock

     (17,434     —     

Payments on mortgages payable

     (90,145     (33,771

Payments on notes payable

     (222,000     (40,500

Proceeds from notes payable

     98,500        159,000   

Proceeds from unsecured notes

     248,693        —     

Distribution to non-controlling interests

     (943     (971

Preferred stock dividends

     (8,231     (8,232

Common stock dividends

     (27,641     (23,457

Deferred financing costs

     (2,409     (680
  

 

 

   

 

 

 

Net cash provided by financing activities

     137,575        92,487   
  

 

 

   

 

 

 

Net increase (decrease)

     2,898        (2,113

Cash and cash equivalents, beginning of period

     3,245        5,596   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 6,143      $ 3,483   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $459 and $50

   $ 8,309      $ 12,114   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Assumption of net mortgage debt in connection with property acquisitions

   $  —        $ 8,204   
  

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 126     $ 140   
  

 

 

   

 

 

 

Dispositions of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $10,854)

   $  —        $ 31,104   
  

 

 

   

 

 

 

Common stock dividends payable

   $ 10,695      $ 8,189   
  

 

 

   

 

 

 

Preferred stock dividends payable

   $ 2,045      $ 2,287   
  

 

 

   

 

 

 

OP unit distributions payable

   $ 178      $ 208   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 10,455      $ 3,356   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $  —        $ 476   
  

 

 

   

 

 

 

Change in unrealized loss on investment in equity securities

   $ 22     $  —     
  

 

 

   

 

 

 

OP unit redemptions (common stock)

   $  —        $ 279   
  

 

 

   

 

 

 

Reclassification of offering costs

   $  —        $ 364   
  

 

 

   

 

 

 

Accrued offering costs

   $ 38     $  —     
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $  —        $ 3,226   
  

 

 

   

 

 

 

Conversion of note receivable to property improvements

   $ 910     $  —     
  

 

 

   

 

 

 

Accrued profit participation interests

   $ 1,654      $ —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8


Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per unit amounts)

 

     September 30, 2014
(unaudited)
    December 31,
2013
 

ASSETS:

    

Property:

    

Land

   $ 409,013      $ 380,366   

Buildings

     754,860        642,356   

Site improvements

     69,137        63,242   

Tenant improvements

     62,454        54,025   

Construction in progress

     26,697        7,576   

Less accumulated depreciation

     (83,008     (61,479
  

 

 

   

 

 

 

Property, net

     1,239,153        1,086,086   

Cash and cash equivalents

     6,143        3,245   

Restricted cash

     7,707        8,147   

Tenant receivables, net

     4,404        5,117   

Lease intangibles, net

     81,796        78,345   

Deferred rent receivable

     10,824        9,226   

Other assets

     36,022        20,135   

Investment in unconsolidated entities

     8,378        8,520   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,394,427      $ 1,218,821   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL:

    

Liabilities:

    

Mortgages payable, net

   $ 160,837      $ 251,191   

Notes payable

     56,000        179,500   

Unsecured notes

     348,725        100,000   

Accounts payable and other liabilities

     40,821        21,700   

Lease intangibles, net

     36,260        28,114   

Distributions payable

     12,918        10,932   
  

 

 

   

 

 

 

Total liabilities(2)

     655,561        591,437   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

Preferred OP units, 50,000,000 units authorized

    

7.0% Series A cumulative convertible perpetual preferred units, $50,000 liquidation preference ($25.00 per unit), 1,330,975 and 2,000,000 units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     31,746        47,703   

8.125% Series B cumulative redeemable preferred units, $92,000 liquidation preference ($25.00 per unit), 3,680,000 units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     88,720        88,720   

Limited partners’ capital, 1,019,523 common OP units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     1,585        2,167   

General partner’s capital, 61,116,408 and 48,381,365 common OP units issued and outstanding at September 30, 2014 and December 31, 2013, respectively

     615,311        487,133   

Accumulated other comprehensive loss

     (22     —    
  

 

 

   

 

 

 

Total partners’ capital

     737,340        625,723   

Non-controlling interests

     1,526        1,661   
  

 

 

   

 

 

 

Total capital

     738,866        627,384   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 1,394,427      $ 1,218,821   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, L.P.’s consolidated total assets at September 30, 2014 and December 31, 2013 include $15,146 and $15,470, respectively, of assets (primarily real estate assets) of a VIE that can only be used to settle the liabilities of that VIE.

(2) 

Excel Trust, L.P.’s consolidated total liabilities at September 30, 2014 and December 31, 2013 include $232 and $220 of accounts payable and other liabilities of a VIE, respectively, that do not have recourse to Excel Trust, L.P.

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

9


Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit data)

(Unaudited)

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Revenues:

    

Rental revenue

   $ 24,750      $ 23,556      $ 74,836      $ 67,685   

Tenant recoveries

     5,057        5,022        15,168        14,099   

Other income

     427        353        1,457        954   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     30,234        28,931        91,461        82,738   

Expenses:

    

Maintenance and repairs

     2,030        1,821        6,439        5,239   

Real estate taxes

     3,148        3,354        9,443        9,312   

Management fees

     496        698        1,533        1,331   

Other operating expenses

     1,632        1,845        4,978        4,707   

Change in fair value of contingent consideration

     —          (10 )     —          (1,568 )

General and administrative

     4,289        3,399        12,263        10,536   

Depreciation and amortization

     11,212        11,637        34,419        34,613   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,807        22,744        69,075        64,170   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,427        6,187        22,386        18,568   

Interest expense

     (6,387 )     (4,728 )     (17,357 )     (13,751 )

Interest income

     103        49        206        146   

Income (loss) from equity in unconsolidated entities

     75        12        240        (13 )

Changes in fair value of financial instruments and gain on OP unit redemption

     —          —          —          230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,218        1,520        5,475        5,180   

Income from discontinued operations before gain on sale of real estate assets

     —          345        —          481   

Gain on sale of real estate assets

     —          11,974        —          11,974   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —          12,319        —          12,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,218        13,839        5,475        17,635   

Net income attributable to non-controlling interests

     (91 )     (77 )     (274 )     (249 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

     1,127        13,762        5,201        17,386   

Preferred operating unit distributions

     (2,501 )     (2,744 )     (7,989 )     (8,232 )

Cost of redemption of preferred units

     (1,477 )     —          (1,477 )     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the unitholders

   $ (2,851 )   $ 11,018      $ (4,265 )   $ 9,154   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations per unit attributable to the unitholders - basic and diluted

     (0.05 )     (0.03 )     (0.09 )     (0.08 )

Net (loss) income per unit attributable to the unitholders - basic and diluted

   $ (0.05 )   $ 0.22      $ (0.09 )   $ 0.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding - basic and diluted

     61,409        48,722        53,494        47,905   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common OP unit

   $ 0.175      $ 0.17      $ 0.525      $ 0.51   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,218      $ 13,839      $ 5,475      $ 17,635   

Other comprehensive (loss) income:

    

Change in unrealized loss on interest rate swaps

     —          163        —          476   

Change in unrealized loss on investment in equity securities

     (22 )     —          (22 )     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,196        14,002        5,453        18,111   

Comprehensive income attributable to non-controlling interests

     (91 )     (77 )     (274 )     (249 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, L.P.

   $ 1,105      $ 13,925      $ 5,179      $ 17,862   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

10


Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL

(Dollars in thousands)

(Unaudited)

 

    Preferred
Operating
Partnership
Units
    Limited Partners’
Capital
    General Partner’s
Capital
                         
    Series A     Series B     Common
OP
Units
    Amount     Common
OP
Units
    Amount     Accumulated
other
Comprehensive
Loss
    Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance at January 1, 2014

  $ 47,703      $ 88,720        1,019,523      $ 2,166        48,381,365      $ 487,134      $  —        $ 625,723      $ 1,661      $ 627,384   

Net proceeds from issuance of common OP units

    —          —          —          —          12,650,000        160,554        —          160,554        —          160,554   

Repurchase of common OP units

    —          —          —          —          (105,775     (1,407     —          (1,407     —          (1,407

Repurchase of preferred OP units

    (15,957     —          —          —          —          (1,477     —          (17,434     —          (17,434

Forfeiture of restricted common OP unit awards

    —          —          —          —          (466,864     —          —          —          —          —     

Issuance of restricted common OP unit awards

    —          —          —          —          657,682        —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          —          3,117        —          3,117        —          3,117   

OP unit distributions

    (2,382     (5,607     —          (534     —          (29,869     —          (38,392     (409     (38,801

Net income (loss)

    2,382        5,607        —          (47     —          (2,741     —          5,201        274        5,475   

Change in unrealized loss on investment in equity securities

    —          —          —          —          —          —          (22     (22     —          (22
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2014

  $ 31,746      $ 88,720        1,019,523      $ 1,585        61,116,408      $ 615,311      $ (22   $ 737,340      $ 1,526      $ 738,866   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Preferred
Operating
Partnership
Units
    Limited Partners’
Capital
    General Partner’s
Capital
                         
    Series A     Series B     Common
OP
Units
    Amount     Common
OP
Units
    Amount     Accumulated
other
Comprehensive
Loss
    Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance at January 1, 2013

  $ 47,703      $ 88,720        1,245,019      $ 5,512        44,905,683      $ 465,612      $ (620   $ 606,927      $ 1,845      $ 608,772   

Net proceeds from sale of common OP units

    —          —          —          —          3,211,928        40,727        —          40,727        —          40,727   

Issuance of restricted common OP unit awards

    —          —          —          —          33,088        —          —          —          —          —     

Redemption of common OP units

    —          —          (19,904     (235     22,074        279        —          44        —          44   

Noncash amortization of share-based compensation

    —          —          —          —          —          1,713        —          1,713        —          1,713   

OP unit distributions

    (2,625     (5,607     —          (624     —          (24,349     —          (33,205     (366     (33,571

Net income (loss)

    2,625        5,607        —          240        —          8,914        —          17,386        249        17,635   

Change in unrealized loss on interest rate swaps

    —          —          —          —          —          —          476        476        —          476   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

  $ 47,703      $ 88,720        1,225,115      $ 4,893        48,172,773      $ 492,896      $ (144   $ 634,068      $ 1,728      $ 635,796   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

11


Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Nine Months Ended
September 30, 2014
    Nine Months Ended
September 30, 2013
 

Cash flows from operating activities:

    

Net income

   $ 5,475      $ 17,635   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     34,419        35,306   

Changes in fair value of financial instruments and gain on OP unit redemption

     —         (230

Change in fair value of contingent consideration

     —         (1,568

Gain on sale of real estate assets

     —         (11,974

(Income) loss from equity in unconsolidated entities

     (240     13   

Deferred rent receivable

     (1,632     (2,913

Amortization of above- and below-market leases

     (136     205   

Amortization of deferred balances

     1,259        1,127   

Bad debt expense

     469        959   

Share-based compensation expense

     3,117        1,713   

Distributions from unconsolidated entities

     417        518   

Change in assets and liabilities (net of the effect of acquisitions):

    

Tenant and other receivables

     243        1,295   

Other assets

     (701     (1,289

Accounts payable and other liabilities

     9,014        2,198   
  

 

 

   

 

 

 

Net cash provided by operating activities

     51,704        42,995   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property (including deposits for potential acquisition)

     (153,440     (121,175

Development of property and property improvements

     (22,598     (16,215

Investments in unconsolidated entities

     —          (106

Return of capital from unconsolidated entities

     —          139   

Disposition of real estate assets

     —          4,355   

Purchase of equity securities

     (10,455     —     

Receipt of master lease payments

     507        384   

Capitalized leasing costs

     (835     (1,538

Restricted cash

     440        (3,439
  

 

 

   

 

 

 

Net cash used in investing activities

     (186,381     (137,595
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common OP units

     160,592        41,098   

Repurchase of common OP units

     (1,407     —     

Repurchase of preferred OP units

     (17,434     —     

Payments on mortgages payable

     (90,145     (33,771

Payments on notes payable

     (222,000     (40,500

Proceeds from notes payable

     98,500        159,000   

Proceeds from unsecured notes

     248,693        —     

Distribution to non-controlling interests

     (409     (366

Preferred OP unit distributions

     (8,231     (8,232

Common OP unit distributions

     (28,175     (24,062

Deferred financing costs

     (2,409     (680
  

 

 

   

 

 

 

Net cash provided by financing activities

     137,575        92,487   
  

 

 

   

 

 

 

Net increase (decrease)

     2,898        (2,113

Cash and cash equivalents, beginning of period

     3,245        5,596   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 6,143      $ 3,483   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $459 and $50

   $ 8,309      $ 12,114   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Assumption of net mortgage debt in connection with property acquisitions

   $  —        $ 8,204   
  

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 126     $ 140   
  

 

 

   

 

 

 

Disposition of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $10,845)

   $  —        $ 31,104   
  

 

 

   

 

 

 

Common OP unit distributions payable

   $ 10,873      $ 8,397   
  

 

 

   

 

 

 

Preferred OP unit distributions payable

   $ 2,045      $ 2,287   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 10,455      $ 3,356   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $  —        $ 476   
  

 

 

   

 

 

 

Change in unrealized loss on investment in equity securities

   $ 22      $  —     
  

 

 

   

 

 

 

OP unit redemptions

   $  —        $ 279   
  

 

 

   

 

 

 

Reclassification of offering costs

   $  —        $ 364   
  

 

 

   

 

 

 

Accrued offering costs

   $ 38      $  —     
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $  —        $ 3,226   
  

 

 

   

 

 

 

Conversion of note receivable to property improvements

   $ 910      $  —     
  

 

 

   

 

 

 

Accrued profit participation interests

   $ 1,654      $  —     
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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EXCEL TRUST, INC. AND EXCEL TRUST, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization:

Excel Trust, Inc., a Maryland corporation (the “Parent Company”), is a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. It conducts substantially all of its business through its subsidiary, Excel Trust, L.P., a Delaware limited partnership (the “Operating Partnership” and together with the Parent Company referred to as the “Company”). The Company seeks investment opportunities throughout the United States, but focuses on the West Coast, East Coast and Sunbelt regions. The Company generally leases anchor space to national and regional supermarket chains, big-box retailers and select national retailers that frequently offer necessity and value oriented items and generate regular consumer traffic.

The Parent Company is the sole general partner of the Operating Partnership and, as of September 30, 2014, owned a 98.3% interest in the Operating Partnership. The remaining 1.7% interest in the Operating Partnership is held by limited partners. Each partner’s percentage interest in the Operating Partnership is determined based on the number of operating partnership units (“OP units”) owned as compared to total OP units (and potentially issuable OP units, as applicable) outstanding as of each period end and is used as the basis for the allocation of net income or loss to each partner.

2. Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying condensed consolidated financial statements of the Company include all the accounts of the Company and all entities in which the Company has a controlling interest. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all the information and footnotes required by GAAP for complete financial statements and have not been audited by independent registered public accountants.

The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. Operating results for the nine months ended September 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company is required to continually evaluate its VIE relationships and consolidate investments in these entities when it is determined to be the primary beneficiary of their operations. A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

Cash and Cash Equivalents:

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value, due to their short term maturities.

Restricted Cash:

Restricted cash is comprised of impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements.

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities are deferred rents in the amount of $3.1 million and $3.5 million at September 30, 2014 and December 31, 2013, respectively.

Revenue Recognition:

The Company commences revenue recognition on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the

 

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lease commencement date. In determining what constitutes the leased asset, the Company evaluates whether the Company or the lessee is the owner, for accounting purposes, of the tenant improvements. If the Company is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the Company concludes that it is not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any tenant improvement allowances funded under the lease are treated as lease incentives, which reduce revenue recognized on a straight-line basis over the remaining non-cancelable term of the respective lease. In these circumstances, the Company begins revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct improvements. The determination of who is the owner, for accounting purposes, of the tenant improvements is highly subjective and determines the nature of the leased asset and when revenue recognition under a lease begins. The Company considers a number of different factors to evaluate whether it or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:

 

   

whether the lease stipulates how and on what a tenant improvement allowance may be spent;

 

   

whether the tenant or landlord retains legal title to the improvements;

 

   

the uniqueness of the improvements;

 

   

the expected economic life of the tenant improvements relative to the length of the lease;

 

   

the responsible party for construction cost overruns; and

 

   

who constructs or directs the construction of the improvements.

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of cash rent due in a year and the amount recorded as rental income is referred to as the “straight-line rent adjustment.” Rental income (net of write-offs for uncollectible amounts) increased by $479,000 and $937,000 in the three months ended September 30, 2014 and 2013, respectively, and by $1.6 million and $2.9 million in the nine months ended September 30, 2014 and 2013, respectively, due to the straight-line rent adjustment. Percentage rent is recognized after tenant sales have exceeded defined thresholds (if applicable) and was $182,000 and $171,000 in the three months ended September 30, 2014 and 2013, respectively, and $579,000 and $741,000 in the nine months ended September 30, 2014 and 2013, respectively.

Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other operating expenses are recognized as revenues in the period the applicable expenses are incurred or as specified in the leases. Other tenants pay a fixed rate and these tenant recoveries are recognized as revenue on a straight-line basis over the term of the related leases.

Property:

Costs incurred in connection with the development or construction of properties and improvements are capitalized. Capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and related costs and other direct costs incurred during the period of development. The Company capitalizes costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but no later than one year from cessation of major construction activity. The Company ceases capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalizes only those costs associated with any remaining portion under construction.

The Company has agreed to provide the developer/manager for development projects at the Plaza at Rockwall, Southlake Park Village, Cedar Square, and Chimney Rock properties with a profit participation interest based on the cash flows of the completed project after the Company has received distributions returning all of its capital investment plus a required rate of return (ranging from an 8% to 12% annualized rate of return). The Company initially records the profit participation interests at the estimated fair value of the obligation at the time of execution of the related agreement. The obligation is adjusted at each reporting date to the greater of the initial fair value at execution, or the amount that would be owed if the obligation were to be settled as of the reporting date. The Company has recorded $3.6 million for the costs related to the grants of these profit participation interests within construction in progress for the respective projects under development. During the three months ended September 30, 2014, the profit participation interest related to the development phase of the Plaza at Rockwall property that was completed during 2014, was settled with the developer for an agreed-upon settlement value of approximately $2.0 million. The settlement was based on 35% of the excess of the estimated fair value of the related real estate after deducting all of the development and operating costs, the investment capital and the required rate of return due to the Company as of the date of settlement. The settlement was comprised of a cash payment of approximately $1.1 million and the conversion of an outstanding note receivable owed by the developer in the amount of $910,000 (including accrued interest of $160,000 – see Note 7 for further discussion).

Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which include HVAC equipment, roofs, parking lots, etc., are capitalized and depreciated over their estimated useful lives. Gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.

 

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Property is recorded at cost and is depreciated using the straight-line method over the estimated lives of the assets as follows:

 

  Building and improvements    15 to 40 years   
  Tenant improvements    Shorter of the useful lives or the terms of the related leases   

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed:

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This assessment considers expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants’ ability to perform their duties and pay rent under the terms of the leases. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense, expected to result from the long-lived asset’s use and eventual disposition. The Company’s evaluation as to whether impairment may exist, including estimates of future anticipated cash flows, are highly subjective and could differ materially from actual results in future periods. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Although the Company’s strategy is to hold its properties over a long-term period, if the strategy changes or market conditions dictate that the sale of properties at an earlier date would be preferable, a property may be classified as held for sale and an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less cost to sell. There was no impairment recorded for the nine months ended September 30, 2014 or 2013.

Investments in Partnerships and Limited Liability Companies:

The Company evaluates its investments in limited liability companies and partnerships to determine whether any such entities may be a VIE and, if a VIE, whether the Company is the primary beneficiary. Generally, an entity is determined to be a VIE when either (1) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support provided by any parties or (2) as a group, the holders of the equity investment lack one or more of the essential characteristics of a controlling financial interest. The primary beneficiary is the entity that has both (1) the power to direct matters that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. In addition, the Company considers the form of ownership interest, voting interest, the size of the investment (including loans) and the rights of other investors to participate in policy making decisions, to replace or remove the manager and to liquidate or sell the entity. The obligation to absorb losses and the right to receive benefits when a reporting entity is affiliated with a VIE must be based on ownership, contractual and/or other pecuniary interests in that VIE.

If the foregoing conditions do not apply, the Company considers whether a general partner or managing member controls a limited partnership or limited liability company. The general partner in a limited partnership or managing member in a limited liability company is presumed to control that limited partnership or limited liability company. The presumption may be overcome if the limited partners or members have either (1) the substantive ability to dissolve the limited partnership or limited liability company or otherwise remove the general partner or managing member without cause or (2) substantive participating rights, which provide the limited partners or members with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s or limited liability company’s business and thereby preclude the general partner or managing member from exercising unilateral control over the partnership or company. If these criteria are not met and the Company is the general partner or the managing member, as applicable, the Company will consolidate the partnership or limited liability company.

Investments that are not consolidated, over which the Company exercises significant influence but does not control, are accounted for under the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for the Company’s portion of earnings or losses and for cash contributions and distributions. Under the equity method of accounting, the Company’s investment is reflected in the condensed consolidated balance sheets and its share of net income or loss is included in the condensed consolidated statements of operations and comprehensive income.

For all investments in unconsolidated entities, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a non-cash charge to earnings. The factors that the Company considers in making these assessments include, but are not limited to, severity and duration of the unrealized loss, market prices, market conditions, the occurrence of ongoing financial difficulties, available financing, new product initiatives and new collaborative agreements.

Investments in Equity Securities:

The Company, through its Operating Partnership, may hold investments in equity securities in certain publicly-traded companies. The Company does not acquire investments for trading purposes and, as a result, all of the Company’s investments in publicly-traded

 

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companies are considered “available-for-sale” and are recorded at fair value. Changes in the fair value of investments classified as available-for-sale are recorded in other comprehensive income (loss). The fair value of the Company’s equity securities in publicly-traded companies is determined based upon the closing trading price of the equity security as of the balance sheet date. The cost of investments sold is determined by the specific identification method, with net realized gains and losses included in other income. For all investments in equity securities, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a non-cash charge to earnings. The factors that the Company considers in making these assessments include, but are not limited to, severity and duration of the unrealized loss, market prices, market conditions, the occurrence of ongoing financial difficulties, available financing and new product and service initiatives.

During the three months ended September 30, 2014, the Company purchased approximately 434,000 shares of preferred stock in public companies within the real estate industry for an initial cost basis of approximately $10.4 million.

Investments in equity securities, which are included in other assets on the accompanying consolidated balance sheets, consisted of the following (in thousands):

 

     September 30,
2014
    December 31,
2013
 

Equity securities, initial cost basis

   $ 10,455      $ —    

Gross unrealized gains

     41        —    

Gross unrealized losses

     (63     —    
  

 

 

   

 

 

 

Equity securities, fair value(1)

   $ 10,433      $ —    
  

 

 

   

 

 

 

 

(1) 

Determination of fair value is classified as Level 1 in the fair value hierarchy based on the use of quoted prices in active markets (see section entitled “Fair Value of Financial Instruments” below).

Share-Based Payments:

All share-based payments to employees are recognized in earnings based on their fair value on the date of grant. Through September 30, 2014, the Company has awarded only restricted stock awards under its incentive award plan, which are based on shares of the Parent Company’s common stock. The fair value of equity awards that include only service or performance vesting conditions is determined based on the closing market price of the underlying common stock on the date of grant. The fair value of equity awards that include one or more market vesting conditions is determined based on the use of a widely accepted valuation model. The fair value of equity grants is amortized to general and administrative expense ratably over the requisite service period for awards that include only service vesting conditions and utilizing a graded vesting method (an accelerated vesting method in which the majority of compensation expense is recognized in earlier periods) for awards that include one or more market vesting conditions, adjusted for anticipated forfeitures.

Purchase Accounting:

The Company, with the assistance of independent valuation specialists as needed, records the purchase price of acquired properties as tangible and identified intangible assets and liabilities based on their respective fair values. Tangible assets (building and land) are recorded based upon the Company’s determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors considered include an estimate of carrying costs during the expected lease-up periods taking into account current market conditions and costs to execute similar leases. The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, site improvements and leasing costs are based upon current market replacement costs and other relevant market rate information. Additionally, the purchase price of the applicable property is recorded as the above- or below-market value of in-place leases, the value of in-place leases and above- or below-market value of debt assumed, as applicable.

The value recorded as the above- or below-market component of the acquired in-place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the lease over its remaining term, and (2) the Company’s estimate of the amounts that would be paid using fair market rates at the time of acquisition over the remaining term of the lease. The amounts recorded as above-market leases are included in lease intangible assets, net in the Company’s accompanying condensed consolidated balance sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired leases with each property. The amounts recorded as below-market lease values are included in lease intangible liabilities, net in the Company’s accompanying condensed consolidated balance sheets and amortized to rental income over the remaining non-cancelable lease term plus any below-market fixed price renewal options of the acquired leases with each property.

The value recorded as above- or below-market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage. The amounts recorded as above- or below-market debt are included in mortgage payables, net in the Company’s accompanying condensed consolidated balance sheets and are amortized to interest expense over the remaining term of the assumed mortgage.

 

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Tenant receivables:

Tenant receivables and deferred rent are carried net of the allowances for uncollectible current tenant receivables and deferred rent. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company maintains an allowance for deferred rent receivable arising from the straight-lining of rents. Such allowances are charged to bad debt expense which is included in other operating expenses on the accompanying condensed consolidated statement of operations. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. At September 30, 2014 and December 31, 2013, the Company had $484,000 and $895,000, respectively, in allowances for uncollectible accounts (including straight-line deferred rent receivables) as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the three months ended September 30, 2014 and 2013, $97,000 and $517,000, respectively, of receivables were charged to bad debt expense. During the nine months ended September 30, 2014 and 2013, $469,000 and $959,000, respectively, of receivables were charged to bad debt expense.

Non-controlling Interests:

Non-controlling interests on the condensed consolidated balance sheets of the Parent Company relate to the OP units that are not owned by the Parent Company and the portion of consolidated joint ventures not owned by the Parent Company. The OP units not held by the Parent Company may be redeemed by the Parent Company at the holder’s option for cash. The Parent Company, at its option, may satisfy the redemption obligation with common stock on a one-for-one basis, which has been further evaluated to determine that permanent equity classification on the balance sheets is appropriate.

During the nine months ended September 30, 2013, a total of 19,904 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Company for redemption, resulting in the issuance of 22,074 shares of the Parent Company’s common stock. The OP units were redeemed for common stock on a one-for-one basis, with additional common stock provided as a result of the accompanying additional redemption obligation that guaranteed consideration equal to $14.00 per OP unit on the date of redemption. The remaining additional redemption obligation of $246,000 associated with the 2011 Edwards Theatres acquisition expired on March 11, 2013 and was reclassified and recognized as a gain in changes in fair value of financial instruments and gain on OP unit redemption (net of a loss of $16,000 on the OP unit redemption) on the accompanying condensed consolidated financial statements. The remaining outstanding OP units related to the 2011 Edwards Theatres acquisition continue to be redeemable by the OP unitholders for cash or common stock on a one-for-one basis (the determination of redemption for cash or common stock is at the Parent Company’s option).

Non-controlling interests on the condensed consolidated balance sheets of the Operating Partnership represent the portion of equity that the Operating Partnership does not own in those entities it consolidates.

Concentration of Risk:

The Company maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At various times during the periods, the Company had deposits in excess of the FDIC insurance limit.

In the three and nine months ended September 30, 2014 and 2013, no tenant accounted for more than 10% of revenues.

At September 30, 2014, the Company’s gross real estate assets in the states of California, Arizona, Utah, Texas and Virginia represented approximately 21.5%, 15.0%, 13.7%, 13.4% and 12.9%, respectively, of the Company’s total assets. At December 31, 2013, the Company’s gross real estate assets in the states of California, Arizona, Virginia and Texas represented approximately 23.9%, 17.6%, 14.7% and 13.7%, respectively, of the Company’s total assets. For the nine months ended September 30, 2014, the Company’s revenues derived from properties located in the states of California, Arizona, Virginia and Texas represented approximately 23.0%, 18.6%, 12.1% and 11.4%, respectively, of the Company’s total revenues. For the nine months ended September 30, 2013, the Company’s revenues derived from properties located in the states of California, Arizona, Virginia and Texas represented approximately 22.5%, 18.2%, 11.8% and 11.2%, respectively, of the Company’s total revenues.

Management Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

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Fair Value of Financial Instruments:

The Company measures financial instruments and other items at fair value where required under GAAP, but has elected not to measure any additional financial instruments and other items at fair value as permitted under fair value option accounting guidance.

Fair value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, there is a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the assets or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. 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.

The Company has used interest rate swaps to manage its interest rate risk (see Note 11). The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Changes in the fair value of financial instruments (other than derivative instruments for which an effective hedging relationship exists and available-for-sale securities) are recorded as a charge against earnings in the condensed consolidated statements of operations in the period in which they occur. The Company estimates the fair value of financial instruments at least quarterly based on current facts and circumstances, projected cash flows, quoted market prices and other criteria (primarily utilizing Level 3 inputs). The Company may also utilize the services of independent third-party valuation experts to estimate the fair value of financial instruments, as necessary.

Derivative Instruments:

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. 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 the use of derivative financial instruments. Specifically, from time to time the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value 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.

In addition, from time to time the Company may execute agreements in connection with business combinations that include embedded derivative instruments as part of the consideration provided to the sellers of the properties. Although these embedded derivative instruments are not intended as hedges of risks faced by the Company, they can provide additional consideration to the Company’s selling counterparties and may be a key component of negotiations.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

 

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The Company records all derivative instruments on the condensed consolidated balance sheets at their fair value. In determining the fair value of derivative instruments, the Company also considers the credit risk of its counterparties, which typically constitute larger financial institutions engaged in providing a wide variety of financial services. These financial institutions generally face similar risks regarding changes in market and economic conditions, including, but not limited to, changes in interest rates, exchange rates, equity and commodity pricing and credit spreads.

Accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative, whether it has been designated as a hedging instrument and whether the hedging relationship has continued to satisfy the criteria to apply hedge accounting. For derivative instruments qualifying as cash flow hedges, the effective portion of changes in the fair value is initially recorded in accumulated other comprehensive income (loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the cash flows of the derivative hedging instrument with the changes in the cash flows of the hedged item or transaction.

The Company formally documents the hedging relationship for all derivative instruments, has accounted for its interest rate swap agreements as cash flow hedges and does not utilize derivative instruments for trading or speculative purposes.

Changes in Accumulated Other Comprehensive Loss:

The following table reflects amounts that were reclassified from accumulated other comprehensive loss and included in earnings for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

     Parent Company     Operating Partnership  
     Nine Months Ended     Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Balance – January 1

   $ —        $ (572   $ —        $ (620

Unrealized loss on interest rate swaps:

        

Unrealized loss

     —          (19     —          (19

Amount reclassified and recognized in net income(1)

     —          495        —          495   

Unrealized gain on investment in equity securities:

        

Unrealized loss

     (22     —          (22     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net change in other comprehensive income

     (22     476        (22     476   

Total other comprehensive loss allocable to non-controlling interests

     —          (11     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance – September 30

   $ (22   $ (107   $ (22   $ (144
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Amounts reclassified from unrealized loss on derivative instruments are included in interest expense in the condensed consolidated statements of operations ($171,000 was recognized in interest expense for the three months ended September 30, 2013 – see Note 11).

Revision to Consolidated Financial Statements:

Subsequent to the issuance of the Parent Company’s consolidated financial statements for the year ended December 31, 2013, the Parent Company determined that certain dividends paid that were reflected as a reduction of additional paid-in capital should have been reflected as a reduction of available retained earnings. The Parent Company reviewed the impact of this correction with respect to the prior period consolidated financial statements and determined that the correction was not material. However, the Parent Company has revised the accompanying condensed consolidated balance sheet at December 31, 2013 to reflect this correction in the prior period. The effect of the correction to the consolidated balance sheets is an increase to additional paid-in capital and a corresponding decrease to retained earnings of $18.1 million at December 31, 2013. The effect of the correction to the consolidated statement of equity for the nine months ended September 30, 2013 was an increase in reported additional paid-in capital from $469.0 million to $484.8 million and a decrease in reported cumulative (deficit) retained earnings from $15.7 million to $0. The condensed consolidated statement of equity for the nine months ended September 30, 2014 included herein reflects a reclassification of $18.1 million from additional paid-in capital to retained earnings relating to the year ended December 31, 2013. This correction had no effect on previously reported revenues, net income, earnings per share, cash flows or total stockholders’ equity.

 

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Recent Accounting Pronouncements:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in this update change the requirements for reporting discontinued operations. As a result of ASU 2014-08, a disposal of a component of an entity or a group of components is required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also requires an entity to provide certain disclosures about a disposal of an individually significant component of such entity that does not qualify for discontinued operations presentation in the financial statements. The Company chose to early adopt ASU 2014-08 on January 1, 2014, which did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue Recognition – Revenue from Contracts with Customers (“ASU 2014-09”). The amendments in this update require companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 31, 2016 and for interim periods therein and requires expanded disclosures. The Company is currently assessing the impact of the adoption of ASU 2014-09 on its consolidated financial position and results of operations.

3. Acquisitions:

The Company completed the following property acquisitions in the nine months ended September 30, 2014, which were acquired for cash (dollars in thousands):

 

Property

  

Date Acquired

  

Location

   Debt
Assumed
 
The Family Center at Fort Union(1)    September 26, 2014    Midvale, UT    $ —    
The Family Center at Orem(1)    September 26, 2014    Orem, UT    $ —    

The following summary provides an allocation of purchase price for each of the above acquisitions (dollars in thousands):

 

     Building      Land      Above-Market
Leases
     Below-Market
Leases
    In-Place
Leases
     Purchase
Price
 

The Family Center at Fort Union(2)

   $ 101,461       $ 24,200       $ 875       $ (11,048 )   $ 15,983       $ 131,471   

The Family Center at Orem (2)

     11,229         4,450         —          (296 )     1,577         16,960   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 112,690       $ 28,650       $ 875       $ (11,344 )   $ 17,560       $ 148,431   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Remaining useful life(3)

           69         81        78      

 

(1) 

On September 26, 2014, the Company completed the acquisition of a portfolio of two retail shopping centers, which are located in Utah. The purchase price of $148.4 million was paid entirely in cash.

 

(2) 

As of September 30, 2014, the purchase price allocation related to the acquisition of the Family Center at Fort Union and Family Center at Orem properties was preliminary and the final purchase price allocation will be determined pending the receipt of information necessary to complete the valuation of assets and liabilities, which may result in a change from the initial estimates.

 

(3) 

Weighted-average remaining useful life (months) for recorded intangible assets and liabilities as of the date of acquisition.

The Company completed the following property acquisitions in the nine months ended September 30, 2013, which were acquired for cash unless specified below (dollars in thousands):

 

Property

  

Date Acquired

  

Location

   Debt
Assumed
 

Tracy Pavilion

   January 24, 2013    Tracy, CA    $ —    

Stadium Center

   July 1, 2013    Manteca, CA    $ —    

League City Towne Center

   August 1, 2013    League City, TX    $ —    

Living Spaces-Promenade(1)

   August 27, 2013    Scottsdale, AZ    $ 7,268   

 

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The following summary provides an allocation of purchase price for each of the above acquisitions (dollars in thousands):

 

     Building      Land      Above-Market
Leases
     Below-Market
Leases
    In-Place
Leases
     Debt
(Premium)/Discount
    Other      Purchase
Price
 

Tracy Pavilion

   $ 22,611       $ 6,193       $ 163       $ (1,136 )   $ 2,907       $ —       $ —        $ 30,738   

Stadium Center

     28,872         10,284         882         (2,939 )     4,051         —         —          41,150   

League City Towne Center

     24,767         10,858         315         (1,249 )     4,809         —         —          39,500   

Living Spaces-Promenade(1)

     1,038         14,514         —          (116 )     1,500         (936 )     —          16,000   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 77,288       $ 41,849       $ 1,360       $ (5,440 )   $ 13,267       $ (936 )   $ —        $ 127,388   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Remaining useful life(2)

           54         108        75         76        

 

(1) 

On August 27, 2013, the Company acquired a land parcel that was previously not owned at The Promenade retail property in Scottsdale, Arizona (not considered a separate property). The land parcel contains a building, which was constructed by the tenant and is subject to a ground lease.

