10-Q 1 rpai-2018x630x10q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2018
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
Commission File Number: 001-35481
RETAIL PROPERTIES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
 
42-1579325
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2021 Spring Road, Suite 200, Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
(630) 634-4200
(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. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
(Do not check if a smaller reporting company)
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of the registrant’s classes of common stock as of July 27, 2018:
Class A common stock:    219,550,397 shares



RETAIL PROPERTIES OF AMERICA, INC.
TABLE OF CONTENTS





PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except par value amounts)

 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
Investment properties:
 
 
 
Land
$
1,041,593

 
$
1,066,705

Building and other improvements
3,570,680

 
3,686,200

Developments in progress
21,300

 
33,022

 
4,633,573

 
4,785,927

Less accumulated depreciation
(1,246,096
)
 
(1,215,990
)
Net investment properties
3,387,477

 
3,569,937

Cash and cash equivalents
29,125

 
25,185

Accounts and notes receivable (net of allowances of $7,211 and $6,567, respectively)
71,745

 
71,678

Acquired lease intangible assets, net
109,054

 
122,646

Assets associated with investment properties held for sale

 
3,647

Other assets, net
73,990

 
125,171

Total assets
$
3,671,391

 
$
3,918,264

 
 
 
 
Liabilities and Equity
 
 
 
Liabilities:
 
 
 
Mortgages payable, net
$
274,267

 
$
287,068

Unsecured notes payable, net
696,055

 
695,748

Unsecured term loans, net
447,583

 
547,270

Unsecured revolving line of credit
126,000

 
216,000

Accounts payable and accrued expenses
62,168

 
82,698

Distributions payable
36,363

 
36,311

Acquired lease intangible liabilities, net
91,053

 
97,971

Other liabilities
66,313

 
69,498

Total liabilities
1,799,802

 
2,032,564

 
 
 
 
Commitments and contingencies (Note 14)

 

 
 
 
 
Equity:
 
 
 
Preferred stock, $0.001 par value, 10,000 shares authorized, none issued or outstanding

 

Class A common stock, $0.001 par value, 475,000 shares authorized,
219,550 and 219,237 shares issued and outstanding as of June 30, 2018
and December 31, 2017, respectively
219

 
219

Additional paid-in capital
4,576,752

 
4,574,428

Accumulated distributions in excess of earnings
(2,710,081
)
 
(2,690,021
)
Accumulated other comprehensive income
4,699

 
1,074

Total equity
1,871,589

 
1,885,700

Total liabilities and equity
$
3,671,391

 
$
3,918,264


See accompanying notes to condensed consolidated financial statements

1


RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive Income (Loss)
(Unaudited)
(in thousands, except per share amounts)

 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues
 
 
 
 
 
 
 
 
Rental income
 
$
92,646

 
$
106,017

 
$
187,101

 
$
215,991

Tenant recovery income
 
25,183

 
29,524

 
53,273

 
60,310

Other property income
 
1,335

 
1,798

 
3,632

 
4,731

Total revenues
 
119,164

 
137,339

 
244,006

 
281,032

 
 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
 
Operating expenses
 
19,384

 
21,004

 
39,639

 
42,868

Real estate taxes
 
17,701

 
21,487

 
38,169

 
43,366

Depreciation and amortization
 
43,710

 
52,325

 
88,938

 
105,799

Provision for impairment of investment properties
 
724

 
13,034

 
1,316

 
13,034

General and administrative expenses
 
10,274

 
10,370

 
22,769

 
21,583

Total expenses
 
91,793

 
118,220

 
190,831

 
226,650

 
 
 
 
 
 
 
 
 
Operating income
 
27,371

 
19,119

 
53,175

 
54,382

 
 
 
 
 
 
 
 
 
Interest expense
 
(16,817
)
 
(21,435
)
 
(35,582
)
 
(106,967
)
Other income, net
 
328

 
451

 
550

 
456

Income (loss) from continuing operations
 
10,882

 
(1,865
)
 
18,143

 
(52,129
)
Gain on sales of investment properties
 

 
116,628

 
34,519

 
157,792

Net income
 
10,882

 
114,763

 
52,662

 
105,663

Preferred stock dividends
 

 
(2,363
)
 

 
(4,725
)
Net income attributable to common shareholders
 
$
10,882

 
$
112,400

 
$
52,662

 
$
100,938

 
 
 
 
 
 
 
 
 
Earnings per common share – basic and diluted
 
 
 
 
 
 
 
 
Net income per common share attributable to common shareholders
 
$
0.05

 
$
0.48

 
$
0.24

 
$
0.43

 
 
 
 
 
 
 
 
 
Net income
 
$
10,882

 
$
114,763

 
$
52,662

 
$
105,663

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on derivative instruments (Note 9)
 
859

 
(145
)
 
3,613

 
487

Comprehensive income attributable to the Company
 
$
11,741

 
$
114,618

 
$
56,275

 
$
106,150

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – basic
 
218,982

 
234,243

 
218,915

 
235,269

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding – diluted
 
219,410

 
234,818

 
219,406

 
235,842


See accompanying notes to condensed consolidated financial statements

2


RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Equity
(Unaudited)
(in thousands, except per share amounts)

 
Preferred Stock
 
Class A
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of January 1, 2017
5,400

 
$
5

 
236,770

 
$
237

 
$
4,927,155

 
$
(2,776,033
)
 
$
722

 
$
2,152,086

Net income

 

 

 

 

 
105,663

 

 
105,663

Other comprehensive income

 

 

 

 

 

 
487

 
487

Distributions declared to preferred shareholders
($0.875 per share)

 

 

 

 

 
(4,725
)
 

 
(4,725
)
Distributions declared to common shareholders
($0.33125 per share)

 

 

 

 

 
(77,553
)
 

 
(77,553
)
Issuance of restricted shares

 

 
285

 

 

 

 

 

Stock-based compensation expense

 

 

 

 
3,549

 

 

 
3,549

Shares withheld for employee taxes

 

 
(88
)
 

 
(1,333
)
 

 

 
(1,333
)
Balance as of June 30, 2017
5,400

 
$
5

 
230,943

 
$
231

 
$
4,853,680

 
$
(2,752,648
)
 
$
1,209

 
$
2,102,477

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2018

 
$

 
219,237

 
$
219

 
$
4,574,428

 
$
(2,690,021
)
 
$
1,074

 
$
1,885,700

Cumulative effect of accounting change

 

 

 

 

 
(12
)
 
12

 

Net income

 

 

 

 

 
52,662

 

 
52,662

Other comprehensive income

 

 

 

 

 

 
3,613

 
3,613

Distributions declared to common shareholders
($0.33125 per share)

 

 

 

 

 
(72,710
)
 

 
(72,710
)
Issuance of common stock

 

 
59

 

 

 

 

 

Issuance of restricted shares

 

 
382

 

 

 

 

 

Stock-based compensation expense, net of forfeitures

 

 
(12
)
 

 
3,729

 

 

 
3,729

Shares withheld for employee taxes

 

 
(116
)
 

 
(1,405
)
 

 

 
(1,405
)
Balance as of June 30, 2018

 
$

 
219,550

 
$
219

 
$
4,576,752

 
$
(2,710,081
)
 