 

(2) 

Weighted-average remaining useful life (months) for recorded intangible assets and liabilities as of the date of acquisition.

The Company recorded revenues and a net loss for the three and nine months ended September 30, 2014 of $186,000 and $123,000, respectively, related to the 2014 acquisitions. The Company recorded revenues and net income for the three months ended September 30, 2013 of $2.6 million and $414,000, respectively, and for the nine months ended September 30, 2013 of $3.9 million and $401,000, respectively, related to the 2013 acquisitions.

The following unaudited pro forma information for the three and nine months ended September 30, 2014 and 2013 has been prepared to reflect the incremental effect of the properties acquired in 2014 and 2013, as if such acquisitions had occurred on January 1, 2013 and January 1, 2012, respectively (dollars in thousands):

 

     Three Months Ended      Nine Months Ended  
     September 30, 2014     September 30, 2013      September 30, 2014     September 30, 2013  

Revenues

   $ 33,508      $ 33,185       $ 102,146      $ 99,377   

Net income (loss)(1)

   $ 2,153      $ 14,649       $ 8,004      $ 20,626   

Earnings per share

   $ (0.03   $ 0.24       $ (0.04   $ 0.25   

 

(1) 

Pro forma results for the three and nine months ended September 30, 2014 were adjusted to exclude non-recurring acquisition costs of approximately $291,000 related to the 2014 acquisitions. Pro forma results for the three and nine months ended September 30, 2013 were adjusted to exclude non-recurring acquisition costs of approximately $109,000 and $166,000, respectively, related to the 2013 acquisitions, but to include these costs relating to the 2014 acquisitions.

The Company has entered into purchase agreements to acquire a retail property and outparcels at an existing property, located in California and Maryland, for approximately $59.5 million. The properties comprise approximately 174,000 square feet of gross leasable area. The acquisitions of these properties are subject to due diligence and other customary closing conditions. There can be no assurances that due diligence or other conditions will be satisfied or that the acquisitions will close on the terms described herein, or at all. In addition, as of September 30, 2014, the Company had paid approximately $5.1 million in deposits related to properties that are currently under contract or were acquired subsequent to September 30, 2014. The acquisition of one of these properties, Downtown at the Gardens, was completed on October 1, 2014 (see Note 20 for further discussion).

 

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4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at September 30, 2014 and December 31, 2013:

 

     September 30,
2014
     December 31,
2013
 
     (in thousands)  

In-place leases, net of accumulated amortization of $28.2 million and $26.7 million as of September 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 76 and 78 months as of September 30, 2014 and December 31, 2013, respectively)

   $ 50,057       $ 47,058   

Above-market leases, net of accumulated amortization of $8.6 million and $7.5 million as of September 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 58 and 62 months as of September 30, 2014 and December 31, 2013, respectively)

     11,538         13,725   

Leasing commissions, net of accumulated amortization of $8.3 million and $7.1 million as of September 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 95 and 99 months as of September 30, 2014 and December 31, 2013, respectively)

     20,201         17,562   
  

 

 

    

 

 

 
   $     81,796       $ 78,345   
  

 

 

    

 

 

 

Estimated amortization of lease intangible assets as of September 30, 2014 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining three months)

   $ 5,001   

2015

     16,847   

2016

     12,679   

2017

     10,383   

2018

     8,538   

Thereafter

     28,348   
  

 

 

 

Total

   $ 81,796   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended September 30, 2014 and 2013 was $4.9 million and $5.5 million, respectively. Included in these amounts are $1.2 million and $1.0 million, respectively, of amortization of above-market lease intangible assets recorded against rental revenue. Amortization expense recorded on the lease intangible assets for the nine months ended September 30, 2014 and 2013 was $15.0 million and $18.3 million, respectively. Included in these amounts are $3.1 million and $3.6 million, respectively, of amortization of above-market lease intangible assets recorded against rental revenue.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at September 30, 2014 and December 31, 2013:

 

     September 30,
2014
     December 31,
2013
 
     (in thousands)  

Below-market leases, net of accumulated amortization of $9.9 million and $7.9 million as of September 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 108 and 123 months as of September 30, 2014 and December 31, 2013, respectively)

   $     36,260       $ 28,114   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended September 30, 2014 and 2013 was $928,000 and $1.1 million, respectively. Amortization recorded on the lease intangible liabilities for the nine months ended September 30, 2014 and 2013 was $3.2 million and $3.4 million, respectively. These amounts were recorded as rental revenue in the Company’s condensed consolidated statements of operations.

 

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Estimated amortization of lease intangible liabilities as of September 30, 2014 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining three months)

   $ 1,421   

2015

     5,264   

2016

     4,750   

2017

     4,378   

2018

     4,135   

Thereafter

     16,312   
  

 

 

 

Total

   $ 36,260   
  

 

 

 

6. Variable Interest Entities

Consolidated Variable Interest Entities

Included within the condensed consolidated financial statements is the 50% owned joint venture with AB Dothan, LLC, that is deemed a VIE, and for which the Company is the primary beneficiary as it has the power to direct activities that most significantly impact the economic performance of the VIE. The joint venture’s activities principally consist of owning and operating a neighborhood retail center with 171,670 square feet of gross leasable area (“GLA”) located in Dothan, Alabama.

As of September 30, 2014 and December 31, 2013, total carrying amount of assets was approximately $15.1 million and $15.5 million, respectively, which includes approximately $13.1 million and $13.3 million, respectively, of real estate assets at the end of each period. As of September 30, 2014 and December 31, 2013, the total carrying amount of liabilities was approximately $12.3 million and $12.4 million, respectively.

7. Note Receivable

In September 2012, the Company extended a note receivable in the amount of $750,000 to a third party developer (the “Developer”). The note receivable bore interest at 10.0% per annum, with the principal and accrued interest due upon maturity and was recourse to the borrower. In August 2014, the note receivable was settled pursuant to a transaction between the Company and the Developer in which the Developer agreed to a redemption of a profit participation interest in future cash flow distributions following completion of a ground-up development at the Company’s wholly-owned Plaza at Rockwall property. In connection with the redemption of the Developer’s interest, the Company agreed to a payment of approximately $2.0 million, comprised of a cash payment of $1.1 million and the conversion of the outstanding balance of the note receivable of $750,000 and accrued interest of $160,000.

8. Debt

Debt of the Parent Company

The Parent Company does not directly hold any indebtedness. All of the Company’s debt is held directly or indirectly by the Operating Partnership. However, the Parent Company has guaranteed the Operating Partnership’s unsecured revolving credit facility (including the letter of credit that secures the redevelopment revenue bonds at the Northside Mall property) and the Operating Partnership’s senior unsecured notes.

 

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Debt of the Operating Partnership

Mortgages Payable

Mortgages payable held by the Operating Partnership at September 30, 2014 and December 31, 2013 consist of the following (dollars in thousands):

 

     Carrying Amount of
Mortgage Notes
     Contractual
Interest Rate
(September 30, 2014)
    Effective
Interest Rate
(September 30, 2014)
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   September 30,
2014
     December 31,
2013
           

Edwards Theatres

   $  —           11,520         —          —          —           —     

Excel Centre

     —           12,018         —          —          —           —     

Merchant Central

     —           4,370         —          —          —           —     

Red Rock Commons

     —           13,970         —          —          —           —     

Gilroy Crossing

     —           45,836         —          —          —           —     

The Promenade

     46,586         47,957         4.80     4.80     344         October 2015   

5000 South Hulen

     13,237         13,421         5.60     6.90     83         April 2017   

Lake Pleasant Pavilion

     27,597         27,855         6.09     5.00     143         October 2017   

Rite Aid — Vestavia Hills

     880         1,015         7.25     7.25     21         October 2018   

Living Spaces-Promenade

     6,875         7,075         7.88     4.59     80         November 2019   

West Broad Village(2)

     39,700         39,700         3.33     3.33     110         May 2020   

Lowe’s, Shippensburg

     12,874         13,157         7.20     7.20     110         October 2031   

Northside Mall(3)

     12,000         12,000         0.05     1.05     1         November 2035   
  

 

 

    

 

 

           
     159,749         249,894             

Plus: premium(4)

     1,088         1,297             
  

 

 

    

 

 

           

Mortgage notes payable, net

   $ 160,837       $ 251,191             
  

 

 

    

 

 

           

 

(1) 

Amount represents the monthly payment of principal and interest at September 30, 2014.

 

(2) 

The loan at the West Broad Village property was refinanced in April 2013 and bears a fixed rate of 3.33% with a new maturity date of May 1, 2020. Debt payments are interest-only through May 2016.

 

(3) 

The debt represents redevelopment revenue bonds to be used for the redevelopment of this property, which mature in November 2035. Interest is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.05% at September 30, 2014 and 0.10% at December 31, 2013). The interest rate on the bonds is currently priced off of the Securities Industry and Financial Markets Association Index but could change based on the credit of the bonds. The bonds are secured by a $12.1 million letter of credit issued by the Company from the Company’s unsecured revolving credit facility. An underwriter’s discount related to the original issuance of the bonds with a remaining balance of $101,000 and $105,000 at September 30, 2014 and December 31, 2013, respectively, is being amortized as additional interest expense through November 2035.

 

(4) 

Represents (a) the fair value adjustment on assumed debt on acquired properties at the time of acquisition to account for below- or above-market interest rates and (b) an underwriter’s discount for the issuance of redevelopment bonds.

Total interest cost capitalized for the three months ended September 30, 2014 and 2013 was $401,000 and $34,000, respectively, and for the nine months ended September 30, 2014 and 2013 was $859,000 and $50,000, respectively.

 

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Table of Contents

The Company’s mortgage debt maturities at September 30, 2014 for each of the next five years and thereafter are as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining three months)

   $ 971   

2015

     47,918   

2016

     2,362   

2017

     41,446   

2018

     2,196   

Thereafter

     64,856   
  

 

 

 
   $ 159,749   
  

 

 

 

Notes Payable

Unsecured Revolving Credit Facility

The Operating Partnership’s unsecured revolving credit facility has a borrowing capacity of $300.0 million, which may be increased from time to time up to an additional $200.0 million for a total borrowing capacity of $500.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is April 6, 2018 and may be extended for an additional nine months at the Operating Partnership’s option. The Operating Partnership, among other things, is subject to covenants requiring the maintenance of (1) maximum leverage ratios on unsecured, secured and overall debt and (2) minimum fixed coverage ratios. At September 30, 2014, the Operating Partnership believes that it was in compliance with all financial covenants in the credit agreement.

As of September 30, 2014, the unsecured revolving credit facility bore interest at the rate of LIBOR plus a margin of 90 to 170 basis points (margin of 130 basis point at September 30, 2014), depending on the Parent Company’s credit rating. As of September 30, 2014, the Operating Partnership was responsible for paying a fee of 0.25% or 0.30% on the full capacity of the facility. Borrowings from the unsecured revolving credit facility were $56.0 and $179.5 million with a weighted-average interest rate of 1.45% and 1.67% at September 30, 2014 and December 31, 2013, respectively. The Operating Partnership has issued $16.9 million in letters of credit from the unsecured revolving credit facility, which secure an outstanding $12.0 million bond payable for the Northside Mall property and construction activities at the Southlake Park Village property. The Northside Mall property bond is included with the mortgages payable on the Company’s condensed consolidated balance sheets. At September 30, 2014, there was approximately $222.5 million available for borrowing under the unsecured revolving credit facility.

Unsecured Notes

Unsecured Senior Notes due 2020 and 2023

As of September 30, 2014, the Operating Partnership had outstanding $100.0 million aggregate principal amount of senior unsecured notes issued to various entities associated with the Prudential Capital Group. Of the senior unsecured notes, $75.0 million are designated Series A Notes and will mature in November 2020, with a fixed interest rate of 4.40%, and $25.0 million are designated Series B Notes and will mature in November 2023, with a fixed interest rate of 5.19% (the Series A Notes and the Series B Notes are referred to collectively as the “Notes due 2020 and 2023”). The terms of the Notes due 2020 and 2023 are governed by a Note Purchase Agreement, dated November 12, 2013 (the “Purchase Agreement”), among the Operating Partnership, as issuer, the Parent Company and the purchasers named therein. Interest on the Notes due 2020 and 2023 is payable quarterly, beginning on February 12, 2014. The Operating Partnership may prepay all or a portion of the Notes due 2020 and 2023 upon notice to the holders for 100% of the principal amount so prepaid plus a make-whole premium as set forth in the Purchase Agreement.

The Purchase Agreement contains various restrictive covenants, including limitations on the Operating Partnership’s ability to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Operating Partnership’s obligations under the Notes due 2020 and 2023 are fully and unconditionally guaranteed by the Parent Company and certain of its subsidiaries. Certain events would be considered events of default and could result in the acceleration of the maturity of the Notes.

Unsecured Senior Notes due 2024

On May 12, 2014, the Operating Partnership completed the issuance of $250.0 million aggregate principal amount of 4.625% senior unsecured notes due 2024 (the “Notes due 2024”). The Notes due 2024 bear interest at 4.625% per annum and were issued at 99.477% of the principal amount to yield 4.691% to maturity. Interest is payable on May 15 and November 15 of each year beginning November 15, 2014 until the maturity date of May 15, 2024. The Operating Partnership’s obligations under the Notes due 2024 are fully and unconditionally guaranteed by the Parent Company. On or before February 15, 2024, the Operating Partnership may redeem all or a portion of the Notes due 2024 upon notice to the holders at a redemption price equal to the greater of (1) 100% of the principal amount of the Notes due 2024 being redeemed and (2) 100% of the principal amount plus a make-whole premium as set forth in the Indenture governing the Notes due 2024 (the “Indenture”), plus accrued and unpaid interest up to, but not including, the redemption date. After February 15, 2024, the redemption price will be equal to 100% of the principal amount of the Notes due 2024 being

 

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redeemed, plus accrued and unpaid interest up to, but not including, the redemption date. Proceeds from the issuance of the Notes due 2024 were used to repay a portion of the outstanding indebtedness under the Company’s unsecured revolving credit facility and for other general corporate and working capital purposes.

The Notes due 2024 are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership. However, the Notes due 2024 are effectively subordinated to the Operating Partnership’s existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Operating Partnership’s subsidiaries, including guarantees provided by the Operating Partnership’s subsidiaries under the Company’s unsecured line of credit.

The Indenture contains certain covenants that, among other things, limit the Parent Company’s and the Operating Partnership’s ability to consummate a merger, consolidation or sale of all or substantially all of their assets or incur additional indebtedness.

The carrying value of the Notes due 2024:

 

     September 30,
2014
    December 31,
2013
 
     (in thousands)  

Principal amount

   $ 250,000      $ —    

Unamortized debt discount

     (1,275     —    
  

 

 

   

 

 

 
   $ 248,725      $ —    
  

 

 

   

 

 

 

In connection with this debt offering, the Operating Partnership incurred approximately $1.6 million of underwriting discount, which has been recorded as deferred financing costs and is being amortized over the term of the Notes due 2024.

The Notes due 2020, 2023 and 2024 are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership except that the Notes due 2024 are effectively subordinated to guarantees provided by certain of the Operating Partnership’s subsidiaries under the Notes due 2020 and 2023. The Notes due 2020, 2023 and 2024 are effectively subordinated to the Operating Partnership’s existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Operating Partnership’s subsidiaries, including guarantees provided by certain of the Operating Partnership’s subsidiaries under the Company’s unsecured line of credit.

9. Earnings Per Share of the Parent Company

Basic earnings (loss) per share of the Parent Company is computed by dividing income (loss) applicable to common stockholders by the weighted-average shares outstanding, as adjusted for the effect of participating securities. The Parent Company’s unvested restricted share awards are participating securities as they contain non-forfeitable rights to dividends. The impact of unvested restricted share awards on earnings (loss) per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends and the unvested restricted shares’ participation rights in undistributed earnings.

The calculation of diluted earnings per share for the three and nine months ended September 30, 2014 does not include 727,230 and 568,594 shares, respectively, of unvested restricted common stock or 1,019,523 OP units as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the common stockholders. The calculation of diluted earnings per share for the three and nine months ended September 30, 2013 does not include 657,873 and 683,922 shares, respectively, of unvested restricted common stock or 1,225,115 and 1,230,437 OP units, respectively, as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the common stockholders. In addition, 3,173,142 and 3,301,803 shares of common stock for the three and nine months ended September 30, 2014, respectively, and 3,356,178 and 3,341,076 shares of common stock for the three and nine months ended September 30, 2013, respectively, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (“Series A preferred stock”), were anti-dilutive and were not included in the calculation of diluted earnings per share based on the “if converted” method.

 

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Computations of basic and diluted earnings per share for the three and nine months ended September 30, 2014 and 2013 (in thousands, except share data) were as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Basic earnings per share:

        

Income from continuing operations

   $ 1,218      $ 1,520      $ 5,475      $ 5,180   

Preferred dividends

     (2,501     (2,744     (7,989     (8,232

Cost of redemption of preferred stock

     (1,477     —         (1,477     —    

Allocation to participating securities

     (124     (109     (373     (326

Income from continuing operations attributable to non-controlling interests

     (70     (108     (227     (260
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations applicable to the common stockholders

   $ (2,954   $ (1,441   $ (4,591   $ (3,638
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ (2,830   $ 10,739      $ (4,218   $ 8,914   

Allocation to participating securities

     (124     (143     (373     (326
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income applicable to the common stockholders

   $ (2,954   $ 10,596      $ (4,591   $ 8,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic and diluted

     60,389,204        47,496,811        52,293,209        46,674,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

        

Loss from continuing operations per share attributable to the common stockholders

   $ (0.05   $ (0.03   $ (0.09   $ (0.08

Income from discontinued operations per share attributable to the common stockholders

     —         0.25        —         0.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to the common stockholders

   $ (0.05   $ 0.22      $ (0.09   $ 0.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

10. Earnings Per Unit of the Operating Partnership

Basic earnings (loss) per unit of the Operating Partnership is computed by dividing income (loss) applicable to unitholders by the weighted-average OP units outstanding, as adjusted for the effect of participating securities. The Operating Partnership’s unvested restricted OP unit awards are participating securities as they contain non-forfeitable rights to dividends. The impact of unvested restricted OP unit awards on earnings (loss) per unit has been calculated using the two-class method whereby earnings are allocated to the unvested restricted OP unit awards based on distributions and the unvested restricted OP units’ participation rights in undistributed earnings.

The calculation of diluted earnings per unit for the three and nine months ended September 30, 2014 does not include 727,230 and 568,594 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the unitholders. The calculation of diluted earnings per unit for the three and nine months ended September 30, 2013 does not include 657,873 and 683,922 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the unitholders. In addition, 3,173,142 and 3,301,803 OP units for the three and nine months ended September 30, 2014, respectively, and 3,356,178 and 3,341,076 OP units for the three and nine months ended September 30, 2013, respectively, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Units (“Series A preferred units”), were anti-dilutive and were not included in the calculation of diluted earnings per unit based on the “if converted” method.

 

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Computations of basic and diluted earnings per unit for the three and nine months ended September 30, 2014 and 2013 (in thousands, except unit data) were as follows:

 

     Three Months Ended     Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Basic earnings per unit:

        

Income from continuing operations

   $ 1,218      $ 1,520      $ 5,475      $ 5,180   

Preferred distributions

     (2,501     (2,744     (7,989     (8,232

Cost of redemption of preferred units

     (1,477     —         (1,477     —    

Allocation to participating securities

     (124     (109     (373     (326

Income from continuing operations attributable to non-controlling interests

     (91     (77     (274     (249
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations applicable to the unitholders

   $ (2,975   $ (1,410   $ (4,638   $ (3,627
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the unitholders

   $ (2,851   $ 11,018      $ (4,265   $ 9,154   

Allocation to participating securities

     (124     (109     (373     (326
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income applicable to the unitholders

   $ (2,975   $ 10,909      $ (4,638   $ 8,828   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding:

        

Basic and diluted

     61,408,727        48,721,926        53,493,570        47,904,824   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per unit:

        

Loss from continuing operations per unit attributable to the unitholders

   $ (0.05   $ (0.03   $ (0.09   $ (0.08

Income from discontinued operations per unit attributable to the unitholders

     —         0.25        —         0.26   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per unit attributable to the unitholders

   $ (0.05   $ 0.22      $ (0.09   $ 0.18   
  

 

 

   

 

 

   

 

 

   

 

 

 

11. Derivatives and Hedging Activities

In December 2010, the Company executed two pay-fixed interest rate swaps with a notional value of $55.8 million (weighted-average interest rate of 1.41%) to hedge the variable cash flows associated with one of the Company’s mortgage payables. As a result of the interest rate swaps, the Company either (1) received the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate was less than LIBOR or (2) paid such difference if the Strike Rate was greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The two interest rate swaps were settled in December 2013 in connection with the repayment of the underlying mortgage note at the Park West Place property. The Company had no derivative financial instruments outstanding at September 30, 2014 and had no derivative financial instruments outstanding prior to the execution of the two swaps.

During the three and nine months ended September 30, 2013, the Company did not record any amounts in earnings attributable to hedge ineffectiveness.

 

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Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

    Three Months Ended     Nine Months Ended  
    September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Amount of unrealized loss recognized in OCI (effective portion):

       

Interest rate swaps

  $ —       $ (7   $ —       $ (19

Other derivatives

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —       $ (7   $ —       $ (19
 

 

 

   

 

 

   

 

 

   

 

 

 

Amount of loss reclassified from accumulated OCI into income (effective portion):

       

Interest rate swaps (interest expense)

  $ —       $ (171   $ —       $ (495

Other derivatives

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —       $ (171   $ —       $ (495
 

 

 

   

 

 

   

 

 

   

 

 

 

Amount of gain recognized in income (ineffective portion and amount excluded from effectiveness testing):

       

Interest rate swaps (other income/expense)

  $ —       $ —        $ —       $ —     

Other derivatives (changes in fair value of financial instruments and gain on OP unit redemption)

    —          —          —          230   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ —       $ —        $ —       $ 230   
 

 

 

   

 

 

   

 

 

   

 

 

 

12. Equity of the Parent Company

The Parent Company has issued restricted stock awards to senior executives, directors and employees totaling 1,327,509 shares of common stock (net of forfeitures and unvested awards of 489,864 shares), which are included in the total shares of common stock outstanding as of September 30, 2014.

As of September 30, 2014, the Parent Company had outstanding 1,330,975 shares of Series A preferred stock, with a liquidation preference of $25.00 per share. The Parent Company pays cumulative dividends on the Series A preferred stock when, as and if declared by the Parent Company’s board of directors, at a rate of 7.00% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Series A preferred stock is $1.75, payable quarterly in arrears on or about the 15th day of January, April, July and October of each year. Holders of the Series A preferred stock generally have no voting rights except for limited voting rights if the Parent Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. The Series A preferred stock is convertible, at the holders’ option, at any time and from time to time, into common stock of the Parent Company. The initial conversion rate of the Series A preferred stock was 1.6667 shares of common stock per share of Series A preferred stock. Effective September 26, 2013 (the ex-dividend date), the conversion rate was adjusted to 1.6836 shares of common stock per share of Series A preferred stock as a result of the aggregate dividends that the Parent Company declared and paid on its common stock, beginning with the quarter ended September 30, 2011 and through the quarter ended September 30, 2013, being in excess of the reference dividend of $0.15 per share. The conversion rate will continue to be subject to customary adjustments in certain circumstances. Beginning on April 1, 2014, the Parent Company may, at its option, convert some or all of the Series A preferred stock if the closing price of the common stock equals or exceeds 140% of the conversion price for at least 20 of the 30 consecutive trading days ending the day before the notice of exercise of conversion is sent and the Parent Company has either declared and paid, or declared and set apart for payment, any unpaid dividends that are in arrears on the Series A preferred stock.

During the three months ended September 30, 2014, the Parent Company repurchased 669,025 shares of Series A preferred stock for an aggregate cost of approximately $17.4 million (including transaction costs) at a weighted-average purchase price of $25.79 per share. The repurchased shares of Series A preferred stock were subsequently retired by the Parent Company. The repurchase resulted in a charge of approximately $1.5 million, which is classified as cost of redemption of preferred stock on the accompanying condensed consolidated statements of operations and comprehensive income.

As of September 30, 2014, the Parent Company had outstanding 3,680,000 shares of 8.125% Series B Cumulative Redeemable Preferred Stock (“Series B preferred stock”), with a liquidation preference of $25.00 per share. The Parent Company pays cumulative dividends on the Series B preferred stock, when, as and if declared by the Parent Company’s board of directors, at a rate of 8.125% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Series B preferred stock is $2.03125, payable quarterly in arrears on or about the 15th day of January, April, July and October of each year. Holders of the Series B preferred

 

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stock generally have no voting rights except for limited voting rights if the Parent Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. At any time on and after January 31, 2017, the Parent Company may, at its option, redeem the Series B preferred stock, in whole or from time to time in part, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. In addition, upon the occurrence of a change of control, the Parent Company or a successor may, at its option, redeem the Series B preferred stock, in whole or in part and within 120 days after the first date on which such change of control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption.

The Parent Company’s board of directors has authorized a stock repurchase program under which the Parent Company may acquire up to $50.0 million of its common stock and preferred stock in open market and negotiated purchases with no expiration date (the repurchase program was increased from $30.0 million to $50.0 million in February 2014). In the nine months ended September 30, 2014, the Parent Company repurchased 105,775 shares of its common stock for an aggregate cost of approximately $1.4 million (including transaction costs) at a weighted-average purchase price of $12.52 per share and 669,025 shares of its Series A preferred stock for an aggregate cost of approximately $17.4 million (including transaction costs) at a weighted-average purchase price of $25.79 per share. The repurchased shares of common stock and preferred stock were subsequently retired by the Parent Company. No stock was repurchased during the year ended December 31, 2013. As of September 30, 2014, approximately $24.7 million remained available under the stock repurchase program to acquire outstanding shares of the Parent Company’s common stock and preferred stock.

The Parent Company and the Operating Partnership have entered into equity distribution agreements (the “Equity Distribution Agreements”) with four sales agents, under which the Parent Company can issue and sell shares of its common stock from time to time through, at its discretion, any of the sales agents. The Equity Distribution Agreements were initially entered into in March 2012 with an aggregate offering price of up to $50.0 million and subsequently amended and restated in May 2013, permitting additional sales with an aggregate offering price of up to $100.0 million. The sales of common stock made under the Equity Distribution Agreements are made in “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended. During the year ended December 31, 2013, the Parent Company issued 3,211,928 shares of common stock pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $40.7 million at an average stock issuance price of $13.05 per share. The net proceeds of $40.7 million were contributed to the Operating Partnership in exchange for 3,211,928 OP units. During the nine months ended September 30, 2014, the Parent Company did not issue any shares pursuant to the Equity Distribution Agreements. As of September 30, 2014, approximately $95.0 million remained available under the Equity Distribution Agreements to issue and sell shares of the Parent Company’s common stock and preferred stock.

On June 25, 2014, the Parent Company completed the issuance of 12,650,000 shares of common stock, including the exercise of an option to purchase an additional 1,650,000 shares, resulting in net proceeds of approximately $160.6 million, after deducting the underwriters’ discount and commissions and offering expenses. The net proceeds were contributed to the Operating Partnership in exchange for 12,650,000 OP units.

Consolidated net income is reported in the Company’s condensed consolidated financial statements at amounts that include the amounts attributable to both the common stockholders and the non-controlling interests. During the period from March 2012 to March 2013, a total of 591,474 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Parent Company for redemption, resulting in the issuance of an additional 531,768 shares of common stock and cash payments totaling approximately $1.9 million to former unitholders (see Note 19 for further discussion).

A charge/credit is recorded each period in the condensed consolidated statements of income for the non-controlling interests’ proportionate share of the Company’s net income (loss).

On September 30, 2014, the Parent Company accrued a liability for a dividend of $10.7 million payable to the common stockholders of record, a dividend of $2.5 million payable to the preferred stockholders of record and a distribution of $178,000 payable to the holders of record of OP units as of September 30, 2014, each of which was paid in October 2014.

2010 Equity Incentive Award Plan

The Company has established the 2010 Equity Incentive Award Plan of Excel Trust, Inc. and Excel Trust, L.P. (the “2010 Plan”), pursuant to which the Parent Company’s board of directors or a committee of its independent directors may make grants of stock options, restricted stock, stock appreciation rights and other stock-based awards to its non-employee directors, employees and consultants (an equivalent amount of common OP units are issued to the Parent Company for each such grant with similar terms and conditions). The maximum number of shares of the Parent Company’s common stock that may be issued pursuant to the 2010 Plan is 2,850,000 (of which 1,522,491 shares of common stock remain available for issuance as of September 30, 2014).

 

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The following shares of restricted common stock were issued during the nine months ended September 30, 2014:

 

Grant Date

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

March 7, 2014(1)

   $ 12.57         4,000         4   

March 18, 2014(2)

   $ 12.80         558,331         1, 3   

March 24, 2014(3)

   $ 12.56         83,500         3   

May 13, 2014(4)

   $ 12.89         12,412         1   

 

(1) 

Shares issued to certain of the Company’s employees. These shares vest over four years with 25% vesting on the first anniversary of the grant date and the remainder vesting in equal quarterly installments thereafter.

 

(2) 

Shares issued to senior management and other employees of the Company. A portion of the stock grants (452,500 shares of restricted common stock) vest over a three-year period and include performance or service conditions. The remaining stock grants (105,831 shares of restricted common stock) include a variety of performance and market conditions, with the restricted shares vesting at the discretion of the Parent Company’s board of directors on December 31, 2014 based on the achievement of the Company’s objectives during the year ended December 31, 2014.

 

(3) 

Shares issued to certain of the Company’s employees. These shares vest over a three-year period with 33% vesting in equal annual installments on December 31, 2014, 2015 and 2016.

 

(4) 

Shares issued to members of the Company’s board of directors. These shares vest in equal quarterly installments.

Shares of the Parent Company’s restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the administrator of the 2010 Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions expire upon vesting. Shares of the Parent Company’s restricted common stock have full voting rights and rights to dividends upon grant. The Company recognized compensation expense during the three and nine months ended September 30, 2014 of $1.2 million and $3.1 million, respectively, and for the three and nine months ended September 30, 2013 of $583,000 and $1.7 million, respectively, related to the restricted common stock grants ultimately expected to vest. Accounting Standards Codification (“ASC”) Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has estimated $0 in forfeitures for all periods presented. Stock compensation expense is included in general and administrative expense in the accompanying condensed consolidated statements of operations and comprehensive income.

As of September 30, 2014 and December 31, 2013, there was approximately $6.9 million and $1.6 million, respectively, of total unrecognized compensation expense related to the non-vested shares of the Parent Company’s restricted common stock. As of September 30, 2014 and December 31, 2013, this expense was expected to be recognized over a weighted-average remaining period of 1.9 and 1.1 years, respectively.

 

     Number of Unvested
Shares of
Restricted
Common Stock
    Weighted-
Average Grant
Date Fair Value
 

Balance - January 1, 2014

     611,683      $ 9.73   

Grants

     658,243      $ 12.77   

Forfeitures

     (466,864   $ 8.88   

Vested(1)

     (92,172   $ 12.57   
  

 

 

   

 

 

 

Balance - September 30, 2014

     710,890      $ 12.74   
  

 

 

   

 

 

 

 

(1) 

During the nine months ended September 30, 2014, 561 shares of common stock were surrendered to the Parent Company and subsequently retired in lieu of cash payments for taxes due on the vesting of restricted stock. The forfeiture of these shares is reflected in the accompanying condensed consolidated statements of equity and capital as a decrease of the total restricted common shares issued during each period presented.

401(k) Retirement Plan

The Company maintains a 401(k) retirement plan covering substantially all employees, which permits participants to defer up to the maximum allowable amount of their eligible compensation as determined by the Internal Revenue Service. This deferred compensation, together with Company matching contributions equal to 100% of employee deferrals up to 3.0% of eligible compensation and 50% of employee deferrals for the next 2.0% of eligible compensation, is fully vested and funded as of September 30, 2014. Costs related to the matching portion of the plan for the three months ended September 30, 2014 and 2013 were approximately $41,000 and $39,000, respectively. Costs related to the matching portion of the plan for the nine months ended September 30, 2014 and 2013 were approximately $121,000 and $113,000, respectively.

 

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13. Equity of the Operating Partnership

As of September 30, 2014, the Operating Partnership had outstanding 62,135,931 OP units. The Parent Company owned 98.3% of the partnership interests in the Operating Partnership at September 30, 2014, is the Operating Partnership’s general partner and is responsible for the management of the Operating Partnership’s business. As the general partner of the Operating Partnership, the Parent Company effectively controls the ability to issue common stock of the Parent Company upon a limited partner’s notice of redemption. In addition, the Parent Company has generally acquired OP units upon a limited partner’s notice of redemption in exchange for shares of its common stock. The redemption provisions of OP units owned by limited partners that permit the Parent Company to settle in either cash or common stock at the option of the Parent Company are further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Operating Partnership evaluated this guidance, including the requirement to settle in unregistered shares, and determined that these OP units meet the requirements to qualify for presentation as permanent equity.

As of September 30, 2014, the Operating Partnership had outstanding 1,330,975 Series A preferred units and 3,680,000 8.125% Series B Cumulative Redeemable Preferred Units (collectively referred to as the “Preferred Units”). The Preferred Units were issued to the Parent Company in exchange for the net proceeds from the issuance of preferred stock of the Parent Company and contain the same terms and conditions as the preferred stock instruments (including, among other things, distribution rates and exchange or redemption provisions).

During the three months ended September 30, 2014, the Operating Partnership repurchased 669,025 Series A preferred units from the Parent Company (in connection with the Parent Company’s repurchase of its Series A preferred stock) for an aggregate cost of approximately $17.4 million (including transaction costs) at a weighted-average purchase price of $25.79 per share. The shares of Series A preferred stock were subsequently retired by the Operating Partnership. The repurchase resulted in a charge of approximately $1.5 million, which is classified as cost of redemption of preferred units on the accompanying condensed consolidated statements of operations.

During the nine months ended September 30, 2014, the Operating Partnership repurchased 105,775 common OP units from the Parent Company (in connection with the Parent Company’s repurchase of its common stock) for an aggregate cost of approximately $1.4 million (including transaction costs) at a weighted-average purchase price of $12.52 per unit. The OP units were subsequently retired by the Operating Partnership. No OP units were repurchased from the Parent Company in connection with repurchases of its common stock during the year ended December 31, 2013.

In connection with the Equity Distribution Agreements, during the year ended December 31, 2013 the Operating Partnership issued 3,211,928 OP units to the Parent Company in exchange for net proceeds of approximately $40.7 million, which were used to repay outstanding indebtedness under its unsecured revolving credit facility and for other general corporate and working capital purposes. During the nine months ended September 30, 2014, the Operating Partnership did not issue any OP units to the Parent Company in connection with the Equity Distribution Agreements.

On June 25, 2014, the Operating Partnership issued 12,650,000 OP units to the Parent Company in exchange for net proceeds of approximately $160.6 million, which were used to fund certain property acquisitions and for other general corporate and working capital purposes.