$
4,699

 
$
1,871,589


See accompanying notes to condensed consolidated financial statements

3



RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
52,662

 
$
105,663

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
88,938

 
105,799

Provision for impairment of investment properties
1,316

 
13,034

Gain on sales of investment properties
(34,519
)
 
(157,792
)
Amortization of loan fees and debt premium and discount, net
1,780

 
5,871

Amortization of stock-based compensation
3,729

 
3,549

Premium paid in connection with defeasance of mortgages payable

 
59,968

Debt prepayment fees
974

 
4,545

Payment of leasing fees and inducements
(3,652
)
 
(9,757
)
Changes in accounts receivable, net
(1,520
)
 
4,094

Changes in accounts payable and accrued expenses, net
(19,554
)
 
(15,577
)
Changes in other operating assets and liabilities, net
3,287

 
11,383

Other, net
(4,738
)
 
(63
)
Net cash provided by operating activities
88,703

 
130,717

 
 
 
 
Cash flows from investing activities:
 
 
 
Purchase of investment properties

 
(99,434
)
Capital expenditures and tenant improvements
(32,961
)
 
(31,629
)
Proceeds from sales of investment properties
187,125

 
404,996

Investment in developments in progress
(6,933
)
 
(8,612
)
Net cash provided by investing activities
147,231

 
265,321

 
 
 
 
Cash flows from financing activities:
 
 
 
Principal payments on mortgages payable
(12,818
)
 
(38,571
)
Proceeds from unsecured term loans

 
200,000

Repayments of unsecured term loans
(100,000
)
 

Proceeds from unsecured revolving line of credit
196,000

 
474,000

Repayments of unsecured revolving line of credit
(286,000
)
 
(378,000
)
Payment of loan fees and deposits
(5,393
)
 
(10
)
Debt prepayment fees
(974
)
 
(4,545
)
Purchase of U.S. Treasury securities in connection with defeasance of mortgages payable

 
(439,403
)
Distributions paid
(72,658
)
 
(83,182
)
Shares repurchased through share repurchase program

 
(75,697
)
Other, net
(1,405
)
 
(1,333
)
Net cash used in financing activities
(283,248
)
 
(346,741
)
 
 
 
 
Net (decrease) increase in cash, cash equivalents and restricted cash
(47,314
)
 
49,297

Cash, cash equivalents and restricted cash, at beginning of period
86,335

 
82,349

Cash, cash equivalents and restricted cash, at end of period
$
39,021

 
$
131,646

(continued)
 

4



RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Six Months Ended June 30,
 
2018
 
2017
Supplemental cash flow disclosure, including non-cash activities:
 
 
 
Cash paid for interest, net of interest capitalized
$
34,179

 
$
41,017

Distributions payable
$
36,363

 
$
38,318

Accrued capital expenditures and tenant improvements
$
7,550

 
$
6,089

Accrued leasing fees and inducements
$
761

 
$
840

Accrued redevelopment costs
$
1,074

 
$
1,019

Developments in progress placed in service
$
9,355

 
$

U.S. Treasury securities transferred in connection with defeasance of mortgages payable
$

 
$
439,403

Defeasance of mortgages payable
$

 
$
379,435

 
 
 
 
Purchase of investment properties (after credits at closing):
 
 
 
Net investment properties
$

 
$
(101,307
)
Accounts receivable, acquired lease intangibles and other assets

 
(7,659
)
Accounts payable, acquired lease intangibles and other liabilities

 
7,008

Deferred gain

 
2,524

 
$

 
$
(99,434
)
 
 
 
 
Proceeds from sales of investment properties:
 
 
 
Net investment properties
$
148,448

 
$
245,853

Accounts receivable, acquired lease intangibles and other assets
10,999

 
8,280

Accounts payable, acquired lease intangibles and other liabilities
(6,841
)
 
(6,253
)
Deferred gain

 
(676
)
Gain on sales of investment properties
34,519

 
157,792

 
$
187,125

 
$
404,996

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash reported on the Company’s
condensed consolidated balance sheets to such amounts shown in the Company’s
condensed consolidated statements of cash flows:
 
 
 
Cash and cash equivalents, at beginning of period
$
25,185

 
$
53,119

Restricted cash, at beginning of period (included in “Other assets, net”)
61,150

 
29,230

Total cash, cash equivalents and restricted cash, at beginning of period
$
86,335

 
$
82,349

 
 
 
 
Cash and cash equivalents, at end of period
$
29,125

 
$
28,003

Restricted cash, at end of period (included in “Other assets, net”)
9,896

 
103,643

Total cash, cash equivalents and restricted cash, at end of period
$
39,021

 
$
131,646


See accompanying notes to condensed consolidated financial statements

5

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited financial statements of Retail Properties of America, Inc. for the year ended December 31, 2017, which are included in its 2017 Annual Report on Form 10-K, as certain footnote disclosures which would substantially duplicate those contained in the Annual Report have been omitted from this Quarterly Report. In the opinion of management, all adjustments necessary, all of which were of normal recurring nature, for a fair presentation have been included in this Quarterly Report.
(1) ORGANIZATION AND BASIS OF PRESENTATION
Retail Properties of America, Inc. (the Company) was formed on March 5, 2003 and its primary purpose is to own and operate high quality, strategically located open-air shopping centers, including properties with a mixed-use component. As of June 30, 2018, the Company owned 105 retail operating properties in the United States.
The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended (the Code). The Company believes it qualifies for taxation as a REIT and, as such, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to its shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its taxable income. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and U.S. federal income and excise taxes on its undistributed income. The Company has one wholly-owned subsidiary that has jointly elected to be treated as a taxable REIT subsidiary (TRS) and is subject to U.S. federal, state and local income taxes at regular corporate tax rates. The income tax expense incurred by the TRS did not have a material impact on the Company’s accompanying condensed consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development costs, fair value measurements, provision for impairment, including estimates of holding periods, capitalization rates and discount rates (where applicable), provision for income taxes, recoverable amounts of receivables, deferred taxes and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from these estimates.
All share amounts and dollar amounts in this Quarterly Report on Form 10-Q, including the condensed consolidated financial statements and notes thereto, are stated in thousands with the exception of per share amounts and per square foot amounts.
The accompanying condensed consolidated financial statements include the accounts of the Company, as well as all wholly-owned subsidiaries and any consolidated variable interest entities (VIEs). All intercompany balances and transactions have been eliminated in consolidation. Wholly-owned subsidiaries generally consist of limited liability companies, limited partnerships and statutory trusts.
The Company’s property ownership as of June 30, 2018 is summarized below:
 
Property Count
Retail operating properties
105

Redevelopment projects:
 
Reisterstown Road Plaza
1

Circle East – redevelopment portion (a)

Carillon (b)
1

Total number of wholly-owned properties
107

(a)
This portion of the property was formerly known as Towson Circle and the operating portion, which was formerly known as Towson Square, is included within the property count for retail operating properties.
(b)
The Company has begun activities in anticipation of future redevelopment of this property, which was formerly known as Boulevard at the Capital Centre.