Consolidated net income is reported in the Operating Partnership’s condensed consolidated financial statements at amounts that include the amounts attributable to both the unitholders and the non-controlling interests in a consolidated joint venture property. During the period from March 2012 to March 2013, a total of 591,474 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Parent Company for redemption, resulting in the issuance of an additional 531,768 shares of the Parent Company’s common stock (and the issuance of an equivalent number of OP units to the Parent Company) and cash payments totaling approximately $1.9 million to former unitholders (see Note 19 for further discussion).

 

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The following table shows the vested partnership interests in the Operating Partnership as of September 30, 2014 and December 31, 2013:

 

     September 30, 2014     December 31, 2013  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     60,405,518         98.3     47,769,682         97.9

Non-controlling interests consisting of:

          

OP units held by employees and third parties

     1,019,523         1.7     1,019,523         2.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     61,425,041         100.0     48,789,205         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

14. Investment in Unconsolidated Entities

The Company has formed a limited liability company (“La Costa LLC”) with GEM Realty Capital, Inc. (“GEM”) in which the Company and GEM hold 20% and 80% ownership interests, respectively. La Costa LLC is the owner of the La Costa Town Center property. The Company’s ownership interest in La Costa LLC is reflected in the accompanying balance sheets at the Company’s historical cost basis as an investment in a profit-sharing arrangement. La Costa LLC does not qualify as a VIE and consolidation is not required as the Company does not control the operations of the property and the majority owner bears the majority of any losses incurred. The Company receives 20% of the cash flow distributions and may receive a greater portion of cash distributions in the future based upon the performance of the property and the availability of cash for distribution. In addition, the Company receives fees in its role as the day-to-day property manager and for any development services that it provides. The Company’s interest in the income or losses of the underlying venture is reflected in a manner similar to the equity method of accounting.

On October 9, 2014, the Company completed the disposition of the La Costa Town Center property for a sales price of approximately $31.6 million, excluding closing costs (the Company’s proportionate share of the sales price was $6.3 million). The sale resulted in a gain of approximately $1.3 million, which will be recognized as a gain on the sale of investment in unconsolidated properties.

The Company also holds a 50% tenant-in-common ownership interest in The Fountains at Bay Hill property (“Bay Hill”). The remaining 50% undivided interest in the Bay Hill property is held by MDC Fountains, LLC (“MDC”). The Bay Hill property does not qualify as a VIE and consolidation is not required as the Company does not control the operations of the property. The Company receives 50% of the cash flow distributions and recognizes 50% of the results of operations. In addition, the Company receives fees in its role as the day-to-day property manager. The Company’s 50% ownership interest is reflected in the accompanying balance sheets as an investment in unconsolidated entities and the Company’s interest in the income or losses of the property is recorded based on the equity method of accounting.

General information on the La Costa LLC and Bay Hill properties as of September 30, 2014 was as follows:

 

Unconsolidated Investment

   Partner      Ownership Interest     Formation/
Acquisition Date
   Property

La Costa LLC(1)

     GEM         20   September 7, 2012    La Costa Town Center

Bay Hill(2)

     MDC         50   October 19, 2012    The Fountains at Bay Hill

 

(1) 

At September 30, 2014, La Costa LLC had real estate assets of $23.6 million, total assets of $24.9 million, mortgages payable of $14.1 million and total liabilities of $14.4 million. At December 31, 2013, La Costa LLC had real estate assets of $23.4 million, total assets of $25.7 million, mortgages payable of $14.1 million and total liabilities of $14.5 million. Total revenues were $385,000 and $1.2 million, total expenses were $384,000 and $1.2 million (including interest expense) and net loss was $274,000 and $726,000 for the three and nine months ended September 30, 2014, respectively. Total revenues were $430,000 and $2.7 million, total expenses were $798,000 and $3.3 million (including interest expense) and net loss was $368,000 and $632,000 for the three and nine months ended September 30, 2013, respectively. The mortgage note was assumed with the contribution of the property and bears interest at the rate of LIBOR plus a margin of 575 basis points (5.9% at each of September 30, 2014 and December 31, 2013). The mortgage note has a maturity date of October 1, 2014, which may be extended for three additional one-year periods at La Costa LLC’s election and upon the satisfaction of certain conditions (including the payment of an extension fee upon the exercise of the second and third renewal options, execution of an interest rate cap and the establishment of certain reserve accounts). La Costa LLC has also entered into an interest rate cap related to the mortgage note, which limits LIBOR to a maximum of 3.0% and expires on October 1, 2014.

 

(2) 

At September 30, 2014, Bay Hill had real estate assets of $36.5 million, total assets of $39.4 million, mortgages payable of $23.1 million and total liabilities of $25.1 million. At December 31, 2013, Bay Hill had real estate assets of $37.0 million, total assets of $39.9 million, mortgages payable of $23.4 million and total liabilities of $25.6 million. Total revenues were $959,000 and $2.9 million, total expenses were $508,000 and $1.6 million (including interest expense) and net income was $260,000 and $770,000

 

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  for the three and nine months ended September 30, 2014, respectively. Total revenues were $978,000 and $2.8 million, total expenses were $650,000 and $2.1 million (including interest expense) and net income was $174,000 and $230,000 for the three and nine months ended September 30, 2013, respectively. The mortgage note assumed with the acquisition of the Bay Hill property bears interest at the rate of LIBOR plus a margin of 325 basis points (3.4% at each of September 30, 2014 and December 31, 2013). The mortgage note has a maturity date of April 2, 2015, which may be extended for two additional one-year periods at the borrower’s election and upon the satisfaction of certain conditions.

15. Discontinued Operations

On July 19, 2013, the Company completed the disposition of the Walgreens property, located in North Corbin, Kentucky, for a sales price of approximately $4.5 million, excluding closing costs. On September 13, 2013, the Company completed the disposition of the Grant Creek Town Center property, located in Missoula, Montana, for a sales price of approximately $32.3 million, excluding closing costs. The Grant Creek Town Center property sale was classified as an exchange pursuant to section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”); therefore, the funds were restricted as to their usage and were reflected as restricted cash on the condensed consolidated balance sheets at September 30, 2013. The Company subsequently utilized the funds to provide the purchase price for the acquisition of two properties during the three months ended December 31, 2013.

All properties sold were part of the retail properties segment – see Note 21. The following table provides information regarding the disposition of the properties:

 

     (in thousands)                

Property

   Sales Price      Gain on Sale      Date of Sale      Acquisition Date  

Walgreens — North Corbin

   $ 4,514       $ 1,129         7/19/2013         5/24/2010   

Grant Creek Town Center

   $ 32,343       $ 10,926         9/13/2013         8/27/2010   

The results of operations for the properties are reported as discontinued operations for all periods presented in the accompanying condensed consolidated statements of operations. The following table summarizes the revenue and expense components that comprise income from discontinued operations (dollars in thousands):

 

     Three Months Ended     Nine Months Ended  
     September 30,
2014
     September 30,
2013
    September 30,
2014
     September 30,
2013
 

Total revenues

   $ —        $ 559      $ —         $ 1,815   

Total expenses

     —           214        —           1,334   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before non-controlling interests and gain on sale of real estate assets

     —           345        —           481   

Gain on sale of real estate assets

     —           11,974        —           11,974   

Non-controlling interest in discontinued operations(1)

     —           (248     —           (229
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from discontinued operations available to the common stockholders

   $ —        $ 12,071      $ —        $ 12,226   
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Amounts represent the portion of non-controlling interest related to OP units not held by the Parent Company that would be attributable to discontinued operations (no amounts would be allocable with respect to the condensed consolidated financial statements of the Operating Partnership).

16. Related Party Transactions

Subsequent to the Parent Company’s initial public offering, many of the employees of Excel Realty Holdings, LLC (“ERH”, a company that managed the operations of the Parent Company’s predecessor under various management agreements) became employees of the Company. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. For the three months ended September 30, 2014 and 2013, approximately $67,000 and $82,000, respectively, was reimbursed to the Company from ERH and included in other income in the condensed consolidated statements of operations. For the nine months ended September 30, 2014 and 2013, approximately $227,000 and $230,000, respectively, was reimbursed to the Company from ERH and included in other income in the condensed consolidated statements of operations.

17. Income Taxes

Income Taxes of the Parent Company

The Parent Company elected to be taxed as a REIT under the Code, beginning with the taxable year ended December 31, 2010. To qualify as a REIT, the Parent Company must meet a number of organizational and operational requirements, including the

 

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requirement that it distribute currently at least 90% of its REIT taxable income to its stockholders (excluding any net capital gain). It is the Parent Company’s intention to comply with these requirements and maintain the Parent Company’s REIT status. As a REIT, the Parent Company generally will not be subject to corporate federal, state or local income taxes on income it distributes currently (in accordance with the Code and applicable regulations) to its stockholders. If the Parent Company fails to qualify as a REIT in any taxable year, then it will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if the Parent Company qualifies for taxation as a REIT, it may be subject to certain state and local taxes on its income, properties and operations and to federal income and excise taxes on its taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder and on the taxable income of any of its taxable REIT subsidiaries.

Income Taxes of the Operating Partnership

As a partnership, the allocated share of income of the Operating Partnership is included in the income tax returns of the general and limited partners. Accordingly, no accounting for income taxes is required in the accompanying condensed consolidated financial statements. The Operating Partnership may be subject to certain state or local taxes on its income and property.

The Operating Partnership has formed a taxable REIT subsidiary (the “TRS”) on behalf of the Parent Company. In general, the TRS may perform non-customary services for tenants, hold assets that the Parent Company cannot hold directly and, except for the operation or management of health care facilities or lodging facilities or the providing of any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, may engage in any real estate or non-real estate related business. The TRS is subject to corporate federal income taxes on its taxable income at regular corporate tax rates. The TRS accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.

18. Commitments and Contingencies

Litigation:

The Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against it which if determined unfavorably, would have a material effect on its consolidated financial position, results of operations or cash flows.

Environmental Matters:

The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its condensed consolidated balance sheets, results of operations or cash flows. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that it believes would require additional disclosure or the recording of a loss contingency.

Other

The Company’s other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In management’s opinion, these matters are not expected to have a material adverse effect on its condensed consolidated balance sheets, results of operations or cash flows. In addition, the Company expects to incur construction costs relating to development projects on portions of existing operating properties and at its non-operating properties (Chimney Rock Phase II and Southlake Park Village).

19. Fair Value of Financial Instruments

The Company is required to disclose fair value information relating to financial instruments that are remeasured on a recurring basis and those that are only initially recognized at fair value (not required to be subsequently remeasured). The Company’s disclosures of estimated fair value of financial instruments were determined using available market information and appropriate valuation methods. The use of different assumptions or methods of estimation may have a material effect on the estimated fair value of financial instruments.

 

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The following table reflects the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis at September 30, 2014 (dollars in thousands):

 

     Balance at
December 31,
2012
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

           

Assets:

           

Other assets related to business combinations

   $ —         $ —         $ —        $ —    

Investment in equity securities(1)

     10,433         10,433        —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,433       $ 10,433      $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table reflects the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis at December 31, 2013 (dollars in thousands):

 

     Balance at
December 31,
2013
     Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
     Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

           

Assets:

           

Other assets related to business combinations(2)

   $ 507       $ —         $ —        $ 507   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

Amount reflects the Company’s investment in equity securities of publicly-traded companies, which are considered available-for-sale and recorded at fair value based upon the closing trading price of the equity security as of the balance sheet date.

 

(2)

Amount reflects the fair value of funds expected to be received pursuant to master lease agreements executed in connection with the Promenade Corporate Center acquisition. The Company has estimated the fair value of the asset based on its expectations of the probability of leasing or releasing spaces within the term of the master lease agreements and corresponding estimates for time required to lease, lease rates and funds required for tenant improvements and lease commissions. This amount has been included in other assets in the accompanying condensed consolidated balance sheets, with subsequent changes in the fair value of the asset recorded as a gain (loss) in earnings in the period in which the change occurs.

The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2014 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
 

Beginning balance, January 1, 2014

   $ 507   

Total gains: Included in earnings

     —     

Purchases, issuances or settlements

     (507
  

 

 

 

Ending balance, September 30, 2014

   $ —     
  

 

 

 

 

(1) 

The change of $507,000 for other assets related to business combinations during the nine months ended September 30, 2014 is comprised of cash payments received on the master lease asset.

 

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The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of September 30, 2013 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
    Contingent Consideration
Related to Business
Combinations (2)
    Derivative Instruments
Related to Business
Combinations (3)
 

Beginning balance, January 1, 2013

   $ 992      $ (1,787   $ (274

Total gains: Included in earnings

     6        1,562        246   

Purchases, issuances or settlements

     (384     20        28   
  

 

 

   

 

 

   

 

 

 

Ending balance, September 30, 2013

   $ 614      $ (205   $ —    
  

 

 

   

 

 

   

 

 

 

 

(1) 

The change of $378,000 for other assets related to business combinations during the nine months ended September 30, 2013 is comprised of payments received on the master lease assets and an increase in the estimated fair value of funds to be received from escrow of $6,000.

 

(2) 

The change of $1.6 million for contingent consideration related to business combinations represents the reversal of a contingent liability related to the earn-out for one property as a result of a shortfall in expected leasing of vacant space at the property and a reduction in the contingent liability related to another property as a result of higher leasing costs than originally estimated (recognized as changes in fair value of contingent consideration in the condensed consolidated statements of operations). The remaining earn-out has a fair value of approximately $205,000 based on the funds due to the former owner, which were paid in full in October 2013.

 

(3) 

The change of $274,000 for derivative instruments related to business combinations during the nine months ended September 30, 2013 is related to changes to the redemption provision for OP units issued in connection with the 2011 Edwards Theatres acquisition as a result of (a) a decrease of $246,000 due to recognition of a gain included in earnings related to changes in the fair value of the redemption obligation and (b) a decrease of $28,000 due to the redemption of corresponding OP units.

There were no additional gains or losses, purchases, sales, issuances, settlements, or transfers in or out related to any of the three levels of the fair value hierarchy during the nine months ended September 30, 2014 and 2013.

The Company has not elected the fair value measurement option for any of its other financial assets or liabilities. The Company estimates the fair value of its financial assets using a discounted cash flow analysis based on an appropriate market rate for a similar type of instrument. The Company estimates the fair value of its financial liabilities by using either (1) a discounted cash flow analysis using an appropriate market discount rate for similar types of instruments, or (2) a present value model and an interest rate that includes a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt.

The fair values of certain additional financial assets and liabilities at September 30, 2014 and December 31, 2013 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (dollars in thousands):

 

     September 30, 2014      December 31, 2013  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Note receivable (Other Assets)

   $ —        $ —        $ 750       $ 750   

Financial liabilities:

           

Mortgage notes payable

     160,837         166,776         251,191         254,473   

Notes payable

     56,000         55,487         179,500         179,500   

Unsecured notes

     348,725         352,066         100,000         100,000   

20. Subsequent Events

On October 1, 2014, the Company completed the acquisition of a retail center with approximately 340,000 square feet of GLA located in Palm Beach Gardens, Florida for a contractual purchase price, excluding closing costs, of approximately $141.5 million (cash payment of approximately $98.8 million and the assumption of a mortgage note with an outstanding balance of $42.7 million). An allocation of purchase price for the acquisition of the retail property has not yet been performed as the Company is continuing to collect the necessary information.

 

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On October 16, 2014, the Parent Company repurchased an additional 150,000 shares of Series A preferred stock for an aggregate cost of approximately $3.8 million (excluding transaction costs) at a weighted-average purchase price of $25.00 per share. The repurchased shares of Series A preferred stock were subsequently retired and the Company will recognize a charge on the redemption.

On October 23, 2014, the Company completed the disposition of the Lowe’s property located in Shippensburg, Pennsylvania for a sales price of approximately $24.4 million, excluding closing costs. In connection with the disposition, the mortgage note secured by the property was also legally defeased. The sale resulted in a gain of approximately $1.9 million, which will be recognized as a gain on the sale of real estate assets.

21. Segment Disclosure

The Company’s reportable segments consist of the three types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties, Multi-family Properties and Retail Properties. The Company was formed for the primary purpose of owning and operating Retail Properties. As such, administrative costs are shown under the Retail Properties segment. The Retail Properties operating segment also includes undeveloped land which the Company intends to develop into retail properties.

The Company evaluates the performance of the operating segments based upon property operating income. “Property Operating Income” is defined as operating revenues (rental revenue, tenant recoveries and other income) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses). The Company also evaluates interest expense, interest income, and depreciation and amortization by segment. Corporate general and administrative expense, interest expense related to corporate indebtedness and other non-recurring gains or losses are reflected within the Retail Properties operating segment as this constitutes the Company’s primary business objective and represents the majority of its operations. There is no intersegment activity.

 

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The following tables reconcile the Company’s segment activity to its consolidated results of operations and financial position for the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

     For the Three Months Ended     For the Nine Months Ended  
     September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Office Properties:

        

Total revenues

   $ 2,233      $ 2,052      $ 6,627      $ 6,428   

Property operating expenses

     (906     (906     (2,649     (2,593
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     1,327        1,146        3,978        3,835   

Changes in fair value of contingent consideration

     —          —          —          6   

General and administrative costs

     (1     (9     (6     (16

Depreciation and amortization

     (905     (980     (2,708     (2,832

Interest expense

     —          (194     (191     (579
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 421      $ (37   $ 1,073      $ 414   
  

 

 

   

 

 

   

 

 

   

 

 

 

Multi-family Properties:

        

Total revenues

   $ 1,326      $ 1,397      $ 4,109      $ 4,053   

Property operating expenses

     (453     (675 )     (1,412     (1,374 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     873        722        2,697        2,679   

General and administrative costs

     (15     206        (39     (104 )

Depreciation and amortization

     (463     (460 )     (1,389     (2,298 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 395      $ 468      $ 1,269      $ 277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retail Properties:

        

Total revenues

   $ 26,675      $ 25,482      $ 80,725      $ 72,257   

Property operating expenses

     (5,947     (6,137     (18,332     (16,622
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     20,728        19,345        62,393        55,635   

Changes in fair value of contingent consideration

     —          10        —          1,562   

General and administrative costs

     (4,273     (3,596     (12,218     (10,416

Depreciation and amortization

     (9,844     (10,197     (30,322     (29,483

Interest expense

     (6,387     (4,534     (17,165     (13,172

Interest income

     103        49        205        146   

Income (loss) from equity in unconsolidated entities

     75        12        240        (13

Changes in fair value of financial instruments and gain on OP unit redemption

     —          —          —          230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     402        1,089        3,133        4,489   

Income from discontinued operations

     —          12,319        —          12,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 402      $ 13,408      $ 3,133      $ 16,944   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments:

        

Total revenues

   $ 30,234      $ 28,931      $ 91,461      $ 82,738   

Property operating expenses

     (7,306     (7,718     (22,393     (20,589
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     22,928        21,213        69,068        62,149   

Changes in fair value of contingent consideration

     —          10        —          1,568   

General and administrative costs

     (4,289     (3,399     (12,263     (10,536

Depreciation and amortization

     (11,212     (11,637     (34,419     (34,613

Interest expense

     (6,387     (4,728     (17,357     (13,751

Interest income

     103        49        206        146   

Income (loss) from equity in unconsolidated entities

     75        12        240        (13

Changes in fair value of financial instruments and gain on OP unit redemption

     —          —          —          230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,218        1,520        5,475        5,180   

Income from discontinued operations

     —          12,319        —          12,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,218      $ 13,839      $ 5,475      $ 17,635   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation to Condensed Consolidated Net Income Attributable to the Common Stockholders (Parent Company):

        

Total net income for reportable segments

   $ 1,218      $ 13,839      $ 5,475      $ 17,635   

Net income attributable to non-controlling interests

     (70 )     (356     (227     (489
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

   $ 1,148      $ 13,483      $ 5,248      $ 17,146   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation to Condensed Consolidated Net Income Attributable to the Unitholders (Operating Partnership):

        

Total net income for reportable segments

   $ 1,218      $ 13,839      $ 5,475      $ 17,635   

Net income attributable to non-controlling interests

     (91     (77     (274     (249 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

   $ 1,127      $ 13,762      $ 5,201      $ 17,386   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     September 30,      December 31,  
     2014      2013  

Assets:

     

Office Properties:

     

Total assets

   $ 63,477       $ 67,273   

Multi-family Properties:

     

Total assets

     69,476         70,732   

Retail Properties:

     

Total assets

     1,261,474         1,080,816   
  

 

 

    

 

 

 

Total Reportable Segments & Consolidated Assets:

     

Total assets

   $ 1,394,427       $ 1,218,821   
  

 

 

    

 

 

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Excel Trust, Inc., a Maryland corporation, and any of our subsidiaries, including Excel Trust, L.P., a Delaware limited partnership of which Excel Trust, Inc. is the parent company and general partner, which may be referred to herein as the “Operating Partnership.”

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the retail industry or the markets in which we operate; changes in local, regional and national economic conditions; our inability to compete effectively; our inability to collect rent from tenants; defaults on or non-renewal of leases by tenants; increased interest rates and operating costs; decreased rental rates or increased vacancy rates; our failure to obtain necessary outside financing on favorable terms or at all; changes in the availability of additional acquisition opportunities; our inability to successfully complete real estate acquisitions; our failure to successfully operate acquired properties and operations; our failure to maintain our status as a REIT; our inability to attract and retain key personnel; government approvals, actions and initiatives, including the need for compliance with environmental requirements; financial market fluctuations; our failure to maintain our credit ratings or a downgrade in our credit ratings from one or more of the rating agencies; changes in real estate and zoning laws and increases in real property tax rates; the effects of earthquakes and other natural disasters; and lack of or insufficient amounts of insurance. While forward-looking statements reflect our good faith beliefs (or those of the indicated third parties), they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2013. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Management’s Overview and Summary

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing community and power centers, grocery anchored neighborhood centers and freestanding retail properties. Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth. We generally lease our properties to national and regional supermarket chains, big-box retailers and select national retailers that frequently offer necessity and value oriented items and generate regular consumer traffic. Our tenants often carry goods that are less impacted by fluctuations in the broader U.S. economy and consumers’ disposable income, which we believe generates more predictable property-level cash flows.

 

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The following table reflects our total portfolio at September 30, 2014 (a property is reclassified from development to the operating portfolio at the earlier of 85% occupancy or one year from completion and delivery of the space):

 

     Gross Leasable
Area (GLA)
     % Occupied     % Leased     Number of
Properties
 

Operating Portfolio:

       

Retail properties

     6,718,950         92.9     93.8     36   

Multi-family properties(1)

     339 units         88.8     92.3     n/a   

Office properties

     338,339         85.0     85.0     2   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total/weighted-average operating portfolio

     7,057,289         92.5     93.4     38   
  

 

 

    

 

 

   

 

 

   

 

 

 

Development properties(2)

     311,735         7.0     49.9     n/a   

Unconsolidated properties(3)

     225,863         65.8     65.8     2   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Portfolio:

         

Total/weighted-average total portfolio

     7,594,887         88.2     90.8     40   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Includes the 339 apartment units on the upper levels of our West Broad Village retail shopping center (the number of apartment units and leased percentage are not included in the total/weighted-average).

 

(2) 

Our non-operating properties consisted of Phase II of our Chimney Rock property and an undeveloped land parcel, Southlake Park Village, which are currently under development and are expected to contain approximately 312,000 square feet of GLA upon completion. Phase I of our Chimney Rock property is classified as an operating property.

 

(3) 

Includes our La Costa Town Center and The Fountains at Bay Hill properties in which we hold 20% and 50% ownership interests, respectively.

Our operations are carried out primarily through the Operating Partnership. We receive income primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. Potential impacts to our income include unanticipated tenant vacancies, vacancy of space that takes longer to re-lease and, for non triple-net leases, operating costs that cannot be recovered from our tenants through contractual reimbursement formulas in our leases. Our operating results therefore depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

Critical Accounting Policies

A complete discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the Securities and Exchange Commission, or SEC, and is accessible on the SEC’s website at www.sec.gov.

New Accounting Standards

See Note 2 to the condensed consolidated financial statements included elsewhere herein for disclosure of new accounting standards.

Results of Operations

We operate through three reportable business segments: retail properties, multi-family properties and office properties. At September 30, 2014, we owned 36 consolidated retail operating properties with a total of approximately 6.7 million square feet of GLA. The multi-family segment consists of apartment units at one retail property, West Broad Village, which is located in Richmond, Virginia. The office segment consists of two properties, Excel Centre, a portion of which is utilized as our headquarters, and the Promenade Corporate Center. These office properties total 338,339 square feet of GLA.

 

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The following table reflects leasing activity at our consolidated retail and office operating properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases during the nine months ended September 30, 2014:

 

     Number
of
Leases
     GLA      Weighted-
Average
Lease Rate
     Weighted-
Average
Prior Lease
Rate
     %
Increase
(Decrease)
    Tenant
Improvement
Allowance
(sf)
     Leasing
Commission (sf)
 

Comparable leases

     98         490,410       $ 17.19       $ 16.41         4.8   $ 0.94       $ 1.38   

Non-comparable leases

     39         118,430       $ 22.41         n/a         n/a      $ 25.70       $ 8.52   
  

 

 

    

 

 

               

Total leasing activity

     137         608,840                 
  

 

 

    

 

 

               

 

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Comparison of the Three Months Ended September 30, 2014 to the Three Months Ended September 30, 2013

The following table sets forth historical financial information related to our operating portfolio for same properties (all properties that we consolidated, owned and operated for the entirety of both periods being compared, except for properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared), new properties (properties that were not owned during the entirety of the periods being compared), redevelopment/development properties (properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared) and corporate entities (legal entities performing general and administrative functions) (dollars in thousands, except on a per square foot basis):

 

    Same Properties(1)     New Properties     Redevelopment/
Development Properties
    Corporate     Total  
    As of September 30,  
    2014     2013     2014     2013     2014     2013     2014     2013     2014     2013  

Rentable GLA

    5,510,488        5,510,488        1,546,763        355,462       —          —          —          —          7,057,289        5,865,988   

Percent leased

    92.9     92.0     95.1     98.2     —          —          —          —          93.4     92.4

Number of properties

    31        31        7        2       —          —          —          —          38        33   

Percent of total portfolio

    78.1     93.9     21.9     6.1       —          —          —          —          100.0     100.0
    Same Properties     New Properties     Redevelopment/
Development Properties(3)
    Corporate     Total  
    Three months ended September 30,  
    2014     2013     2014     2013     2014     2013     2014     2013     2014     2013  

Rental revenue

  $ 21,991      $ 22,132      $ 2,735      $ 1,449      $ 83      $ 33     $ (59   $ (58   $ 24,750      $ 23,556   

Tenant recoveries

    4,355        4,620        689        401        13        1       —          —          5,057        5,022   

Other income

    209        230        7        (7     —          —          211        130        427        353   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    26,555        26,982        3,431        1,843        96        34       152        72        30,234        28,931   

Rental operations(2)

    6,811        7,538        753        436        23        7       (281     (263     7,306        7,718   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income

  $ 19,744      $ 19,444      $ 2,678      $ 1,407      $ 73      $ 27     $ 433      $ 335      $ 22,928      $ 21,213   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes two properties, Walgreens — North Corbin and Grant Creek Towne Center, which were sold in 2013 and have been reflected as discontinued operations for all periods presented in the condensed consolidated financial statements contained elsewhere herein. These properties had been classified as same properties in previous filings with the SEC.

 

(2) 

Amount includes the following expenses that are directly attributable to a property: maintenance and repairs, real estate taxes, management fees and other operating expenses.

 

(3) 

Includes development activities at our non-operating properties, consisting of Phase II of our Chimney Rock property and an undeveloped land parcel, Southlake Park Village, which are expected to contain approximately 312,000 square feet of GLA in the aggregate upon completion.

 

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The following table provides a reconciliation of property operating income (as defined in the table above) to net income for the three months ended September 30, 2014 and 2013 (dollars in thousands):

 

     Three Months Ended        
     September 30,
2014
    September 30,
2013
    Change     Percent
Change
 

Property operating income

   $ 22,928      $ 21,213      $ 1,715        8.1

Unallocated (income) expense:

        

Changes in fair value of contingent consideration

     —         (10     10        n/a   

General and administrative

     4,289        3,399        890        26.2

Depreciation and amortization

     11,212        11,637        (425     3.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,427        6,187        1,240        20.0

Interest expense, net

     (6,284     (4,679     (1,605     34.3

Income from equity in unconsolidated entities

     75        12        63        525.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,218        1,520        (302     19.9

Income from discontinued operations

     —         12,319        (12,319     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,218      $ 13,839      $ (12,621     91.2
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income: Property operating income increased by $1.7 million, or 8.1%, to $22.9 million for the three months ended September 30, 2014 compared to $21.2 million for the three months ended September 30, 2013. The increase was primarily related to the acquisition of four consolidated operating properties in 2013 after August 1, 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on property operating income for the three months ended September 30, 2014.

Changes in fair value of contingent consideration: A gain on changes in fair value of contingent consideration of approximately $10,000 was recognized in the three months ended September 30, 2013 related to the expiration of an earn-out period for a 2012 acquisition due to an increase in the actual leasing costs as compared to the initial estimates. The earn-out period expired on September 30, 2013 and the balance of $205,000 was paid in full in October 2013.

General and administrative: General and administrative expenses increased by $890,000, or 26.2%, to $4.3 million for the three months ended September 30, 2014 compared to $3.4 million for the three months ended September 30, 2013. The increase in general and administrative expenses was primarily due to an increase in share-based compensation expense as a result of new restricted stock grants issued in March 2014 (share-based compensation expense of $1.2 million and $583,000 for the three months ended September 30, 2014 and 2013, respectively). In addition, there was an increase in personnel, acquisition, disposition and other infrastructure costs due to our continued growth.

Depreciation and amortization: Depreciation and amortization expense decreased $425,000, or 3.7%, to $11.2 million for the three months ended September 30, 2014 compared to $11.6 million for the three months ended September 30, 2013. The decrease was primarily related to the full amortization of certain assets associated with older property acquisitions, partially offset by the acquisition of four consolidated operating properties in 2013 after August 1, 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on depreciation and amortization for the three months ended September 30, 2014.

Interest expense, net: Interest expense, net increased $1.6 million, or 34.3%, to $6.3 million for the three months ended September 30, 2014 compared to $4.7 million for the three months ended September 30, 2013. The increase was primarily due to the issuance of $100.0 million of unsecured notes at a weighted-average interest rate of 4.6% in November 2013 and the issuance of $250.0 million of unsecured notes at an interest rate of 4.625% in May 2014. The proceeds from these issuances were primarily utilized to repay outstanding borrowings under our unsecured revolving credit facility, which carried a lower variable interest rate. In addition, the increase was due to our assumption of approximately $7.3 million of mortgage debt in connection with our acquisition of the additional land parcel at The Promenade retail center in August 2013, partially offset by lower levels of outstanding borrowings under our unsecured revolving credit facility as a result of the repayment of outstanding borrowings and the repayment of higher interest rate secured indebtedness in 2014.

Income from equity in unconsolidated entities: Income of $75,000 for the three months ended September 30, 2014 and $12,000 for the three months ended September 30, 2013, respectively, are comprised of our proportionate share of the net income or loss from the operations of our unconsolidated properties.

 

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Income from discontinued operations: Income of $12.3 million (including a gain on sale of approximately $12.0 million) for the three months ended September 30, 2013 represents the operations of our Walgreens and Grant Creek Town Center properties, which were sold on July 19, 2013 and September 13, 2013, respectively. As a result of these dispositions, at September 30, 2013 the operations of the properties were classified as discontinued operations within the condensed consolidated statements of income for all periods presented (see Note 15 of the condensed consolidated financial statements contained elsewhere herein for further discussion).

 

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Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013

The following table sets forth historical financial information related to our operating portfolio for same properties (all properties that we consolidated, owned and operated for the entirety of both periods being compared, except for properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared), new properties (properties that were not owned during the entirety of the periods being compared), redevelopment/development properties (properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared) and corporate entities (legal entities performing general and administrative functions) (dollars in thousands, except on a per square foot basis):

 

    Same Properties(1)     New Properties     Redevelopment/
Development Properties
    Corporate     Total  
    As of September 30,  
    2014     2013     2014     2013     2014     2013     2014     2013     2014     2013  

Rentable GLA

    5,348,063        5,348,025        1,709,226        517,925        —          —          —          —          7,057,289        5,865,988   

Percent leased

    92.7     92.1     95.6     96.1     —          —          —          —          93.4     92.4

Number of properties

    30        30        8        3        —          —          —          —          38        33   

Percent of total portfolio

    75.8     91.2     24.2     8.8     —          —          —          —          100.0     100.0
    Same Properties     New Properties     Redevelopment/
Development Properties(3)
    Corporate     Total  
    Nine months ended September 30,  
    2014     2013     2014     2013     2014     2013     2014     2013     2014     2013  

Rental revenue

  $ 64,938      $ 64,653      $ 9,854      $ 3,172      $ 222      $ 33     $ (178   $ (173   $ 74,836      $ 67,685   

Tenant recoveries

    12,739        13,338        2,394        777        35        2       —          (18     15,168        14,099   

Other income

    863        555        27        (7     —          —          567        406        1,457        954   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    78,540        78,546        12,275        3,942        257        35       389        215        91,461        82,738   

Rental operations(2)

    20,474        20,443        2,666        905        58        7       (805     (766     22,393        20,589   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income

  $ 58,066      $ 58,103      $ 9,609      $ 3,037      $ 199      $ 28     $ 1,194      $ 981      $ 69,068      $ 62,149   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Excludes two properties, Walgreens — North Corbin and Grant Creek Towne Center, which were sold in 2013 and have been reflected as discontinued operations for all periods presented in the condensed consolidated financial statements contained elsewhere herein. These properties had been classified as same properties in previous filings with the SEC.

 

(2) 

Amount includes the following expenses that are directly attributable to a property: maintenance and repairs, real estate taxes, management fees and other operating expenses.

 

(3) 

Includes development activities at our non-operating properties, consisting of Phase II of our Chimney Rock property and an undeveloped land parcel, Southlake Park Village, which are expected to contain approximately 312,000 square feet of GLA in the aggregate upon completion.

 

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The following table provides a reconciliation of property operating income (as defined in the table above) to net income for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

     Nine Months Ended        
     September 30,
2014
    September 30,
2013
    Change     Percent
Change
 

Property operating income

   $ 69,068      $ 62,149      $ 6,919        11.1

Unallocated (income) expense:

        

Changes in fair value of contingent consideration

     —         (1,568     1,568        n/a   

General and administrative

     12,263        10,536        1,727        16.4

Depreciation and amortization

     34,419        34,613        (194     0.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     22,386        18,568        3,818        20.6

Interest expense, net

     (17,151     (13,605     (3,546     26.1

Income (loss) from equity in unconsolidated entities

     240        (13     253        1946.2

Changes in fair value of financial instruments and gain on redemption of OP units

     —         230        (230     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     5,475        5,180        295        5.7

Income from discontinued operations

     —         12,455        (12,455     n/a   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,475      $ 17,635      $ (12,160     69.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income: Property operating income increased by $6.9 million, or 11.1%, to $69.1 million for the nine months ended September 30, 2014 compared to $62.2 million for the nine months ended September 30, 2013. The increase was primarily related to the acquisition of six consolidated operating properties in 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on property operating income for the nine months ended September 30, 2014.

Changes in fair value of contingent consideration: A gain on changes in fair value of contingent consideration of approximately $1.6 million was recognized in the nine months ended September 30, 2013 as a result of the reversal of a contingent liability related to an earn-out at one property due to a shortfall in expected leasing of vacant space at the property.

General and administrative: General and administrative expenses increased by $1.7 million, or 16.4%, to $12.2 million for the nine months ended September 30, 2014 compared to $10.5 million for the nine months ended September 30, 2013. The increase in general and administrative expenses was primarily due to an increase in share-based compensation expense compared to the prior period as a result of new restricted stock grants issued in March 2014 (share-based compensation expense of $3.1 million and $1.7 million for the nine months ended September 30, 2014 and 2013, respectively). In addition, there was an increase in personnel, acquisition, disposition and other infrastructure costs due to our continued growth.