6

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Refer to the Company’s 2017 Annual Report on Form 10-K for a summary of its significant accounting policies. Except as disclosed below, there have been no changes to the Company’s significant accounting policies in the six months ended June 30, 2018.
Recently Adopted Accounting Pronouncements
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, on a modified retrospective basis. This new guidance replaces existing revenue recognition standards. The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Substantially all of the Company’s revenue follows the existing leasing guidance and is not impacted by the adoption of this standard, however, the sale of investment property is required to follow the new guidance as well as ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets discussed below. The sale of investment property is reported as “gain on sales of investment properties” in the accompanying condensed consolidated statements of operations and other comprehensive income (loss) and further discussed in Note 4 – Dispositions. The adoption of ASU 2014-09, Revenue from Contracts with Customers, did not have a material effect on the Company’s condensed consolidated financial statements as substantially all of its revenue falls outside of the scope of this guidance.
Effective January 1, 2018, the Company adopted ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets, on a modified retrospective basis. This new pronouncement, which adds guidance for partial sales of nonfinancial assets and clarifies the scope of Subtopic 610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, applies to the derecognition of all nonfinancial assets (including real estate) for which the counterparty is not a customer. The sale of investment property is reported as “gain on sales of investment properties” in the accompanying condensed consolidated statements of operations and other comprehensive income (loss) and further discussed in Note 4 – Dispositions. The adoption of this pronouncement did not have a material effect on the Company’s condensed consolidated financial statements as the adoption of the new guidance did not result in a change to the timing or amount of gain recognized upon disposition as compared to the previous guidance.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall, on a prospective basis. This new guidance requires companies to disclose the fair value of financial assets and financial liabilities measured at amortized cost in accordance with the exit price notion, which is consistent with the Company’s existing practices, and no longer requires disclosure of the methods and significant assumptions used, including any changes, to estimate fair value. In addition, companies are required to disclose all financial assets and financial liabilities grouped by (i) measurement category and (ii) form of financial instrument. The adoption of this pronouncement did not have a material effect on the Company’s condensed consolidated financial statements.
The Company elected to early adopt ASU 2017-12, Derivatives and Hedging, as of January 1, 2018. This new guidance amends the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in an entity’s financial statements. It also eliminates the requirement to separately measure and report hedge ineffectiveness. Entities are now required to present the earnings effect of the hedging instrument in the same income statement line item in which they report the earnings effect of the hedged item. In addition, entities may perform the initial quantitative assessment of hedge effectiveness at any time after hedge designation, but no later than the first quarterly effectiveness testing date, and subsequent assessments of hedge effectiveness may be performed qualitatively unless facts and circumstances change. Disclosure requirements have been modified to include a tabular disclosure related to the effect of hedging instruments on the income statement and the requirement to disclose the ineffective portion of the change in fair value of such instruments has been eliminated. The adoption of this pronouncement resulted in a cumulative effect adjustment of $12 to accumulated other comprehensive income and accumulated distributions in excess of earnings related to eliminating the separate measurement of ineffectiveness. The amended presentation and disclosure guidance is required only prospectively.
Recently Issued Accounting Pronouncements
In June 2018, the Securities and Exchange Commission issued a final rule, Inline XBRL Filing of Tagged Data, which will require the use of the Inline eXtensible Business Reporting Language (XBRL) format for the submission of operating company financial statement information. In addition, the final rule will eliminate the requirement for operating companies to post “Interactive Data Files” (i.e., machine-readable computer code that presents information in XBRL format) on their websites. Large accelerated filers

7

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

that prepare their financial statements in accordance with GAAP will be subject to Inline XBRL requirements beginning with the fiscal period ending on or after June 15, 2019. The Company expects to use Inline XBRL starting with its Form 10-Q for the quarter ending June 30, 2019.
In February 2016, the Financial Accounting Standards Board (FASB) issued ASU 2016-02, Leases. This new guidance is effective January 1, 2019, with early adoption permitted. The pronouncement will require lessees to recognize a liability to make lease payments and a right-of-use (ROU) asset, initially measured at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. The guidance allows lessors to make an accounting policy election, by class of underlying asset, to not separate non-lease components from lease components, if certain requirements are met. The guidance also provides an optional transition method which would allow entities to initially apply the new guidance in the period of adoption, recognizing a cumulative-effect adjustment to the opening balance of retained earnings, if necessary.
Upon adoption, the Company will recognize a lease liability and an ROU asset for operating leases where it is the lessee, such as ground leases and office leases. The Company is in the process of evaluating the inputs required to calculate the amounts that will be recorded on its balance sheet for each lease. For leases with a term of 12 months or less, the Company expects to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. For leases where it is the lessor, the Company expects that accounting for lease components will be largely unchanged from existing GAAP and to elect the practical expedient to not separate non-lease components from lease components. Only incremental direct leasing costs may be capitalized under the new guidance, which is consistent with the Company’s existing policies. The Company expects to adopt this new guidance on January 1, 2019 and apply the requirements as of that date. The Company will continue to evaluate the impact of this guidance until it becomes effective, but the Company does not expect the guidance regarding capitalization of leasing costs will have any effect on its condensed consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This new guidance is effective January 1, 2020, with early adoption permitted beginning January 1, 2019, and replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. Financial assets that are measured at amortized cost will be required to be presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis. In addition, an entity must consider broader information in developing its expected credit loss estimate, including the use of forecasted information. Generally, the pronouncement requires a modified retrospective method of adoption. The Company will continue to evaluate the impact of this guidance until it becomes effective.
(3) ACQUISITIONS
The Company did not acquire any properties during the six months ended June 30, 2018.
The Company closed on the following acquisitions during the six months ended June 30, 2017:
Date
 
Property Name
 
Metropolitan
Statistical Area (MSA)
 
Property Type
 
Square
Footage
 
Acquisition
Price
 
January 13, 2017
 
Main Street Promenade (a)
 
Chicago
 
Multi-tenant retail
 
181,600

 
$
88,000

 
January 25, 2017
 
Carillon – Fee Interest
 
Washington, D.C.
 
Fee interest (b)
 

 
2,000

 
February 24, 2017
 
One Loudoun Downtown –
Phase II
 
Washington, D.C.
 
Additional phase of multi-tenant retail (c)
 
15,900

 
4,128

 
April 5, 2017
 
One Loudoun Downtown –
Phase III
 
Washington, D.C.
 
Additional phase of multi-tenant retail (c)
 
9,800

 
2,193

 
May 16, 2017
 
One Loudoun Downtown –
Phase IV
 
Washington, D.C.
 