Depreciation and amortization: Depreciation and amortization expense decreased $194,000, or 0.6%, to $34.4 million for the nine months ended September 30, 2014 compared to $34.6 million for the nine months ended September 30, 2013. The decrease was primarily related to the full amortization of certain assets associated with older property acquisitions, partially offset by the acquisition of six consolidated operating properties in 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on depreciation and amortization for the nine months ended September 30, 2014.

Interest expense, net: Interest expense, net increased $3.5 million, or 26.1%, to $17.1 million for the nine months ended September 30, 2014 compared to $13.6 million for the nine months ended September 30, 2013. The increase was primarily due to the issuance of $100.0 million of unsecured notes at a weighted-average interest rate of 4.6% in November 2013 and the issuance of $250.0 million of unsecured notes at an interest rate of 4.625% in May 2014. The proceeds from these issuances were primarily utilized to repay outstanding borrowings under our unsecured revolving credit facility, which carried a lower variable interest rate. In addition, the increase was due to our assumption of approximately $7.3 million of mortgage debt in connection with our acquisition of the additional land parcel at The Promenade retail center in August 2013, partially offset by lower levels of outstanding borrowings under our unsecured revolving credit facility as a result of the repayment of outstanding borrowings and the repayment of higher interest rate secured indebtedness in 2014.

 

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Income from equity in unconsolidated entities: Income of $240,000 for the nine months ended September 30, 2014 and a loss of $13,000 for the nine months ended September 30, 2013 are comprised of our proportionate share of the net income or loss from the operations of our unconsolidated properties.

Changes in fair value of financial instruments and gain on redemption of OP units: A gain on changes in fair value of financial instruments and gain on redemption of OP units of approximately $230,000 was recognized in the nine months ended September 30, 2013 as a result of (1) the redemption of 19,904 OP units and (2) the expiration of the guaranteed redemption period for OP units issued in connection with the 2011 Edwards acquisition, which resulted in the recognition of a gain of approximately $246,000 representing the unutilized portion of the remaining redemption provision.

Income from discontinued operations: Income of $12.5 million (including a gain on sale of approximately $12.0 million) for the nine months ended September 30, 2013 represents the operations of our Walgreens and Grant Creek Town Center properties, which were sold on July 19, 2013 and September 13, 2013, respectively. As a result of these dispositions, at September 30, 2013 the operations of the properties were classified as discontinued operations within the condensed consolidated statements of income for all periods presented (see Note 15 of the condensed consolidated financial statements contained elsewhere herein for further discussion).

Results of Operations – Segments

We evaluate the performance of our segments based upon property operating income. “Property Operating Income” is defined as operating revenues (rental revenue, tenant recoveries and other income) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses).

You should read the following discussion in conjunction with the segment information disclosed in Note 21 to our condensed consolidated financial statements in accordance with ASC 280, Segment Reporting. Our results of operations for the three and nine months ended September 30, 2014 and 2013 may not be indicative of our future results of operations.

The following table sets forth results of operations presented by segments for the three months ended September 30, 2014 and 2013 (dollars in thousands):

 

     Three Months Ended               
     September 30,
2014
     September 30,
2013
     Change     Percent
Change
 

Revenues:

          

Office properties

   $ 2,233       $ 2,052       $ 181        8.8

Multi-family properties

     1,326         1,397         (71     5.1

Retail properties

     26,675         25,482         1,193        4.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenues

   $ 30,234       $ 28,931       $ 1,303        4.5

Property operating expenses:

          

Office properties

   $ 906       $ 906       $ —         0.0

Multi-family properties

     453         675         (222     32.9

Retail properties

     5,947         6,137         (190     3.1
  

 

 

    

 

 

    

 

 

   

 

 

 

Total property operating expenses

   $ 7,306       $ 7,718       $ (412     5.3

Comparison of the Three Months Ended September 30, 2014 to the Three Months Ended September 30, 2013

Revenue-office properties: Office properties revenue increased by $181,000, or 8.8%, to $2.2 million for the three months ended September 30, 2014 compared to $2.1 million for the three months ended September 30, 2013. The increase was the result of the commencement of certain leases at our Promenade Corporate Center property due to the releasing of vacant space. The percentage of space leased at properties comprising our office segment increased from 80.8% at September 30, 2013 to 85.0% at September 30, 2014.

Revenue-multi-family properties: Multi-family property revenue decreased by $71,000, or 5.1%, to $1.3 million for the three months ended September 30, 2014 compared to $1.4 million for the three months ended September 30, 2013. The decrease was primarily the result of turnover in leased apartments at the property (the leased percentage of the apartments fell from 95.3% at September 30, 2013 to 92.3% at September 30, 2014), which typically have a term of one year or less.

Revenue-retail properties: Retail property revenue increased by $1.2 million, or 4.7%, to $26.7 million for the three months ended September 30, 2014 compared to $25.5 million for the three months ended September 30, 2013. The increase was primarily related to the acquisition of four consolidated operating properties in 2013 after August 1, 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The

 

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acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on revenue for the three months ended September 30, 2014. In addition, we recognized an increase in contractual lease rates of approximately 5.9% for new or renewed leases executed during the twelve months ended September 30, 2014 for spaces previously occupied.

Property operating expenses-office properties: Office property operating expenses were $906,000 for both the three months ended September 30, 2014 and 2013.

Property operating expenses-multi-family properties: Multi-family property operating expenses decreased by $222,000, or 32.9%, to $453,000 for the three months ended September 30, 2014 compared to $675,000 for the three months ended September 30, 2013. The decrease was primarily related to the hiring of on-site management employees after March 31, 2013. The expenses related to these employees are now included in property operating expenses. Prior to the hiring of on-site management employees, expenses related to personnel managing the multi-family property were included in general and administrative expenses.

Property operating expenses-retail properties: Property operating expenses related to our retail properties decreased by $190,000, or 3.1%, to $5.9 million for the three months ended September 30, 2014 compared to $6.1 million for the three months ended September 30, 2013. The decrease was primarily related to the receipt of a real estate tax refund in 2014 (related to 2013), the write-off of straight-line rent receivable balances in 2013 related to the early lease terminations and the acquisition of five consolidated retail operating properties after September 30, 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade), partially offset by the acquisition of four consolidated operating properties in 2013 after August 1, 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on property operating expenses for the three months ended September 30, 2014.

The following table sets forth results of operations presented by segments for the nine months ended September 30, 2014 and 2013 (dollars in thousands):

 

     Nine Months Ended                
     September 30,
2014
     September 30,
2013
     Change      Percent
Change
 

Revenues:

           

Office properties

   $ 6,627       $ 6,428       $ 199         3.1

Multi-family properties

     4,109         4,053         56         1.4

Retail properties

     80,725         72,257         8,468         11.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 91,461       $ 82,738       $ 8,723         10.5

Property operating expenses:

           

Office properties

   $ 2,649       $ 2,593       $ 56         2.2

Multi-family properties

     1,412         1,374         38         2.8

Retail properties

     18,332         16,622         1,710         10.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total property operating expenses

   $ 22,393       $ 20,589       $ 1,804         8.8

Comparison of the Nine Months Ended September 30, 2014 to the Nine Months Ended September 30, 2013

Revenue-office properties: Office properties revenue increased by $199,000, or 3.1%, to $6.6 million for the nine months ended September 30, 2014 compared to $6.4 million for the nine months ended September 30, 2013. The increase was the result of the commencement of certain leases at our Promenade Corporate Center property due to the releasing of vacant space. The percentage of space leased at properties comprising our office segment increased from 80.8% at September 30, 2013 to 85.0% at September 30, 2014.

Revenue-multi-family properties: Multi-family property revenue increased by $56,000, or 1.4%, to $4.1 million for the nine months ended September 30, 2014 compared to $4.0 million for the nine months ended September 30, 2013. The increase was primarily the result of sustained high levels in the leased percentage of apartments and small increases in the monthly rental rates.

Revenue-retail properties: Retail property revenue increased by $8.5 million, or 11.7%, to $80.7 million for the nine months ended September 30, 2014 compared to $72.2 million for the nine months ended September 30, 2013. The increase was primarily related to the acquisition of six consolidated operating properties in 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not

 

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have a material impact on revenues for the nine months ended September 30, 2014. In addition, we recognized an increase in contractual lease rates of approximately 5.9% for new or renewed leases executed during the twelve months ended September 30, 2014 for spaces previously occupied.

Property operating expenses-office properties: Office property operating expenses were $2.6 million for both the nine months ended September 30, 2014 and 2013.

Property operating expenses-multi-family properties: Multi-family property operating expenses were $1.4 million for both the nine months ended September 30, 2014 and 2013.

Property operating expenses-retail properties: Property operating expenses related to our retail properties increased by $1.7 million, or 10.3%, to $18.3 million for the nine months ended September 30, 2014 compared to $16.6 million for the nine months ended September 30, 2013. The increase was primarily related to the acquisition of six consolidated operating properties in 2013 (including our acquisition of the additional land parcel at The Promenade retail center, which is not considered a property separate from The Promenade). The acquisition of an undeveloped land parcel (Southlake Park Village) in November 2013 and two consolidated operating properties on September 26, 2014 did not have a material impact on property operating expenses for the nine months ended September 30, 2014.

Cash Flows

The following is a comparison, for the nine months ended September 30, 2014 and 2013, of our cash flows.

Cash and cash equivalents were $6.1 million and $3.5 million at September 30, 2014 and 2013, respectively.

Net cash provided by operating activities was $51.7 million for the nine months ended September 30, 2014 and $43.0 million for the nine months ended September 30, 2013, an increase of $8.7 million. The increase was primarily due to cash flow generated from operations of new acquisitions and an increase in accrued liabilities in 2014 due to an increase in accrued property taxes due to our recent acquisitions and an increase in interest payable due to the $250.0 million aggregate principal amount of unsecured notes issued in May 2014 (semi-annual interest payment due in November 2014).

Net cash used in investing activities was $186.4 million for the nine months ended September 30, 2014 compared to $137.6 million for the nine months ended September 30, 2013, an increase of $48.8 million. The increase was primarily the result of an increase in funds used for acquisitions and development of real estate of $38.6 million and the purchase of $10.5 million of marketable securities.

Net cash provided by financing activities was $137.6 million for the nine months ended September 30, 2014 compared to $92.5 million for the nine months ended September 30, 2013, an increase of $45.1 million. The increase was primarily due to higher net proceeds from the issuance of common stock of approximately $119.5 million as a result of the June 2014 common stock offering and proceeds from the issuance of the $250.0 million aggregate principal amount of unsecured notes in May 2014. This was partially offset by an increase in the repayment of mortgage notes and outstanding borrowings on the unsecured line of credit of approximately $56.4 million and $181.5 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, a decrease in borrowings from the unsecured line of credit of $60.5 million and the repurchase of shares of the Series A preferred stock by the Parent Company in the amount of $17.4 million during the nine months ended September 30, 2014.

Funds From Operations

We present funds from operations, or FFO, because we consider FFO an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT. As defined by NAREIT, FFO represents net income (loss) (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net gains (losses) on the disposition of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with

 

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GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table presents a reconciliation of FFO of Excel Trust, Inc. for the three and nine months ended September 30, 2014 and 2013 (in thousands):

 

    Three Months Ended     Nine Months Ended  
    September 30,
2014
    September 30,
2013
    September 30,
2014
    September 30,
2013
 

Net (loss) income attributable to the common stockholders(1)

  $ (2,830   $ 10,739      $ (4,218   $ 8,914   

Non-controlling interests in operating partnership(1)

    (21     279        (47     240   

Depreciation and amortization

    11,212        11,766        34,419        35,306   

Depreciation and amortization related to joint ventures(2)

    137        214        463        879   

Gain on sale of real estate assets

    —         (11,974     —         (11,974
 

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

  $ 8,498      $ 11,024      $ 30,617      $ 33,365   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Net income allocable to non-controlling interests in the Operating Partnership is included in net income (loss) attributable to unitholders of the Operating Partnership as reflected in the condensed consolidated financial statements of the Operating Partnership, included elsewhere herein.

 

(2) 

Includes a reduction for 50% of the depreciation and amortization expense associated with the proportionate share of our consolidated Dothan property not owned by us and an increase for our proportionate share of depreciation and amortization expense at our unconsolidated La Costa Town Center and Bay Hill properties.

Liquidity and Capital Resources of Excel Trust, Inc.

In this “Liquidity and Capital Resources of Excel Trust, Inc.” section, the term the “Company” refers only to Excel Trust, Inc. on an unconsolidated basis, and excludes the Operating Partnership and all other subsidiaries. For further discussion of the liquidity and capital resources of the Company on a consolidated basis, see the section entitled “Liquidity and Capital Resources of Excel Trust, L.P.” below.

The Company’s business is operated primarily through the Operating Partnership. The Company issues public equity from time to time, but does not otherwise generate any capital itself or conduct any business itself, other than incurring certain expenses in operating as a public company which are fully reimbursed by the Operating Partnership. The Company itself does not hold any indebtedness, and its only material asset is its ownership of partnership interests of the Operating Partnership. The Company’s principal funding requirement is the payment of dividends on its common and preferred shares. The Company’s principal source of funding for its dividend payments is distributions it receives from the Operating Partnership.

As of September 30, 2014, the Company owned an approximate 98.3% partnership interest in the Operating Partnership. The remaining 1.7% partnership interests are owned by non-affiliated investors and certain of the Company’s directors and executive officers. As the sole general partner of the Operating Partnership, the Company exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.

The liquidity of the Company is dependent on the Operating Partnership’s ability to make sufficient distributions to the Company. The primary cash requirement of the Company is its payment of dividends to its stockholders. The Company also guarantees some of the Operating Partnership’s debt, as discussed further in Note 8 of the condensed consolidated financial statements contained elsewhere herein. If the Operating Partnership fails to fulfill certain of its debt requirements, which trigger the Company’s guarantee obligations, then the Company will be required to fulfill its cash payment commitments under such guarantees. However, the Company’s only significant asset is its investment in the Operating Partnership.

We believe the Operating Partnership’s sources of working capital, specifically its cash flow from operations, and borrowings available under its unsecured revolving credit facility, are adequate for it to make its distribution payments to the Company and, in turn, for the Company to make its dividend payments to its stockholders for at least the next twelve months. However, there can be no assurance that the Operating Partnership’s sources of capital will continue to be available at all or in amounts sufficient to meet its needs, including its ability to make distribution payments to the Company. The unavailability of capital could adversely affect the Operating Partnership’s ability to pay distributions to the Company, which would in turn adversely affect the Company’s ability to pay cash dividends to its stockholders.

 

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The Company’s short-term liquidity requirements consist primarily of funds to pay for future dividends expected to be paid to the Company’s stockholders and operating expenses and other expenditures directly associated with our properties, including:

 

   

interest expense and scheduled principal payments on outstanding indebtedness,

 

   

general and administrative expenses,

 

   

anticipated and unanticipated capital expenditures, tenant improvements and leasing commissions,

 

   

construction of the non-operating portion of some of our properties, and

 

   

properties under contract or acquired after September 30, 2014.

We have entered into equity distribution agreements, or the Equity Distribution Agreements, with four sales agents, under which the Company can issue and sell shares of its common stock from time to time through, at its discretion, any of the sales agents. The Equity Distribution Agreements were initially entered into in March 2012 and were subsequently amended and restated in May 2013, permitting additional sales with an aggregate offering price of up to $100.0 million. The sales of common stock made under the Equity Distribution Agreements are made in “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities Act. During the year ended December 31, 2013, the Company issued 3,211,928 shares of its common stock pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $40.7 million at an average stock issuance price of $13.05 per share. The net proceeds of $40.7 million were contributed to the Operating Partnership in exchange for 3,211,928 OP units. During the nine months ended September 30, 2014, the Company did not issue any shares pursuant to the Equity Distribution Agreements. As of September 30, 2014, the remaining aggregate offering price for sales of the Company’s shares permitted under the Equity Distribution Agreements was $95.0 million.

On June 25, 2014, the Company completed the issuance of 12,650,000 shares of its common stock, including the exercise of an option to purchase an additional 1,650,000 shares, resulting in net proceeds of approximately $160.6 million, after deducting the underwriters’ discount and commissions and offering expenses. The net proceeds were contributed to the Operating Partnership in exchange for 12,650,000 OP units.

Future Uses of Cash

The Company may from time to time seek to repurchase or redeem the Operating Partnership’s outstanding debt, the Company’s shares of common stock or preferred stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

The Company’s board of directors has authorized a stock repurchase program under which the Company may acquire up to $50.0 million of its common stock and preferred stock in open market and negotiated purchases with no expiration date. As of September 30, 2014, approximately $24.7 million remained available under the stock repurchase program to acquire outstanding shares of the Company’s common stock and preferred stock. See Note 13 to the condensed consolidated financial statements contained elsewhere herein for further discussion).

As circumstances warrant, the Company may issue equity from time to time, dependent upon market conditions and available pricing. When the Company receives proceeds from preferred or common equity issuances, it is required by the Operating Partnership’s partnership agreement to contribute the proceeds from its equity issuances to the Operating Partnership in exchange for preferred or common OP units. The Operating Partnership may use the proceeds to repay debt, including borrowings under its unsecured revolving credit facility, for acquisitions and for other general corporate purposes.

We are also subject to the commitments discussed below under “Dividends and Distributions.”

Dividends and Distributions

For the Company to maintain its qualification as a REIT, it must pay dividends to its stockholders aggregating annually at least 90% of its ordinary taxable income (excluding any net capital gain). While historically the Company has satisfied this distribution requirement by making cash distributions to its stockholders, it may choose to satisfy this requirement by making distributions of cash or other property, including, in limited circumstances, the Company’s own stock. As a result of this distribution requirement, the Operating Partnership cannot rely on retained earnings to fund its ongoing operations to the same extent that other companies whose parent companies are not REITs can. The Company may need to continue to raise capital in the equity markets to fund the Operating Partnership’s working capital needs, acquisitions and developments.