Development rights (c)
 

 
3,500

 
 
 
 
 
 
 
 
 
207,300

 
$
99,821

(d)
(a)
This property was acquired through two consolidated VIEs and was used to facilitate an Internal Revenue Code Section 1031 tax-deferred exchange (1031 Exchange).
(b)
The wholly-owned multi-tenant retail operating property formerly known as Boulevard at the Capital Centre, which is located in Largo, Maryland, was previously subject to an approximately 70 acre long-term ground lease with a third party. The Company completed a transaction whereby it received the fee interest in approximately 50 acres of the underlying land in exchange for which (i) the Company paid $1,939 and (ii) the term of the ground lease with respect to the remaining approximately 20 acres was shortened to nine months. The Company derecognized building and improvements of $11,347 related to the remaining ground lease, recognized the fair value of land

8

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

received of $15,200 and recorded a deferred gain of $2,524 as of June 30, 2017, which was recognized during the three months ended December 31, 2017 upon the expiration of the ground lease on approximately 20 acres. The total number of properties in the Company’s portfolio was not affected by this transaction.
(c)
The Company acquired three additional phases, including the development rights for an additional 123 residential units for a total of 408 units, at its One Loudoun Downtown multi-tenant retail operating property, which were accounted for as asset acquisitions. The total number of properties in the Company’s portfolio was not affected by these transactions.
(d)
Acquisition price does not include capitalized closing costs and adjustments totaling $2,334.
The following table summarizes the acquisition date values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:
 
 
Six Months Ended
June 30, 2017
Land
 
$
23,559

Building and other improvements, net
 
77,748

Acquired lease intangible assets (a)
 
7,343

Acquired lease intangible liabilities (b)
 
(5,477
)
Other liabilities
 
(1,076
)
Net assets acquired
 
$
102,097

(a)
The weighted average amortization period for acquired lease intangible assets is six years for acquisitions completed during the six months ended June 30, 2017.
(b)
The weighted average amortization period for acquired lease intangible liabilities is 13 years for acquisitions completed during the six months ended June 30, 2017.
The above acquisitions were funded using a combination of available cash on hand, proceeds from dispositions and proceeds from the Company’s unsecured revolving line of credit. All of the acquisitions completed during 2017 were considered asset acquisitions and, as such, transaction costs were capitalized upon closing.
Variable Interest Entities
During the six months ended June 30, 2017, the Company entered into an agreement with a qualified intermediary related to a 1031 Exchange. The Company loaned $87,452 to the VIEs to acquire Main Street Promenade on January 13, 2017. The 1031 Exchange was completed during the year ended December 31, 2017 and, in accordance with applicable provisions of the Code, within 180 days after the acquisition date of the property. At the completion of the 1031 Exchange, the sole membership interests of the VIEs were assigned to the Company in satisfaction of the outstanding loan, resulting in the entities being wholly owned by the Company and no longer considered VIEs.
Prior to the completion of the 1031 Exchange, the Company was deemed to be the primary beneficiary of each VIE as it had the ability to direct the activities of the VIEs that most significantly impact their economic performance and had all of the risks and rewards of ownership. Accordingly, the Company consolidated the VIEs. No value or income was attributed to the noncontrolling interest. The assets of the VIEs consisted of the investment property, Main Street Promenade, which was operated by the Company.
(4) DISPOSITIONS
On January 1, 2018, the Company adopted ASU 2014-09, Revenue from Contracts with Customers and ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets on a modified retrospective basis. The dispositions completed during the six months ended June 30, 2018 were not considered to be contracts with customers as defined in ASU 2014-09, Revenue from Contracts with Customers, as they are not considered an output of the Company’s ordinary business activities. Rather, the dispositions follow the new guidance of ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets. The adoption on a modified retrospective basis requires the guidance and related disclosure requirements of ASU 2017-05 to be followed for contracts related to the sale of investment properties completed during the six months ended June 30, 2018. Disclosures related to periods prior to January 1, 2018 for the sale of investment properties are not impacted by the adoption.

9

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Under the new guidance, derecognition of nonfinancial assets and in substance nonfinancial assets, including real estate, and the related gains on sale of investment properties are recognized when (i) the parties to the sale contract have approved the contract and are committed to perform their respective obligations; (ii) the Company can identify each party’s rights regarding the property transferred; (iii) the Company can identify the payment terms for the property transferred; (iv) the contract has commercial substance (that is, the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the contract); and (v) the Company has satisfied its performance obligations by transferring control of the property. Typically, the timing of payment and satisfaction of performance obligations occur simultaneously on the disposition date upon transfer of the property’s ownership.
The Company closed on the following dispositions during the six months ended June 30, 2018:
Date
 
Property Name
 
Property Type
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Gain
January 19, 2018
 
Crown Theater
 
Single-user retail
 
74,200

 
$
6,900

 
$
6,350

 
$
2,952

February 15, 2018
 
Cranberry Square
 
Multi-tenant retail
 
195,200

 
23,500

 
23,163

 
10,174

March 7, 2018
 
Rite Aid Store (Eckerd)–Crossville, TN
 
Single-user retail
 
13,800

 
1,800

 
1,768

 
157

March 20, 2018
 
Home Depot Plaza (b)
 
Multi-tenant retail
 
135,600

 
16,250

 
15,873

 

March 21, 2018
 
Governor's Marketplace
 
Multi-tenant retail
 
243,100

 
23,500

 
20,993

 
7,429

March 28, 2018
 
Stony Creek I & Stony Creek II (c)
 
Multi-tenant retail
 
204,800

 
32,800

 
32,078

 
11,628

April 19, 2018
 
CVS Pharmacy – Lawton, OK
 
Single-user retail
 
10,900

 
1,600

 
1,596

 

May 31, 2018
 
Schaumburg Towers
 
Office
 
895,400

 
86,600

 
73,315

 

 
 
 
 
 
 
1,773,000

 
$
192,950

 
$
175,136

 
$
32,340

(a)
Aggregate proceeds are net of transaction costs, as well as capital and tenant-related costs credited to the buyer at close, as applicable, and exclude $169 of condemnation proceeds, which did not result in any additional gain recognition.
(b)
The Company repaid a $10,750 mortgage payable in conjunction with the disposition of the property.
(c)
The terms of the disposition of Stony Creek I and Stony Creek II were negotiated as a single transaction.
During the six months ended June 30, 2018, the Company also received net proceeds of $11,820 and recognized a gain of $2,179 in connection with the sale of air rights at the redevelopment portion of Circle East. The aggregate proceeds, net of closing costs, from the property dispositions and other transactions during the six months ended June 30, 2018 totaled $187,125, with aggregate gains of $34,519.
Subsequent to June 30, 2018, the Company closed on the first phase of the sale of a land parcel, which included rights to develop eight residential units, at One Loudoun Downtown, a multi-tenant retail operating property located in Ashburn, Virginia, for a sales price of $1,800. The sale of land will occur in three phases and will include the rights to develop a total of 30 residential units for a total sales price of $6,800.

10

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company closed on the following dispositions during the six months ended June 30, 2017:
Date
 
Property Name
 
Property Type
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Gain
January 27, 2017
 
Rite Aid Store (Eckerd), Culver Rd. –
Rochester, NY
 
Single-user retail
 
10,900

 
$
500

 
$
332

 
$

February 21, 2017
 
Shoppes at Park West
 
Multi-tenant retail
 
63,900

 
15,383

 
15,261

 
7,569

March 7, 2017
 
CVS Pharmacy – Sylacauga, AL (b)
 
Single-user retail
 
10,100

 
3,700

 
3,348

 
1,651

March 8, 2017
 
Rite Aid Store (Eckerd) –
Kill Devil Hills, NC
 
Single-user retail
 
13,800

 
4,297

 
4,134

 
1,857

March 15, 2017
 
Century III Plaza – Home Depot (c)
 
Single-user parcel
 
131,900

 
17,519

 
17,344

 
4,487

March 16, 2017
 
Village Shoppes at Gainesville
 
Multi-tenant retail
 
229,500

 
41,750

 
41,380

 
14,107

March 24, 2017
 
Northwood Crossing (b)
 
Multi-tenant retail
 
160,000

 
22,850

 
22,723

 
10,007

April 4, 2017
 
University Town Center (b)
 
Multi-tenant retail
 
57,500

 
14,700

 
14,590

 
9,128

April 4, 2017
 
Edgemont Town Center (b)
 
Multi-tenant retail
 
77,700

 
19,025

 
18,857

 
8,995

April 4, 2017
 
Phenix Crossing (b)
 
Multi-tenant retail
 
56,600

 
12,400

 
12,296

 
5,699

April 27, 2017
 
Brown’s Lane
 
Multi-tenant retail
 
74,700

 
10,575

 
10,318

 
3,408

May 9, 2017
 
Rite Aid Store (Eckerd) – Greer, SC
 
Single-user retail
 
13,800

 
3,050

 
2,961

 
830

May 9, 2017
 
Evans Town Centre
 
Multi-tenant retail
 
75,700

 
11,825

 
11,419

 
5,226

May 25, 2017
 
Red Bug Village
 
Multi-tenant retail
 
26,200

 
8,100

 
7,767

 
2,184

May 26, 2017
 
Wilton Square
 
Multi-tenant retail
 
438,100

 
49,300

 
48,503

 
19,630

May 30, 2017
 
Town Square Plaza
 
Multi-tenant retail
 
215,600

 
28,600

 
26,459

 
3,412

May 31, 2017
 
Cuyahoga Falls Market Center
 
Multi-tenant retail
 
76,400

 
11,500

 
11,101

 
1,300

June 5, 2017
 
Plaza Santa Fe II
 
Multi-tenant retail
 
224,200

 
35,220

 
33,506

 
16,136

June 6, 2017
 
Rite Aid Store (Eckerd) – Columbia, SC
 
Single-user retail
 
13,400

 
3,250

 
3,163

 
1,046

June 16, 2017
 
Fox Creek Village
 
Multi-tenant retail
 
107,500

 
24,825

 
24,415

 
12,470

June 29, 2017
 
Cottage Plaza
 
Multi-tenant retail
 
85,500

 
23,050

 
22,685

 
8,039

June 29, 2017
 
Magnolia Square
 
Multi-tenant retail
 
116,000

 
16,000

 
15,692

 
4,866

June 29, 2017
 
Cinemark Seven Bridges
 
Single-user retail
 
70,200

 
15,271

 
14,948

 
3,973

June 29, 2017
 
Low Country Village I & II (b)
 
Multi-tenant retail
 
139,900

 
22,075

 
21,639

 
10,286

 
 
 
 
 
 
2,489,100

 
$
414,765

 
$
404,841

 
$
156,306

(a)
Aggregate proceeds are net of transaction costs, as well as capital and tenant-related costs credited to the buyer at close, as applicable, and exclude $150 of condemnation proceeds, which did not result in any additional gain recognition.
(b)
As of June 30, 2017, the following disposition proceeds were temporarily restricted related to 1031 Exchanges and are included in “Other assets, net” in the accompanying condensed consolidated balance sheets:
Property Name
 
Proceeds
Temporarily
Restricted
CVS Pharmacy – Sylacauga, AL
 
$
3,332

Northwood Crossing
 
22,719

University Town Center
 
14,595

Edgemont Town Center
 
18,885

Phenix Crossing
 
12,324

Low Country Village I & II
 
21,706

 
 
$
93,561

(c)
The Company disposed of the Home Depot parcel at Century III Plaza, an existing 284,100 square foot multi-tenant retail operating property. The remaining portion of Century III Plaza was classified as held for sale as of June 30, 2017 and was sold on December 15, 2017.
During the six months ended June 30, 2017, the Company also received proceeds of $5 and recognized a gain of $1,486 as a result of the receipt of the escrow related to the disposition of Maple Tree Place on August 12, 2016. The aggregate proceeds, net of closing costs, from the property dispositions and other transactions during the six months ended June 30, 2017 totaled $404,996, with aggregate gains of $157,792.

11

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

None of the dispositions completed during the six months ended June 30, 2018 and 2017 qualified for discontinued operations treatment and none are considered individually significant.
As of June 30, 2018, no properties qualified for held for sale accounting treatment. Crown Theater was classified as held for sale as of December 31, 2017 and was sold during the six months ended June 30, 2018.
The following table presents the assets and liabilities associated with the investment property classified as held for sale:
 
December 31, 2017
Assets
 
Land, building and other improvements
$
2,791

Less accumulated depreciation
(27
)
Net investment properties
2,764

Other assets
883

Assets associated with investment properties held for sale
$
3,647

 
 
Liabilities
 
Other liabilities
$

Liabilities associated with investment properties held for sale
$

(5) EQUITY COMPENSATION PLANS
On May 24, 2018, the Company’s shareholders approved the Company’s Amended and Restated 2014 Long-Term Equity Compensation Plan (Amended 2014 Plan), which amends and restates the Company’s 2014 Long-Term Equity Compensation Plan. The Amended 2014 Plan, subject to certain conditions, authorizes the issuance of incentive and non-qualified stock options, restricted stock and restricted stock units, stock appreciation rights and other similar awards to the Company’s employees, non-employee directors, consultants and advisors in connection with compensation and incentive arrangements that may be established by the Company’s board of directors or executive management.
The following table summarizes the Company’s unvested restricted shares as of and for the six months ended June 30, 2018:

Unvested
Restricted
Shares

Weighted Average
Grant Date
Fair Value per
Restricted Share
Balance as of January 1, 2018
496


$
14.81

Shares granted (a)
382


$
12.81

Shares vested
(345
)

$
14.64

Shares forfeited
(12
)
 
$
13.26

Balance as of June 30, 2018 (b)
521


$
13.50

(a)
Shares granted vest over periods ranging from 0.9 years to three years in accordance with the terms of applicable award agreements.
(b)
As of June 30, 2018, total unrecognized compensation expense related to unvested restricted shares was $3,984, which is expected to be amortized over a weighted average term of 1.4 years.
The following table summarizes the Company’s unvested performance restricted stock units (RSUs) as of and for the six months ended June 30, 2018:
 
Unvested
RSUs
 
Weighted Average
Grant Date
Fair Value
per RSU
RSUs eligible for future conversion as of January 1, 2018
555

 
$
14.60

RSUs granted (a)
291

 
$
14.36

Conversion of RSUs to common stock and restricted shares (b)
(141
)
 
$
14.10

RSUs ineligible for conversion
(56
)
 