 

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Liquidity and Capital Resources of Excel Trust, L.P.

In this “Liquidity and Capital Resources of Excel Trust, L.P.” section, the terms “we,” “our” and “us” refer to the Operating Partnership together with its consolidated subsidiaries or the Operating Partnership and Excel Trust, Inc. together with their consolidated subsidiaries, as the context requires. Excel Trust, Inc. is our sole general partner and consolidates our results of operations for financial reporting purposes. Because we operate on a consolidated basis with Excel Trust, Inc., the section entitled “Liquidity and Capital Resources of Excel Trust, Inc.” should be read in conjunction with this section to understand our liquidity and capital resources on a consolidated basis.

Analysis of Liquidity and Capital Resources

At September 30, 2014, we had $6.1 million of cash and cash equivalents on hand.

Our short-term liquidity requirements consist primarily of funds to pay for future distributions expected to be paid to our unitholders and operating expenses and other expenditures directly associated with our properties, including:

 

   

interest expense and scheduled principal payments on outstanding indebtedness,

 

   

general and administrative expenses,

 

   

anticipated and unanticipated capital expenditures, tenant improvements and leasing commissions,

 

   

construction of the non-operating portion of some of our properties, and

 

   

properties under contract or acquired after September 30, 2014.

Our long term liquidity requirements consist primarily of funds to pay for property acquisitions, scheduled debt maturities, renovations, expansions, capital commitments, construction obligations and other non-recurring capital expenditures that need to be made periodically, and the costs associated with acquisitions and developments of new properties that we pursue.

We intend to satisfy our short-term liquidity requirements primarily through our existing working capital and cash provided by our operations. We believe our rental revenue net of operating expenses will generally provide sufficient cash inflows to meet our debt service obligations (excluding debt maturities), pay general and administrative expenses and fund regular distributions. We anticipate being able to refinance our debt service obligations or borrow from our unsecured revolving credit facility to pay for upcoming debt maturities. We expect to incur approximately $29.2 million in construction costs relating to redevelopment or development projects on portions of existing operating properties and at our non-operating properties (Chimney Rock Phase II and Southlake Park Village). Funds for these costs are expected to come from new mortgage financing, borrowings from our unsecured revolving credit facility and existing cash. We intend to satisfy our other long-term liquidity requirements through our existing working capital, cash provided by indebtedness, long-term secured and unsecured indebtedness and the use of net proceeds from the disposition of non-strategic assets. In addition, we may, from time to time, offer and sell additional equity and debt securities, warrants, rights and other securities to the extent necessary or advisable to meet our liquidity needs.

As of September 30, 2014, our mortgage indebtedness consisted of the following:

 

Property Pledged as Collateral

   Principal
Balance
     Contractual
Interest
Rate
    Monthly
Payment(1)
     Maturity
Date
 

The Promenade

   $ 46,586         4.80     344         October 2015   

5000 South Hulen

     13,237         5.60     83         April 2017   

Lake Pleasant Pavilion

     27,597         6.09     143         October 2017   

Rite Aid — Vestavia Hills

     880         7.25     21         October 2018   

Living Spaces-Promenade

     6,875         7.88     80         November 2019   

West Broad Village(2)

     39,700         3.33     110         May 2020   

Lowe’s, Shippensburg

     12,874         7.20     110         October 2031   

Northside Plaza(3)

     12,000         0.05     1         November 2035   
  

 

 

         
   $ 159,749           

Plus: premium(4)

     1,088           
  

 

 

         

Mortgage notes payable, net

   $ 160,837           
  

 

 

         

 

(1) 

Amount represents the monthly payment of principal and interest at September 30, 2014.

 

(2) 

The loan at the West Broad Village property was refinanced in April 2013 and bears a fixed rate of 3.33% with a new maturity date of May 1, 2020. Debt payments are interest-only through May 2016.

 

(3) 

The debt represents redevelopment revenue bonds to be used for the redevelopment of this property, which mature in November 2035. Interest is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.05% at September 30, 2014). The interest rate on the bonds is currently priced off of the Securities Industry and Financial

 

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  Markets Association Index but could change based on the credit of the bonds. The bonds are secured by a $12.1 million letter of credit issued by us from our unsecured revolving credit facility. An underwriter’s discount related to the original issuance of the bonds with a remaining balance of $101,000 at September 30, 2014 will be amortized as additional interest expense through November 2035.

 

(4) 

Represents (a) the fair value adjustment on assumed debt on acquired properties at the time of acquisition to account for below- or above-market interest rates and (b) an underwriter’s discount for the issuance of redevelopment bonds.

Our unsecured revolving credit facility has a borrowing capacity of $300.0 million, which may be increased from time to time up to an additional $200.0 million for a total borrowing capacity of $500.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is April 6, 2018 and may be extended for an additional nine months at our option.

As of September 30, 2014, the unsecured revolving credit facility bore interest at the rate of LIBOR plus a margin of 90 to 170 basis points, depending on Excel Trust, Inc.’s credit rating. As of September 30, 2014, we were also responsible for paying a fee of 0.25% to 0.30% on the full capacity of the facility. Borrowings under the unsecured revolving credit facility at September 30, 2014 were $56.0 million, at a weighted-average interest rate of 1.45%. We have issued $16.9 million in letters of credit from the unsecured revolving credit facility, which secure an outstanding $12.0 million bond payable for the Northside Mall property and construction activities at the Southlake Park Village property. The Northside Mall property bond is included with the mortgages payable on our condensed consolidated balance sheets. At September 30, 2014, there was approximately $222.5 million available for borrowing under the unsecured revolving credit facility.

Our ability to borrow funds under the credit agreement, and the amount of funds available under the credit agreement at any particular time, are subject to our meeting borrowing base requirements. The amount of funds we can borrow is determined by the net operating income of our unencumbered assets that comprise the borrowing base (as defined in the credit agreement, as amended). We are also subject to financial covenants relating to maximum leverage ratios on unsecured, secured and overall debt, minimum fixed coverage ratios, minimum amount of net worth, dividend payment restrictions and certain investment limitations.

The following is a summary of key financial covenants and their covenant levels as of September 30, 2014:

 

     Required     Actual  

Key financial covenant(1):

    

Ratio of total liabilities to total asset value (maximum)

     60.0     40.8

Ratio of adjusted EBITDA to fixed charges (minimum)

     1.50x        1.9x   

Ratio of secured indebtedness to total asset value (maximum)

     40.0     12.2

 

(1) 

For a complete listing of all debt covenants related to our consolidated indebtedness as well as definitions of the above terms, please refer to our applicable filings with the SEC.

As of September 30, 2014, we believe that we were in compliance with all of the covenants under our credit agreement.

On May 12, 2014, we completed the issuance of $250.0 million aggregate principal amount of 4.625% senior unsecured notes due 2024 (the “Notes due 2024”). The Notes due 2024 bear interest at 4.625% per annum and were issued at 99.477% of the principal amount to yield 4.691% to maturity. Interest is payable on May 15 and November 15 of each year beginning November 15, 2014 until the maturity date of May 15, 2024. Our obligations under the Notes due 2024 are fully and unconditionally guaranteed by Excel Trust, Inc. On or before February 15, 2024, we may redeem all or a portion of the Notes due 2024 upon notice to the holders at a redemption price equal to the greater of (1) 100% of the principal amount of the Notes due 2024 being redeemed and (2) 100% of the principal amount plus a make-whole premium as set forth in the Indenture governing the Notes due 2024, plus accrued and unpaid interest up to, but not including, the redemption date. After February 15, 2024, the redemption price will be equal to 100% of the principal amount of the Notes due 2024 being redeemed, plus accrued and unpaid interest up to, but not including, the redemption date. Proceeds from the issuance of the Notes due 2024 were used to repay a portion of the outstanding indebtedness under our unsecured revolving credit facility and for other general corporate and working capital purposes.

Future Uses of Cash

We may from time to time seek to repurchase or redeem our outstanding debt, OP units or preferred units (subject to the repurchase or redemption of an equivalent number of shares of common stock or preferred stock by Excel Trust, Inc.) or other securities, and Excel Trust, Inc. may seek to repurchase or redeem its outstanding shares of common stock or preferred stock or other securities, in each case in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

 

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As of September 30, 2014, our ratio of debt-to-gross undepreciated asset value was approximately 38.3%. Our organizational documents do not limit the amount or percentage of debt that we may incur, nor do they limit the types of properties we may acquire or develop, and Excel Trust, Inc.’s board of directors may modify our debt policy from time to time. The amount of leverage we will deploy for particular investments in our target assets will depend upon our management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, the credit quality of our target assets and the collateral underlying our target assets. Accordingly, the ratio of debt-to-gross undepreciated asset value may increase or decrease beyond the current amount.

Commitments, Contingencies and Contractual Obligations

The following table outlines our contractual obligations (dollars in thousands) at September 30, 2014 related to our mortgage and note indebtedness and other commitments:

 

     Payments by Period  
     2014
(three months)
     2015-2016      2017-2018      Thereafter      Total  

Principal payments — fixed rate debt

   $ 971       $ 50,280       $ 43,642       $ 402,856       $ 497,749   

Principal payments — variable rate debt(1)

     —          —          56,000         12,000         68,000   

Interest payments — fixed rate debt

     8,956         44,446         38,920         84,585         176,907   

Interest payments — variable rate debt(1)

     205         1,636         1,035         91         2,967   

Construction costs(2)

     5,946         23,228         —          —          29,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 16,078       $ 119,590       $ 139,597       $ 499,532       $ 774,797   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes redevelopment revenue bonds at our Northside Mall property and our unsecured revolving credit facility (there were no outstanding borrowings under our unsecured revolving credit facility at September 30, 2014). Interest on the redevelopment bonds is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.05% at September 30, 2014). The unsecured revolving credit facility bears interest at the rate of LIBOR plus a margin of 90 basis points to 170 basis points, depending on our credit rating (weighted-average interest rate of 1.45% at September 30, 2014). Interest payments for variable rate debt are based on the interest rates in effect and debt balances outstanding on September 30, 2014.

 

(2) 

Amount represents our estimate of costs expected to be incurred relating to development projects on portions of existing operating properties and at our non-operating properties (Chimney Rock Phase II and Southlake Park Village).

Off-Balance Sheet Arrangements

We held a 20% ownership interest in an unconsolidated limited liability company, La Costa LLC, which owned the La Costa Town Center property. La Costa LLC did not qualify as a variable interest entity, or VIE, and consolidation was not required as we did not control the operations of the property. We accounted for our interest in La Costa LLC as a profit-sharing arrangement, which is reflected in a manner that is similar to the equity method of accounting. The assets and liabilities of La Costa LLC were $24.9 million and $14.4 million, respectively, at September 30, 2014.

On October 9, 2014, we completed the disposition of the La Costa Town Center property for a sales price of approximately $31.6 million, excluding closing costs (our proportionate share of the sales price was $6.3 million). The sale resulted in a gain of approximately $1.3 million, which will be recognized as a gain on the sale of investment in unconsolidated properties.

We hold a 50% tenant-in-common ownership interest in a company, Bay Hill Fountains, LLC, or Bay Hill LLC, which owns The Fountains at Bay Hill property, or the Bay Hill property. The Bay Hill LLC does not qualify as a VIE and consolidation is not required as we do not control the operations of the property. We receive 50% of the cash flow distributions and recognize 50% of the results of operations. In addition, we receive fees in our role as the day-to-day property manager. We account for our interest in the Bay Hill property under the equity method of accounting. The assets and liabilities of the Bay Hill property were $39.4 million and $25.1 million, respectively, at September 30, 2014.

 

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Our proportionate share of outstanding indebtedness at the unconsolidated entities as of September 30, 2014 is as follows (dollars in thousands):

 

Name

   Ownership
Interest
    Principal  Amount(1)      Interest Rate     Maturity Date  

La Costa LLC

     20   $ 2,820         5.9     October 1, 2014   

Bay Hill LLC

     50   $ 11,542         3.4     April 2, 2015   

 

(1) 

Amount represents our proportionate share of a secured mortgage note, which bears interest at the rate of LIBOR plus a margin of 575 basis points (La Costa LLC) and at the rate of LIBOR plus a margin of 325 basis points (Bay Hill).

We do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any other financing, liquidity, market or credit risk that could arise if we had engaged in these relationships, other than as described above.

Distribution Policy

Excel Trust, Inc. has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended, or the Code. To continue to qualify as a REIT, Excel Trust, Inc. must meet a number of organizational and operational requirements, including the requirement that Excel Trust, Inc. distribute currently at least 90% of its REIT taxable income (excluding any net capital gain) to its stockholders. It is our intention to comply with these requirements and maintain Excel Trust, Inc.’s REIT status. As a REIT, Excel Trust, Inc. generally will not be subject to corporate United States federal, state or local income taxes on income it distributes currently (in accordance with the Code and applicable regulations) to its stockholders. If Excel Trust, Inc. fails to qualify as a REIT in any taxable year, it will be subject to United States federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if Excel Trust, Inc. qualifies for United States federal taxation as a REIT, we may be subject to certain state and local taxes on our income properties and operations and to United States federal income and excise taxes on our taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

Inflation

Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on our leases that do not contain indexed escalation provisions. In addition, most of our leases require the tenant to pay its share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation, assuming our properties remain leased and tenants fulfill their obligations to reimburse us for such expenses.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing market interest rates. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

The fair value of mortgages payable at September 30, 2014 was approximately $166.8 million compared to the carrying amount of $160.8 million. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately $5.0 million at September 30, 2014. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by approximately $5.3 million at September 30, 2014.

We have a $300.0 million unsecured revolving credit facility. As of September 30, 2014, the unsecured revolving credit facility bore interest at the rate of LIBOR plus a margin of 90 basis points to 170 basis points, depending on our credit rating. As of September 30, 2014, we had $72.9 million of debt and commitments outstanding under our unsecured revolving credit facility, which includes $16.9 million in letters of credit issued under the facility. At September 30, 2014, the outstanding balance on our unsecured revolving credit facility was $56.0 million at a weighted-average interest rate of 1.45%. The fair value of the unsecured revolving credit facility at September 30, 2014 was approximately $55.5 million. Based on outstanding borrowings of $56.0 million at September 30, 2014, an increase of 100 basis points in LIBOR would result in an increase in the interest we incur in the amount of approximately $560,000

 

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We issued $350.0 million aggregate principal amount of senior unsecured notes with a weighted-average fixed interest rate of 4.62%. The fair value of the senior unsecured notes at September 30, 2014 was approximately $352.1 million. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately $24.8 million at September 30, 2014. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by approximately $27.1 million at September 30, 2014.

In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with high credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks and that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into such contracts for speculative or trading purposes.

 

Item 4. Controls and Procedures

Controls and Procedures (Excel Trust, Inc.)

Excel Trust, Inc. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, Excel Trust, Inc. carried out an evaluation, under the supervision and with the participation of management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of Excel Trust, Inc. concluded, as of that time, that Excel Trust, Inc.’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in Excel Trust, Inc.’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Excel Trust, Inc.’s internal control over financial reporting.

Controls and Procedures (Excel Trust, L.P.)

Excel Trust, L.P. maintains disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in its reports under the Exchange Act is processed, recorded, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer of its general partner, Excel Trust, Inc., as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, Excel Trust, L.P. carried out an evaluation, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of its general partner, of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, the Chief Executive Officer and Chief Financial Officer of its general partner concluded, as of that time, that Excel Trust, L.P.’s disclosure controls and procedures were effective at the reasonable assurance level.

There has been no change in Excel Trust, L.P.’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during the last fiscal quarter that has materially affected, or is reasonably likely to materially affect, Excel Trust, L.P.’s internal control over financial reporting.

 

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PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties that we believe would have a material adverse effect on our financial position, results of operations or liquidity. We are involved in routine litigation arising in the ordinary course of business, none of which we believe to be material.

 

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the section entitled “Risk Factors” beginning on page 11 in our Annual Report on Form 10-K for the year ended December 31, 2013, which was filed with the SEC and is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities and Use of Proceeds (Excel Trust, Inc.)

None.

Unregistered Sales of Equity Securities and Use of Proceeds (Excel Trust, L.P.)

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit

Number

  

Description of Exhibit

  10.1    Purchase and Sale Agreement and Joint Escrow Instructions, as amended, among DDR Fort Union I and II LLC, DDR Midvalley LLC, DDR Family Centers LP, DDR Fort Union W LLC, Hermes Associates, Hermes Associates, Ltd., University Square Associates, Ltd. and Excel Trust, L.P., dated May 16, 2014.
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certifications of Chief Executive Officer and 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.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrants have duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized.

 

EXCEL TRUST, INC.    

EXCEL TRUST, L.P.

By: Excel Trust, Inc.

Its general partner

By:  

/S/    GARY B. SABIN        

    By:  

/S/    GARY B. SABIN        

 

Gary B. Sabin

Chairman and Chief Executive Officer

(Principal Executive Officer)

     

Gary B. Sabin

Chairman and Chief Executive Officer

(Principal Executive Officer)

By:  

/S/    JAMES Y. NAKAGAWA        

    By:  

/S/    JAMES Y. NAKAGAWA        

 

James Y. Nakagawa

Chief Financial Officer

(Principal Financial Officer)

     

James Y. Nakagawa

Chief Financial Officer

(Principal Financial Officer)

Dated: November 6, 2014     Dated: November 6, 2014

 

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EXHIBIT INDEX

 

Exhibit

Number

  

Description of Exhibit

  10.1    Purchase and Sale Agreement and Joint Escrow Instructions, as amended, among DDR Fort Union I and II LLC, DDR Midvalley LLC, DDR Family Centers LP, DDR Fort Union W LLC, Hermes Associates, Hermes Associates, Ltd., University Square Associates, Ltd. and Excel Trust, L.P., dated May 16, 2014.
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certifications of Chief Executive Officer and 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.
101.SCH    XBRL Taxonomy Extension Schema Document.
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.

 

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