$
15.36

RSUs eligible for future conversion as of June 30, 2018 (c)
649

 
$
14.54


12

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(a)
Assumptions and inputs as of the grant dates included a weighted average risk-free interest rate of 2.04%, the Company’s historical common stock performance relative to the peer companies within the National Association of Real Estate Investment Trusts (NAREIT) Shopping Center Index and the Company’s weighted average common stock dividend yield of 5.00%. Subject to continued employment, in 2021, following the performance period which concludes on December 31, 2020, one-third of the RSUs that are earned will convert into shares of common stock and two-thirds will convert into restricted shares with a one year vesting term.
(b)
On February 5, 2018, 141 RSUs converted into 42 shares of common stock and 65 restricted shares that will vest on December 31, 2018, subject to continued employment through such date, after applying a conversion rate of 76% based upon the Company’s Total Shareholder Return (TSR) relative to the TSRs of its peer companies, for the performance period that concluded on December 31, 2017. An additional 16 shares of common stock were also issued representing the dividends that would have been paid on the earned awards during the performance period.
(c)
As of June 30, 2018, total unrecognized compensation expense related to unvested RSUs was $5,683, which is expected to be amortized over a weighted average term of 2.7 years.
During the three months ended June 30, 2018 and 2017, the Company recorded compensation expense of $1,596 and $1,756, respectively, related to the amortization of unvested restricted shares and RSUs. During the six months ended June 30, 2018 and 2017, the Company recorded compensation expense of $3,729 and $3,549, respectively, related to the amortization of unvested restricted shares and RSUs. Included within the amortization of stock-based compensation expense recorded during the six months ended June 30, 2018 is compensation expense of $330 related to the accelerated vesting of 23 restricted shares and remaining amortization related to the 29 RSUs that remain eligible for future conversion in conjunction with the departure of the Company’s former Executive Vice President, General Counsel and Secretary. The total fair value of restricted shares vested during the six months ended June 30, 2018 was $4,195.
Prior to 2013, non-employee directors had been granted options to acquire shares under the Company’s Third Amended and Restated Independent Director Stock Option and Incentive Plan. As of June 30, 2018, options to purchase 38 shares of common stock remained outstanding and exercisable. The Company did not grant any options in 2018 or 2017 and did not record any compensation expense related to stock options during the six months ended June 30, 2018 and 2017.
(6) MORTGAGES PAYABLE
The following table summarizes the Company’s mortgages payable:
 
June 30, 2018
 
December 31, 2017

Aggregate
Principal
Balance

Weighted
Average
Interest Rate
 
Weighted
Average Years
to Maturity
 
Aggregate
Principal
Balance
 
Weighted
Average
Interest Rate
 
Weighted
Average Years
to Maturity
Fixed rate mortgages payable (a)
$
274,420


5.00
%
 
4.6
 
$
287,238

 
4.99
%
 
5.2
Premium, net of accumulated amortization
900

 
 
 
 
 
1,024

 
 
 
 
Discount, net of accumulated amortization
(558
)

 
 
 
 
(579
)
 
 
 
 
Capitalized loan fees, net of accumulated
amortization
(495
)
 
 
 
 
 
(615
)
 
 
 
 
Mortgages payable, net
$
274,267


 
 
 
 
$
287,068

 
 
 
 
(a)
The fixed rate mortgages had interest rates ranging from 3.75% to 8.00% as of June 30, 2018 and December 31, 2017.
During the six months ended June 30, 2018, the Company repaid a $10,750 mortgage payable, which had a fixed interest rate of 4.82%, in conjunction with the disposition of the related property and made scheduled principal payments of $2,068 related to amortizing loans.

13

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Debt Maturities
The following table shows the scheduled maturities and principal amortization of the Company’s indebtedness as of June 30, 2018 for the remainder of 2018, each of the next four years and thereafter and the weighted average interest rates by year. The table does not reflect the impact of any debt activity that occurred after June 30, 2018.
 
2018
 
2019
 
2020
 
2021
 
2022
 
Thereafter
 
Total
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages payable (a)
$
2,098

 
$
25,257

 
$
3,923

 
$
22,820

 
$
157,216

 
$
63,106

 
$
274,420

Fixed rate term loans (b)

 

 

 
250,000

 

 
200,000

 
450,000

Unsecured notes payable (c)

 

 

 
100,000

 

 
600,000

 
700,000

Total fixed rate debt
2,098

 
25,257

 
3,923

 
372,820

 
157,216

 
863,106

 
1,424,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate revolving line of credit

 

 

 

 
126,000

 

 
126,000

Total debt (d)
$
2,098

 
$
25,257

 
$
3,923

 
$
372,820

 
$
283,216

 
$
863,106

 
$
1,550,420

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate on debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
5.09
%
 
7.29
%
 
4.62
%
 
3.56
%
 
5.00
%
 
3.91
%
 
4.00
%
Variable rate debt (e)

 

 

 

 
3.14
%
 

 
3.14
%
Total
5.09
%
 
7.29
%
 
4.62
%
 
3.56
%
 
4.17
%
 
3.91
%
 
3.93
%
(a)
Excludes mortgage premium of $900 and discount of $(558), net of accumulated amortization, as of June 30, 2018.
(b)
$250,000 of London Interbank Offered Rate (LIBOR)-based variable rate debt has been swapped to a fixed rate through three interest rate swaps. The swaps effectively convert one-month floating rate LIBOR to a fixed rate of 2.00% through January 5, 2021. In addition, $200,000 of LIBOR-based variable rate debt has been swapped to a fixed rate through two interest rate swaps. The swaps effectively convert one-month floating rate LIBOR to a fixed rate of 1.26% through November 22, 2018.
(c)
Excludes discount of $(793), net of accumulated amortization, as of June 30, 2018.
(d)
The weighted average years to maturity of consolidated indebtedness was 5.3 years as of June 30, 2018. Total debt excludes capitalized loan fees of $(6,064), net of accumulated amortization, as of June 30, 2018, which are included as a reduction to the respective debt balances.
(e)
Represents interest rates as of June 30, 2018.
The Company plans on addressing its debt maturities through a combination of cash flows generated from operations, working capital, capital markets transactions and its unsecured revolving line of credit.
(7) UNSECURED NOTES PAYABLE
The following table summarizes the Company’s unsecured notes payable:
 
 
 
 
June 30, 2018
 
December 31, 2017
Unsecured Notes Payable
 
Maturity Date
 
Principal Balance
 
Interest Rate/
Weighted Average
Interest Rate
 
Principal Balance
 
Interest Rate/
Weighted Average
Interest Rate
Senior notes – 4.12% due 2021
 
June 30, 2021
 
$
100,000

 
4.12
%
 
$
100,000

 
4.12
%
Senior notes – 4.58% due 2024
 
June 30, 2024
 
150,000

 
4.58
%
 
150,000

 
4.58
%
Senior notes – 4.00% due 2025
 
March 15, 2025
 
250,000

 
4.00
%
 
250,000

 
4.00
%
Senior notes – 4.08% due 2026
 
September 30, 2026
 
100,000

 
4.08
%
 
100,000

 
4.08
%
Senior notes – 4.24% due 2028
 
December 28, 2028
 
100,000

 
4.24
%
 
100,000

 
4.24
%
 
 
 
 
700,000

 
4.19
%
 
700,000

 
4.19
%
Discount, net of accumulated amortization
 
 
 
(793
)
 
 
 
(853
)
 
 
Capitalized loan fees, net of accumulated amortization
 
 
 
(3,152
)
 
 
 
(3,399
)
 
 
 
 
Total
 
$
696,055

 
 
 
$
695,748

 
 

14

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Notes Due 2026 and 2028
The note purchase agreement governing the 4.08% senior unsecured notes due 2026 and the 4.24% senior unsecured notes due 2028 (Notes Due 2026 and 2028) contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the note purchase agreement, the Company is subject to various financial covenants, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) a minimum interest coverage ratio; (iii) an unencumbered interest coverage ratio (as set forth in the Company’s unsecured credit facility and the note purchase agreement governing the Notes Due 2021 and 2024 described below); and (iv) a fixed charge coverage ratio (as set forth in the Company’s unsecured credit facility).
Notes Due 2025
The indenture, as supplemented (the Indenture), governing the 4.00% senior unsecured notes due 2025 (Notes Due 2025) contains customary covenants and events of default. Pursuant to the terms of the Indenture, the Company is subject to various financial covenants, including the requirement to maintain the following: (i) maximum secured and total leverage ratios; (ii) a debt service coverage ratio; and (iii) maintenance of an unencumbered assets to unsecured debt ratio.
Notes Due 2021 and 2024
The note purchase agreement governing the 4.12% senior unsecured notes due 2021 and the 4.58% senior unsecured notes due 2024 (Notes Due 2021 and 2024) contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the note purchase agreement, the Company is subject to various financial covenants, some of which are based upon the financial covenants in effect in the Company’s unsecured credit facility, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum interest coverage and unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth.
As of June 30, 2018, management believes the Company was in compliance with the financial covenants under the Indenture and the note purchase agreements.
(8) UNSECURED TERM LOANS AND REVOLVING LINE OF CREDIT
The following table summarizes the Company’s term loans and revolving line of credit:
 
 
 
 
June 30, 2018
 
December 31, 2017
 
 
Maturity Date
 
Balance
 
Interest
Rate
 
Balance
 
Interest
Rate
Unsecured credit facility term loan due 2021 – fixed rate (a)
 
January 5, 2021
 
$
250,000

 
3.20
%
 
$
250,000

 
3.30
%
Unsecured credit facility term loan due 2018 – variable rate
 
May 11, 2018
 

 
%
 
100,000

 
2.93
%
Unsecured term loan due 2023 – fixed rate (b)
 
November 22, 2023
 
200,000

 
2.96
%
 
200,000

 
2.96
%
Subtotal
 
 
 
450,000

 
 
 
550,000

 
 
Capitalized loan fees, net of accumulated amortization
 
 
 
(2,417
)
 
 
 
(2,730
)
 
 
Term loans, net
 
 
 
$
447,583

 
 
 
$
547,270

 
 
 
 
 
 
 
 
 
 
 
 
 
Unsecured credit facility revolving line of credit –
variable rate (c)
 
April 22, 2022
 
$
126,000

 
3.14
%
 
$
216,000

 
2.92
%
(a)
$250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage grid through January 5, 2021. As of June 30, 2018, the leverage grid ranged from 1.20% to 1.70% and the applicable credit spread was 1.20%. As of December 31, 2017, the leverage grid ranged from 1.30% to 2.20% and the applicable credit spread was 1.30%.
(b)
$200,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 1.26% plus a credit spread based on a leverage grid ranging from 1.70% to 2.55% through November 22, 2018. The applicable credit spread was 1.70% as of June 30, 2018 and December 31, 2017.
(c)
Excludes capitalized loan fees, which are included in “Other assets, net” in the accompanying condensed consolidated balance sheets.

15

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Unsecured Credit Facility
On April 23, 2018, the Company entered into its fifth amended and restated unsecured credit agreement (Unsecured Credit Agreement) with a syndicate of financial institutions led by Wells Fargo Bank, National Association serving as syndication agent and KeyBank National Association serving as administrative agent to provide for an unsecured credit facility aggregating $1,100,000 (Unsecured Credit Facility). The Unsecured Credit Facility consists of an $850,000 unsecured revolving line of credit and a $250,000 unsecured term loan and is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with the Unsecured Credit Agreement, the Company may elect to convert to an investment grade pricing grid. As of June 30, 2018, making such an election would have resulted in a higher interest rate and, as such, the Company has not made the election to convert to an investment grade pricing grid.
The following table summarizes the key terms of the Unsecured Credit Facility:
 
 
 
 
 
 
 
 
Leverage-Based Pricing
 
Investment Grade Pricing
Unsecured Credit Facility
 
Maturity Date
 
Extension Option
 
Extension Fee
 
Credit Spread
Facility Fee
 
Credit Spread
Facility Fee
$250,000 unsecured term loan
 
1/5/2021
 
N/A
 
N/A
 
1.20% - 1.70%
N/A
 
0.90% - 1.75%
N/A
$850,000 unsecured revolving line of credit
 
4/22/2022
 
2 six month
 
0.075%
 
1.05% - 1.50%
0.15% - 0.30%
 
0.825%-1.55%
0.125% - 0.30%
The Unsecured Credit Facility has a $500,000 accordion option that allows the Company, at its election, to increase the total Unsecured Credit Facility up to $1,600,000, subject to (i) customary fees and conditions including, but not limited to, the absence of an event of default as defined in the Unsecured Credit Agreement and (ii) the Company’s ability to obtain additional lender commitments.
The Unsecured Credit Agreement contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the Unsecured Credit Agreement, the Company is subject to various financial covenants, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; and (ii) minimum fixed charge and unencumbered interest coverage ratios.
The Company previously had a $1,200,000 unsecured credit facility that consisted of the following: (i) a $750,000 unsecured revolving line of credit that bore interest at a rate of LIBOR plus a credit spread ranging from 1.35% to 2.25% and was scheduled to mature on January 5, 2020; (ii) a $250,000 unsecured term loan that bore interest at a rate of LIBOR plus a credit spread ranging from 1.30% to 2.20% and was scheduled to mature on January 5, 2021; and (iii) a $200,000 unsecured term loan that bore interest at a rate of LIBOR plus a credit spread ranging from 1.45% to 2.20% and was scheduled to mature on May 11, 2018. During the year ended December 31, 2017, the Company repaid $100,000 of the unsecured term loan due 2018 and in conjunction with the execution of the Unsecured Credit Agreement in 2018, the Company repaid the remaining $100,000 balance of the unsecured term loan due 2018.
Term Loan Due 2023
On January 3, 2017, the Company received funding on a seven-year $200,000 unsecured term loan (Term Loan Due 2023) with a group of financial institutions, which closed during the year ended December 31, 2016. The Term Loan Due 2023 is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with the term loan agreement (Term Loan Agreement), the Company may elect to convert to an investment grade pricing grid. As of June 30, 2018, making such an election would have resulted in a higher interest rate and, as such, the Company has not made the election to convert to an investment grade pricing grid.
The following table summarizes the key terms of the Term Loan Due 2023:
Term Loan Due 2023
 
Maturity Date
 
Leverage-Based Pricing
Credit Spread
 
Investment Grade Pricing
Credit Spread
$200,000 unsecured term loan
 
11/22/2023
 
1.70% – 2.55%
 
1.50% – 2.45%
The Term Loan Due 2023 has a $100,000 accordion option that allows the Company, at its election, to increase the total unsecured term loan up to $300,000, subject to customary fees and conditions, including the absence of an event of default as defined in the Term Loan Agreement.

16

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Term Loan Agreement contains customary representations, warranties and covenants, and events of default, including financial covenants that require the Company to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; and (ii) minimum fixed charge and unencumbered interest coverage ratios. As of June 30, 2018, management believes the Company was in compliance with the financial covenants and default provisions under the Term Loan Agreement.
(9) DERIVATIVES
The Company elected to early adopt ASU 2017-12, Derivatives and Hedging, as of January 1, 2018. The adoption eliminated the requirement to separately measure and report hedge ineffectiveness. The Company is now required to present the earnings effect of its hedging instruments in the same income statement line item in which it reports the earnings effect of the hedged items. Disclosures related to periods prior to January 1, 2018 are not impacted by the adoption.
The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company 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 rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
As of June 30, 2018, the Company used five interest rate swaps to hedge the variable cash flows associated with variable rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in “Accumulated other comprehensive income” and are reclassified to interest expense as interest payments are made on the Company’s variable rate debt. Over the next 12 months, the Company estimates that an additional $1,690 will be reclassified as a decrease to interest expense. Prior to January 1, 2018, only the effective portion of changes in fair value of the derivatives that were designated and that qualified as cash flow hedges was recorded in “Accumulated other comprehensive income” and the ineffective portion of the change in fair value of the derivatives was recognized directly in earnings.
The following table summarizes the Company’s interest rate swaps as of June 30, 2018, which effectively convert one-month floating rate LIBOR to a fixed rate:
Effective Date
 
Notional
 
Fixed
Interest Rate
 
Maturity Date
January 3, 2017
 
$
100,000

 
1.26
%
 
November 22, 2018
January 3, 2017
 
$
100,000

 
1.26
%
 
November 22, 2018
December 29, 2017
 
$
100,000

 
2.00
%
 
January 5, 2021
December 29, 2017
 
$
100,000

 
2.00
%
 
January 5, 2021
December 29, 2017
 
$
50,000

 
2.00
%
 
January 5, 2021
The following table summarizes the Company’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
 
 
Number of Instruments
 
Notional
Interest Rate Derivatives
 
June 30, 2018
 
December 31, 2017
 
June 30, 2018
 
December 31, 2017
Interest rate swaps
 
5

 
5

 
$
450,000

 
$
450,000

The table below presents the estimated fair value of the Company’s derivative financial instruments, which are presented within “Other assets, net” in the condensed consolidated balance sheets. The valuation techniques used are described in Note 13 to the condensed consolidated financial statements.
 
 
Fair Value
 
 
June 30, 2018
 
December 31, 2017
Derivatives designated as cash flow hedges:
 
 
 
 
Interest rate swaps
 
$
4,699

 
$
1,086


17

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table presents the effect of the Company’s derivative financial instruments on the accompanying condensed consolidated statements of operations and other comprehensive income (loss) for the three and six months ended June 30, 2018:
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Gain
Recognized in Other
Comprehensive Income
on Derivative
 
Location of Gain
Reclassified from
Accumulated Other
Comprehensive Income
(AOCI) into Income
 
Amount of Gain
Reclassified from
AOCI into Income
 
Total Interest Expense
Presented in the Results
of Operations in which
the Effects of Cash Flow
Hedges are Recorded
 
 
Three Months
Ended
June 30, 2018
 
Six Months
Ended
June 30, 2018
 
 
 
Three Months
Ended
June 30, 2018
 
Six Months
Ended
June 30, 2018
 
Three Months
Ended
June 30, 2018
 
Six Months
Ended
June 30, 2018
Interest rate swaps
 
$
(1,138
)
 
$
(3,805
)
 
Interest expense
 
$
(279
)
 
$
(192
)
 
$
16,817

 
$
35,582

The following table presents the effect of the Company’s derivative financial instruments on the accompanying condensed consolidated statements of operations and other comprehensive income (loss) for the three and six months ended June 30, 2017:
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of Loss (Gain)
Recognized in Other
Comprehensive Income
on Derivative
(Effective Portion)
 
Location of
(Gain) Loss
Reclassified from
AOCI into Income
(Effective Portion)
 
Amount of (Gain) Loss
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of Loss
Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
Amount of Loss
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
 
Three Months
Ended
June 30, 2017
 
Six Months
Ended
June 30, 2017
 
 
 
Three Months
Ended
June 30, 2017
 
Six Months
Ended
June 30, 2017
 
 
 
Three Months
Ended
June 30, 2017
 
Six Months
Ended
June 30, 2017
Interest rate swaps
 
$
59

 
$
(413
)
 
Interest expense
 
$
(86
)
 
$
74

 
Other income, net
 
$
5

 
$
11

(10) EQUITY
In December 2015, the Company entered into an at-the-market (ATM) equity program under which it may issue and sell shares of its Class A common stock, having an aggregate offering price of up to $250,000, from time to time. Actual sales may depend on a variety of factors, including, among others, market conditions and the trading price of the Company’s Class A common stock. Any net proceeds are expected to be used for general corporate purposes, which may include the funding of acquisitions and redevelopment activities and the repayment of debt, including the Company’s unsecured revolving line of credit. The Company did not sell any shares under its ATM equity program during the six months ended June 30, 2018 and 2017. As of June 30, 2018, the Company had Class A common shares having an aggregate offering price of up to $250,000 remaining available for sale under its ATM equity program.
In December 2015, the Company’s board of directors authorized a common stock repurchase program under which the Company may repurchase, from time to time, up to a maximum of $250,000 of shares of its Class A common stock. In December 2017, the Company’s board of directors authorized a $250,000 increase to the common stock repurchase program. The shares may be repurchased in the open market or in privately negotiated transactions and are canceled upon repurchase. The timing and actual number of shares repurchased will depend on a variety of factors, including price in absolute terms and in relation to the value of the Company’s assets, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and priorities. The common stock repurchase program may be suspended or terminated at any time without prior notice. The Company did not repurchase any shares during the six months ended June 30, 2018. During the three and six months ended June 30, 2017, the Company repurchased 6,024 shares at an average price per share of $12.55 for a total of $75,697. As of June 30, 2018, $264,057 remained available for repurchases under the common stock repurchase program.

18

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(11) EARNINGS PER SHARE
The following table summarizes the components used in the calculation of basic and diluted earnings per share (EPS):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
 
2018
 
2017
 
2018
 
2017
 
Numerator:
 
 
 
 
 

 

Income (loss) from continuing operations
$
10,882

 
$
(1,865
)
 
$
18,143


$
(52,129
)

Gain on sales of investment properties

 
116,628

 
34,519


157,792


Preferred stock dividends

 
(2,363
)
 

 
(4,725
)
 
Net income attributable to common shareholders
10,882

 
112,400

 
52,662


100,938


Earnings allocated to unvested restricted shares
(90
)
 
(88
)
 
(172
)
 
(178
)

Net income attributable to common shareholders excluding
amounts attributable to unvested restricted shares
$
10,792

 
$
112,312

 
$
52,490


$
100,760



 
 
 
 




Denominator:
 
 
 
 
 

 
 
Denominator for earnings per common share – basic: