10-Q 1 d550980d10q.htm FORM 10-Q Form 10-Q
Table of Contents

 

 

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 June 30, 2013

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 July 31, 2013, $0.01 par value per share: 48,172,773 shares

 

 

 


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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2013 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 June 30, 2013, Excel Trust, Inc. owned an approximate 97.5% partnership interest in the Operating Partnership. The remaining 2.5% 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, 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 operating partnership units.

Non-controlling interests and stockholders’ equity and partners’ capital are the main areas of difference between the 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.

 

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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:

 

   

consolidated financial statements;

 

   

the following notes to the consolidated financial statements:

 

   

Equity/Partners’ Capital;

 

   

Debt; and

 

   

Earnings per Share/Unit;

 

   

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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PART 1 — FINANCIAL INFORMATION

EXCEL TRUST, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2013

TABLE OF CONTENTS

 

PART I

  Financial Information     4   

Item 1.

  Financial Statements of Excel Trust, Inc.     4   
  Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012     4   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (unaudited)     5   
  Condensed Consolidated Statements of Equity for the six months ended June 30, 2013 and 2012 (unaudited)     6   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (unaudited)     8   
  Financial Statements of Excel Trust, L.P.  
  Condensed Consolidated Balance Sheets as of June 30, 2013 (unaudited) and December 31, 2012     9   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2013 and 2012 (unaudited)     10   
  Condensed Consolidated Statements of Capital for the six months ended June 30, 2013 and 2012 (unaudited)     11   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2013 and 2012 (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     54   

Item 4.

  Controls and Procedures     55   

PART II

  Other Information     56   

Item 1.

  Legal Proceedings     56   

Item 1A.

  Risk Factors     56   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     56   

Item 3.

  Defaults Upon Senior Securities     56   

Item 4.

  Mine Safety Disclosures     56   

Item 5.

  Other Information     56   

Item 6.

  Exhibits     57   

Signatures

      58   

 

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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)

 

     June 30, 2013
(unaudited)
    December 31,
2012
 

ASSETS:

    

Property:

    

Land

   $ 326,633      $ 320,289   

Buildings

     585,396        564,352   

Site improvements

     54,165        51,875   

Tenant improvements

     47,080        42,903   

Construction in progress

     3,370        1,709   

Less accumulated depreciation

     (49,294     (36,765
  

 

 

   

 

 

 

Property, net

     967,350        944,363   

Cash and cash equivalents

     7,199        5,596   

Restricted cash

     7,193        5,657   

Tenant receivables, net

     2,798        5,376   

Lease intangibles, net

     75,059        85,646   

Deferred rent receivable

     7,911        5,983   

Other assets

     18,616        17,618   

Real estate held for sale, net of accumulated depreciation

     3,226        —    

Investment in unconsolidated entities

     8,654        9,015   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,098,006      $ 1,079,254   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 301,235      $ 333,935   

Notes payable

     109,000        75,000   

Accounts payable and other liabilities

     22,016        25,319   

Lease intangibles, net

     24,444        26,455   

Dividends/distributions payable

     10,659        9,773   
  

 

 

   

 

 

 

Total liabilities(2)

     467,354        470,482   

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), 2,000,000 shares issued and outstanding at June 30, 2013 and December 31, 2012

     47,703        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 June 30, 2013 and December 31, 2012

     88,720        88,720   

Common stock, $.01 par value, 200,000,000 shares authorized; 48,026,373 and 44,905,683 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     479        448   

Additional paid-in capital

     477,369        459,151   

Retained Earnings (cumulative deficit)

     2,249        (1,414
  

 

 

   

 

 

 
     616,520        594,608   

Accumulated other comprehensive loss

     (267     (572
  

 

 

   

 

 

 

Total stockholders’ equity

     616,253        594,036   

Non-controlling interests

     14,399        14,736   
  

 

 

   

 

 

 

Total equity

     630,652        608,772   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,098,006      $ 1,079,254   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, Inc.’s consolidated total assets at June 30, 2013 and December 31, 2012, include $15,721 and $15,871, respectively, of 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 June 30, 2013 and December 31, 2012 include $182 and $154 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 Six Months Ended  
     June 30, 2013     June 30, 2012     June 30, 2013     June 30, 2012  

Revenues:

        

Rental revenue

   $ 22,631     $ 16,945     $ 45,041     $ 33,027  

Tenant recoveries

     4,547       3,185       9,279       6,452  

Other income

     285       328       602       688  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     27,463       20,458       54,922       40,167  

Expenses:

        

Maintenance and repairs

     1,772       1,352       3,487       2,674  

Real estate taxes

     3,053       2,460       6,079       4,525  

Management fees

     430       197       663       386  

Other operating expenses

     1,371       953       2,898       1,782  

Change in fair value of contingent consideration

     (1,558 )     —         (1,558 )     —    

General and administrative

     3,309       3,312       7,142       6,815  

Depreciation and amortization

     11,125       8,528       23,492       16,783  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     19,502       16,802       42,203       32,965  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     7,961       3,656       12,719       7,202  

Interest expense

     (4,517 )     (3,986 )     (9,315 )     (7,660 )

Interest income

     48       53       97       106  

Loss from equity in unconsolidated entities

     (65 )     —         (25 )     —    

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

     —         589       230       1,051  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     3,427       312       3,706       699  

Income from discontinued operations

     45       45       90       91  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,472       357       3,796       790  

Net income attributable to non-controlling interests

     (105 )     11       (133 )     16  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

     3,367       368       3,663       806  

Preferred stock dividends

     (2,744 )     (2,744 )     (5,488 )     (4,865 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the common stockholders

   $ 623      $ (2,376 )   $ (1,825 )   $ (4,059 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     0.01       (0.08 )     (0.05 )     (0.14 )

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

   $ 0.01     $ (0.08 )   $ (0.04 )   $ (0.14 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     47,150       32,785       46,256       32,273  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.17     $ 0.1625     $ 0.34     $ 0.325  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,472     $ 357     $ 3,796     $ 790  

Other comprehensive income (loss):

        

Change in unrealized gain on investment in equity securities

     —         82       —         103  

Gain on sale of equity securities (reclassification adjustment)

     —         —         —         (11 )

Change in unrealized loss on interest rate swaps

     152       124       313       108  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     3,624       563       4,109       990  

Comprehensive (income) loss attributable to non-controlling interests

     (109 )     4       (141 )     8  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 3,515     $ 567     $ 3,968     $ 998  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
    Cumulative
Retained
Earnings
(Deficit)
    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

    —          —          3,065,528        31        38,867        —          —          38,898        —          38,898   

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

    —          —          —          —          1,130        —          —          1,130        —          1,130   

Common stock dividends

    —          —          —          —          (16,160     —          —          (16,160     —          (16,160

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (653     (653

Net income

    —          —          —          —          —          3,663        —          3,663        133        3,796   

Preferred stock dividends

    —          —          —          —          (5,488     —          —          (5,488     —          (5,488

Change in unrealized loss on interest rate swaps

    —          —          —          —          —          —          305        305        8        313   

Adjustment for non-controlling interests

    —          —          —          —          (410     —          —          (410     410        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 47,703      $ 88,720        48,026,373      $ 479      $ 477,369      $ 2,249      $ (267   $ 616,253      $ 14,399      $ 630,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Series A
Preferred
Stock
     Series B
Preferred
Stock
     Common Stock      Additional
Paid-in
Capital
    Cumulative
Deficit
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
         Shares      Amount               

Balance at January 1, 2012

   $ 47,703       $ —           30,289,813       $ 302       $ 319,875      $ (3,277   $ (811   $ 363,792      $ 17,194      $ 380,986   

Net proceeds from sale of preferred stock

     —           88,720         —           —           —          —          —          88,720        —          88,720   

Issuance of restricted common stock awards

     —           —           18,356         —           —          —          —          —          —          —     

Redemption of OP units for common stock and cash

     —           —           193,510         2         2,285        —          —          2,287        (3,545     (1,258

Issuance of common stock for acquisition

     —           —           3,230,769         32         39,076        —          —          39,108        —          39,108   

Noncash amortization of share-based compensation

     —           —           —           —           1,589        —          —          1,589        —          1,589   

Common stock dividends

     —           —           —           —           (10,949     —          —          (10,949     —          (10,949

Distributions to non-controlling interests

     —           —           —           —           —          —          —          —          (598     (598

Net income

     —           —           —           —           —          806        —          806        (16     790   

Preferred stock dividends

     —           —           —           —           (4,865     —          —          (4,865     —          (4,865

Change in unrealized gain on investment in equity securities

     —           —           —           —           —          —          99        99        4        103   

Change in unrealized loss on interest rate swaps

     —           —           —           —           —          —          104        104        4        108   

Adjustment for non-controlling interests

     —           —           —           —           (626     —          —          (626     626        —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 47,703       $ 88,720         33,732,448       $ 336       $ 346,385      $ (2,471   $ (608   $ 480,065      $ 13,669      $ 493,734   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30, 2013
    Six Months Ended
June 30, 2012
 

Cash flows from operating activities:

    

Net income

   $ 3,796      $ 790   

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

    

Depreciation and amortization

     23,540        16,831   

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

     (230     (1,051

Change in fair value of contingent consideration

     (1,558     —     

Income from equity in unconsolidated entities

     25        —     

Deferred rent receivable

     (1,977     (1,386

Amortization of above- and below-market leases

     219        (171

Amortization of deferred balances

     806        958   

Bad debt expense

     442        395   

Share-based compensation expense

     1,130        1,589   

Distributions from unconsolidated entities

     303        —     

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

    

Tenant and other receivables

     2,190        824   

Other assets

     (787     (1,013

Accounts payable and other liabilities

     (2,456     424   
  

 

 

   

 

 

 

Net cash provided by operating activities

     25,443        18,190   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property

     (30,707     (74,942

Development of property and property improvements

     (9,234     (4,382

Investments in unconsolidated entities

     (106     —     

Return of capital from unconsolidated entities

     139        —     

Receipt of master lease payments

     277        —     

Capitalized leasing costs

     (1,001     (1,099

Advance of note receivable

     —          (750

Collection of mortgage loan receivable

     —          2,000   

Purchases of equity securities

     —          (125

Proceeds from sale of equity securities

     —          2,942   

Restricted cash

     (1,536     (1,245
  

 

 

   

 

 

 

Net cash used in investing activities

     (42,168     (77,601
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     39,294        —     

Issuance of preferred stock

     —          89,102   

Preferred stock offering costs

     —          (382

OP unit redemptions

     —          (1,915

Payments on mortgages payable

     (32,696     (2,146

Proceeds from mortgages payable

     —          —     

Payments on notes payable

     (35,000     (46,500

Proceeds from notes payable

     69,000        39,129   

Payments of contingent consideration

     —          (1,613

Distribution to non-controlling interests

     (634     (644

Preferred stock dividends

     (5,488     (2,996

Common stock dividends

     (15,293     (10,314

Deferred financing costs

     (855     (423
  

 

 

   

 

 

 

Net cash provided by financing activities

     18,328        61,298   
  

 

 

   

 

 

 

Net increase

     1,603        1,887   

Cash and cash equivalents, beginning of period

     5,596        5,292   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,199      $ 7,179   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $16 and $110

   $ 7,852      $ 5,934   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Acquisition of real estate for common shares and OP units

   $ —        $ 39,108   
  

 

 

   

 

 

 

Assumption of net mortgage debt in connection with property acquisitions

   $ —        $ 29,670   
  

 

 

   

 

 

 

Assets received in connection with property acquisitions

   $ —        $ 772   
  

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 44      $ 539   
  

 

 

   

 

 

 

Common stock dividends payable

   $ 8,164      $ 5,482   
  

 

 

   

 

 

 

Preferred stock dividends payable

   $ 2,287      $ 2,744   
  

 

 

   

 

 

 

OP unit distributions payable

   $ 208      $ 180   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 3,220      $ 618   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $ 313      $ 108   
  

 

 

   

 

 

 

Change in unrealized gain on marketable securities

   $ —        $ 103   
  

 

 

   

 

 

 

OP unit redemptions (common stock)

   $ 279      $ 2,287   
  

 

 

   

 

 

 

Reclassification of offering costs

   $ 396      $ —     
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $ 3,226      $ —     
  

 

 

   

 

 

 

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)

 

     June 30, 2013
(unaudited)
    December 31,
2012
 

ASSETS:

    

Property:

    

Land

   $ 326,633      $ 320,289   

Buildings

     585,396        564,352   

Site improvements

     54,165        51,875   

Tenant improvements

     47,080        42,903   

Construction in progress

     3,370        1,709   

Less accumulated depreciation

     (49,294     (36,765
  

 

 

   

 

 

 

Property, net

     967,350        944,363   

Cash and cash equivalents

     4,209        5,596   

Restricted cash

     7,193        5,657   

Tenant receivables, net

     2,798        5,376   

Lease intangibles, net

     75,059        85,646   

Deferred rent receivable

     7,911        5,983   

Other assets

     21,606        17,618   

Real estate held for sale, net of accumulated depreciation

     3,226        —    

Investment in unconsolidated entities

     8,654        9,015   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,098,006      $ 1,079,254   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL:

    

Liabilities:

    

Mortgages payable, net

   $ 301,235      $ 333,935   

Notes payable

     109,000        75,000   

Accounts payable and other liabilities

     22,016        25,319   

Lease intangibles, net

     24,444        26,455   

Distributions payable

     10,659        9,773   
  

 

 

   

 

 

 

Total liabilities(2)

     467,354        470,482   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

Preferred operating partnership units, 50,000,000 units authorized

    

7.0% Series A cumulative convertible perpetual preferred units, $50,000 liquidation preference ($25.00 per unit), 2,000,000 units issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     47,703        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 June 30, 2013 and December 31, 2012, respectively

     88,720        88,720   

Limited partners’ capital, 1,225,115 and 1,245,019 common operating partnership units issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     4,822        5,512   

General partner’s capital, 48,026,373 and 44,905,683 common operating partnership units issued and outstanding at June 30, 2013 and December 31, 2012, respectively

     487,934        465,612   
  

 

 

   

 

 

 
     629,179        607,547   

Accumulated other comprehensive loss

     (307     (620
  

 

 

   

 

 

 

Total partners’ capital

     628,872        606,927   

Non-controlling interests

     1,780        1,845   
  

 

 

   

 

 

 

Total capital

     630,652        608,772   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 1,098,006      $ 1,079,254   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, L.P.’s consolidated total assets at June 30, 2013 and December 31, 2012, include $15,721 and $15,871, respectively, of 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 June 30, 2013 and December 31, 2012 include $182 and $154 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 share data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30, 2013     June 30, 2012     June 30, 2013     June 30, 2012  

Revenues:

        

Rental revenue

   $ 22,631     $ 16,945     $ 45,041     $ 33,027  

Tenant recoveries

     4,547       3,185       9,279       6,452  

Other income

     285       328       602       688  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     27,463       20,458       54,922       40,167  

Expenses:

        

Maintenance and repairs

     1,772       1,352       3,487       2,674  

Real estate taxes

     3,053       2,460       6,079       4,525  

Management fees

     430       197       663       386  

Other operating expenses

     1,371       953       2,898       1,782  

Change in fair value of contingent consideration

     (1,558 )     —          (1,558 )     —     

General and administrative

     3,309       3,312       7,142       6,815  

Depreciation and amortization

     11,125       8,528       23,492       16,783  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     19,502       16,802       42,203       32,965  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     7,961       3,656       12,719       7,202  

Interest expense

     (4,517 )     (3,986 )     (9,315 )     (7,660 )

Interest income

     48       53       97       106  

Loss from equity in unconsolidated entities

     (65 )     —          (25 )     —     

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

     —          589       230       1,051  
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     3,427       312       3,706       699  

Income from discontinued operations

     45       45       90       91  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,472       357       3,796       790  

Net income attributable to non-controlling interests

     (85 )     (75 )     (172 )     (141 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

     3,387       282       3,624       649  

Preferred operating partnership unit distributions

     (2,744 )     (2,744 )     (5,488 )     (4,865 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the unitholders

   $ 643     $ (2,462 )   $ (1,864 )   $ (4,216 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations per unit attributable to the unitholders - basic and diluted

   $ 0.01     $ (0.08 )   $ (0.05 )   $ (0.14 )

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

   $ 0.01     $ (0.08 )   $ (0.04 )   $ (0.13 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common operating partnership units outstanding - basic and diluted

     48,375       33,991       47,490       33,573  
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per OP unit

   $ 0.17     $ 0.1625     $ 0.34     $ 0.325  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,472     $ 357     $ 3,796     $ 790  

Other comprehensive income (loss):

        

Change in unrealized gain on investment in equity securities

     —          82       —          103  

Gain on sale of equity securities (reclassification adjustment)

     —          —          —          (11 )

Change in unrealized loss on interest rate swaps

     152       124       313       108  
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, L.P.

   $ 3,624     $ 563     $ 4,109     $ 990  
  

 

 

   

 

 

   

 

 

   

 

 

 

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
Operating
Partnership
Units
    Amount     Common
Operating
Partnership
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 operating partnership units

     —          —          —          —          3,065,528        38,898       —          38,898       —          38,898  

Issuance of restricted common operating partnership unit awards

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

Redemption of common operating partnership units

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

Noncash amortization of share-based compensation

     —          —          —          —          —           1,130       —          1,130       —          1,130  

OP unit distributions

     (1,750 )     (3,738 )     —          (416 )     —           (16,160 )     —          (22,064 )     (237 )     (22,301 )

Net income (loss)

     1,750       3,738       —          (39 )     —           (1,825 )     —          3,624       172       3,796  

Change in unrealized loss on interest rate swaps

     —          —          —          —          —           —          313       313       —          313  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 47,703     $ 88,720       1,225,115     $ 4,822       48,026,373      $ 487,934     $ (307 )   $ 628,872     $ 1,780     $ 630,652  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Preferred
Operating
Partnership

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

Balance at January 1, 2012

   $ 47,703     $ —          1,405,405     $ 8,230       30,289,813      $ 323,914     $ (872 )   $ 378,975     $ 2,011     $ 380,986  

Net proceeds from sale of preferred operating partnership units

     —          88,720       —          —          —           —          —          88,720       —          88,720  

Issuance of restricted common operating partnership unit awards

     —          —          —          —          18,356        —          —          —          —          —     

Redemption of common operating partnership units

     —          —          (299,927 )     (3,545 )     193,510        2,287       —          (1,258 )     —          (1,258 )

Issuance of common operating partnership units for acquisition

     —          —          —          —          3,230,769        39,108       —          39,108       —          39,108  

Noncash amortization of share-based compensation

     —          —          —          —          —           1,589       —          1,589       —          1,589  

OP unit distributions

     (1,750 )     (3,115 )     —          (389 )     —           (10,949 )     —          (16,203 )     (209 )     (16,412 )

Net income (loss)

     1,750       3,115       —          (157 )     —           (4,059 )     —          649       141       790  

Change in unrealized gain on investment in equity securities

     —          —          —          —          —           —          103       103       —          103  

Change in unrealized loss on interest rate swaps

     —          —          —          —          —           —          108       108       —          108  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 47,703     $ 88,720       1,105,478     $ 4,139       33,732,448      $ 351,890     $ (661 )   $ 491,791     $ 1,943     $ 493,734  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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)

 

     Six Months Ended
June 30, 2013
    Six Months Ended
June 30, 2012
 

Cash flows from operating activities:

    

Net income

   $ 3,796      $ 790   

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

    

Depreciation and amortization

     23,540        16,831   

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

     (230     (1,051

Change in fair value of contingent consideration

     (1,558     —     

Income from equity in unconsolidated entities

     25        —     

Deferred rent receivable

     (1,977     (1,386

Amortization of above- and below-market leases

     219        (171

Amortization of deferred balances

     806        958   

Bad debt expense

     442        395   

Share-based compensation expense

     1,130        1,589   

Distributions from unconsolidated entities

     303        —     

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

    

Tenant and other receivables

     2,190        824   

Other assets

     (787     (1,013

Accounts payable and other liabilities

     (2,456     424   
  

 

 

   

 

 

 

Net cash provided by operating activities

     25,443        18,190   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property

     (30,707     (74,942

Development of property and property improvements

     (9,234     (4,382

Investments in unconsolidated entities

     (106     —     

Return of capital from unconsolidated entities

     139        —     

Receipt of master lease payments

     277        —     

Capitalized leasing costs

     (1,001     (1,099

Advance of note receivable

     —          (750

Collection of mortgage loan receivable

     —          2,000   

Purchases of equity securities

     —          (125

Proceeds from sale of equity securities

     —          2,942   

Restricted cash

     (1,536     (1,245
  

 

 

   

 

 

 

Net cash used in investing activities

     (42,168     (77,601
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common OP units

     36,304        —     

Issuance of preferred OP units

     —          89,102   

Preferred stock offering costs

     —          (382

OP unit redemptions

     —          (1,915

Payments on mortgages payable

     (32,696     (2,146

Proceeds from mortgages payable

     —          —     

Payments on notes payable

     (35,000     (46,500

Proceeds from notes payable

     69,000        39,129   

Payments of contingent consideration

     —          (1,613

Distribution to non-controlling interests

     (237     (644

Preferred OP unit distributions

     (5,488     (2,996

Common OP unit distributions

     (15,690     (10,314

Deferred financing costs

     (855     (423
  

 

 

   

 

 

 

Net cash provided by financing activities

     15,338        61,298   
  

 

 

   

 

 

 

Net increase

     (1,387     1,887   

Cash and cash equivalents, beginning of period

     5,596        5,292   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 4,209      $ 7,179   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $16 and $110

   $ 7,852      $ 5,934   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Acquisition of real estate for common OP units

   $ —        $ 39,108   
  

 

 

   

 

 

 

Assumption of net mortgage debt in connection with property acquisitions

   $ —        $ 29,670   
  

 

 

   

 

 

 

Assets received in connection with property acquisitions

   $ —        $ 772   
  

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 44      $ 539   
  

 

 

   

 

 

 

Common OP unit distributions payable

   $ 8,372      $ 5,662   
  

 

 

   

 

 

 

Preferred OP unit distributions payable

   $ 2,287      $ 2,744   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 3,220      $ 618   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $ 313      $ 108   
  

 

 

   

 

 

 

Change in unrealized gain on marketable securities

   $ —        $ 103   
  

 

 

   

 

 

 

OP unit redemptions

   $ 279      $ 2,287   
  

 

 

   

 

 

 

Reclassification of offering costs

   $ 396      $ —     
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $ 3,226      $ —     
  

 

 

   

 

 

 

Amount due from Parent Company (proceeds from issuance of common OP units)

   $ 2,990      $ —     
  

 

 

   

 

 

 

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

 

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Table of Contents

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 Northeast, Northwest 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 June 30, 2013, owned a 97.5% interest in the Operating Partnership. The remaining 2.5% 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 common 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 its subsidiaries. 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 Parent Company’s Annual Report on Form 10-K for the year ended December 31, 2012 and the Operating Partnership’s Registration Statement on Form 10. 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 six months ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. All significant intercompany balances and transactions have been eliminated in consolidation.

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 $3.6 million and $4.4 million at June 30, 2013 and December 31, 2012, respectively.

 

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Table of Contents

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 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 $1.1 million and $589,000 in the three months ended June 30, 2013 and 2012, respectively, and $2.0 million and $1.3 million in the six months ended June 30, 2013 and 2012, respectively, due to the straight-line rent adjustment. Percentage rent is recognized after tenant sales have exceeded defined thresholds (if applicable) and was $185,000 and $153,000 for the three months ended June 30, 2013 and 2012, respectively, and $570,000 and $361,000 for the six months ended June 30, 2013 and 2012, 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. In March 2012, the Company reclassified the majority of construction in progress costs relating to two non-operating properties into the corresponding buildings, site improvements and tenant improvements financial statement line items upon substantial completion of development activities.

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.

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
  

 

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Table of Contents

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 six months ended June 30, 2013 or 2012.

Investments in Partnerships and Limited Liability Companies:

The Company evaluates its investments in limited liability companies and partnerships to determine whether 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 consolidated balance sheets and its share of net income or loss is included in the consolidated statements of operations and comprehensive income.

Share-Based Payments:

All share-based payments to employees are recognized in earnings based on their fair value on the date of grant. Through June 30, 2013, 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.

 

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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.

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 June 30, 2013 and December 31, 2012, the Company had $920,000 and $719,000, respectively, in allowances for uncollectible accounts as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the three months ended June 30, 2013 and 2012, $104,000 and $148,000, respectively, of receivables were charged to bad debt expense. During the six months ended June 30, 2013 and 2012, $442,000 and $395,000, respectively, of receivables were charged to bad debt expense.

Non-controlling Interests:

Non-controlling interests on the consolidated balance sheets of the Parent Company relate to the OP units that are 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 sheet is appropriate.

In October 2012, the Operating Partnership issued 411,184 OP units in connection with the Company’s acquisition of the West Broad Village property. During the three months ended March 31, 2013, a total of 19,904 OP units related to the Edwards Theatres acquisition were tendered to the Company for redemption, resulting in the issuance of 22,074 shares of common stock by the Parent Company (an equivalent number of OP units were issued by the Operating Partnership to the Parent Company). 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 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. At June 30, 2013, 172,869 OP units related to the Edwards Theatres acquisition remained outstanding, which 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 consolidated balance sheets of the Operating Partnership represent the portion of equity that the Operating Partnership does not own in those entities it consolidates.

 

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Table of Contents

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 six months ended June 30, 2013 and 2012, no tenant accounted for more than 10% of revenues.

At June 30, 2013, the Company’s gross real estate assets in the states of California, Arizona and Virginia represented approximately 22.0%, 18.2% and 16.3% of the Company’s total assets, respectively. At December 31, 2012, the Company’s gross real estate assets in the states of Arizona, California and Virginia represented approximately 16.6%, 16.5% and 14.6% of the Company’s total assets, respectively. For the six months ended June 30, 2013, the Company’s revenues derived from properties located in the states of California, Arizona, Virginia and Texas represented approximately 21.5%, 18.9%, 12.0% and 10.6% of the Company’s total revenues, respectively. For the six months ended June 30, 2012, the Company’s revenues derived from properties located in the states of California, Arizona, Alabama and Texas represented approximately 29.9%, 21.5%, 10.8% and 10.7% of the Company’s total revenues, respectively.

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.

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.

Although the Company has determined that the majority of the inputs used to value its derivatives classified as cash flow hedges fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2013, the Company has determined that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company has determined that its valuations related to derivatives classified as cash flow hedges in their entirety are classified in Level 2 of the fair value hierarchy (see Note 19).

 

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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 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.

The Company’s investments in equity securities fall within Level 1 of the fair value hierarchy as the Company utilizes observable market-based inputs, based on the closing trading price of securities as of the balance sheet date, to determine the fair value of the investments.

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.

The Company records all derivative instruments on the 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 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.

Revision to Condensed Consolidated Statements of Cash Flows:

Subsequent to the issuance of the Parent Company’s condensed consolidated financial statements for the six months ended June 30, 2012, the Parent Company determined that a cash outflow related to a contingent consideration payment in the six months ended June 30, 2012 should have been reflected as a cash outflow from financing activities rather than operating activities within the condensed consolidated statement of cash flows. The Parent Company reviewed the impact of this correction with respect to the prior period condensed consolidated financial statements and determined that the correction was not material. However, the Parent Company has revised the accompanying condensed consolidated statement of cash flows to reflect this correction in the prior period. The effect of the correction to the condensed consolidated statements of cash flows for the six months ended June 30, 2012 is an increase to cash flows provided by operating activities from an original balance of $16.6 million to a corrected balance of $18.2 million and a decrease to cash flows provided by financing activities from an original balance of $62.9 million to a corrected balance of $61.3 million (a total change of approximately $1.6 million). This correction had no effect on previously reported revenues, net loss, assets or equity.

 

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Recent Accounting Pronouncements:

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2012-02, Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”). The amendments in this update provide an entity with the option to make a qualitative assessment about the likelihood that an indefinite-lived intangible asset is impaired to determine whether it should perform a quantitative impairment test. ASU 2012-02 is effective for fiscal years and interim periods beginning after September 15, 2012. The adoption of ASU 2012-02 on January 1, 2013 did not have a material impact on the Company’s condensed consolidated financial position or results of operations.

In January 2013, the FASB issued ASU No. 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). The amendments in this update require an entity to provide information about the amounts reclassified from accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the income statement or in the notes, significant amounts reclassified from accumulated other comprehensive income by the net income line item. The adoption of ASU 2013-02 on January 1, 2013 did not have a material impact on the Company’s condensed consolidated financial position or results of operations.

3. Acquisitions:

The Company completed the following property acquisition in the six months ended June 30, 2013, which was acquired for cash (in thousands):

 

Property

  

Date Acquired

  

Location

   Debt
Assumed
 

Tracy Pavilion

   January 24, 2013    Tracy, CA    $  —    

The following summary provides an allocation of purchase price for the above acquisition (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   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Remaining useful life(1)

           54         95        62            

 

(1)

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 six months ended June 30, 2012, which were acquired for cash unless specified below (in thousands):

 

Consolidated Property

  

Date Acquired

  

Location

   Debt
Assumed
 

Promenade Corporate Center

   January 23, 2012    Scottsdale, AZ    $  —    

EastChase Market Center

   February 17, 2012    Montgomery, AL      —    

Lake Pleasant Pavilion

   May 16, 2012    Peoria, AZ      28,250   

Unconsolidated Property

  

Date Acquired

  

Location

   Debt
Assumed
 

La Costa Town Center

   February 29, 2012    La Costa, CA    $  —    

 

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

 

Consolidated Property

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

Promenade Corporate Center(1)

   $ 44,465       $ 4,477       $ 781       $ (749   $ 3,279       $ —        $ —         $ 52,253   

EastChase Market Center

     19,567         4,215         360         (1,296     1,804         —          —           24,650   

Lake Pleasant Pavilion

     28,127         9,958         2,857         (184     2,412         (1,420     —           41,750   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 92,159       $ 18,650       $ 3,998       $ (2,229   $ 7,495       $ (1,420   $ —         $ 118,653   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Unconsolidated Property

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

La Costa Town Center(2)

   $ 15,054       $ 8,383       $ 86       $ (2,069   $ 2,046       $ —        $ —         $ 23,500   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 15,054       $ 8,383       $ 86       $ (2,069   $ 2,046       $ —        $ —         $ 23,500   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

 

(1)

The purchase price of $52.3 million reflects $13.9 million in cash paid and the issuance of 3,230,769 shares of common stock with a fair value of approximately $39.1 million based on a closing price of $12.11 per share on the date of acquisition. The purchase price noted above is net of master lease agreements between the Company and the seller in the amount of $772,000 (included in other assets on the accompanying condensed consolidated balance sheets) based on the estimated fair value of funds expected to be received from escrow in connection with the acquisition. Payments under the master lease agreements commence upon the expiration of two existing leases in June 2012 and February 2013 (with terms through May 2013 and January 2015, respectively) unless the related spaces are re-leased with base rents equaling or exceeding the master lease payments. In addition, the seller has agreed to reimburse the Company for any expenditures resulting from tenant improvements or leasing commissions related to the spaces to the extent that funds remain available pertaining to the master lease agreements. See Note 19 for a discussion of changes in the fair value of this asset after the initial acquisition.

 

(2)

This property was originally purchased as a consolidated property. However, in September 2012 the La Costa Town Center property was contributed in exchange for proceeds of approximately $21.2 million to a newly-formed entity in which the Company holds a 20% ownership interest (see Note 14). The Company accounts for its remaining equity ownership in the property in a manner similar to the equity method of accounting, which is reflected in the accompanying condensed consolidated balance sheets as an investment in unconsolidated entities.

The Company recorded revenues and a net loss for the three months ended June 30, 2013 of $746,000 and $10,000, respectively, and for the six months ended June 30, 2013 of $1.3 million and $12,000, respectively, related to the 2013 acquisition. The Company recorded revenues and net income for the three months ended June 30, 2012 of $3.5 million and $36,000, respectively, and recorded revenues and a net loss for the six months ended June 30, 2012 of $7.0 million and $12,000, respectively, related to the 2012 acquisitions.

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

 

     Three Months Ended     Six Months Ended  
     June 30, 2013      June 30, 2012     June 30, 2013      June 30, 2012  

Revenues

   $ 27,463       $ 22,112      $ 55,113       $ 44,106   

Net income (loss)(1)

   $ 3,472       $ (95   $ 3,840       $ 242   

 

(1)

Pro forma results for the six months ended June 30, 2013 were adjusted to exclude non-recurring acquisition costs of approximately $57,000 related to the 2013 acquisition. The pro forma results for the six months ended June 30, 2012 were adjusted to include these costs relating to the 2013 acquisition. A portion of the 2012 acquisitions were funded with proceeds from the offering of 8.125% Series B Cumulative Redeemable Preferred Stock (“Series B preferred stock”) that closed in January 2012. However, pro forma net income for the three and six months ended June 30, 2012 is not adjusted for this funding as the assumed Series B preferred stock quarterly dividends of approximately $1.9 million are not included in the determination of net income (included only as a reduction of net income (loss) attributable to the common stockholders).

At June 30, 2013, the allocation of purchase price to tangible and intangible assets for all 2012 and 2013 acquisitions had been completed with the exception of one item pertaining to the Company’s acquisition of the West Broad Village property. In connection with the acquisition of this property, the Company received a credit at closing in the amount of $450,000 (recorded as a liability) representing the estimated amount due to the property’s tenants for prior periods in which the landlord had not yet completed a reconciliation of common area maintenance expenses. The seller had not provided the Company with the information necessary to complete the reconciliations as of June 30, 2013, but the Company expects to receive the necessary information prior to September 30, 2013.

 

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4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at June 30, 2013 and December 31, 2012:

 

     June 30,
2013
     December 31,
2012
 
     (in thousands)  

In-place leases, net of accumulated amortization of $23.5 million and $20.7 million as of June 30, 2013 and December 31, 2012, respectively (with a weighted average remaining life of 80 and 82 months as of June 30, 2013 and December 31, 2012, respectively)

   $ 43,838       $ 50,666   

Above-market leases, net of accumulated amortization of $6.6 million and $5.2 million as of June 30, 2013 and December 31, 2012, respectively (with a weighted average remaining life of 67 and 70 months as of June 30, 2013 and December 31, 2012, respectively)

     14,164         15,888   

Leasing commissions, net of accumulated amortization of $6.1 million and $4.9 million as of June 30, 2013 and December 31, 2012, respectively (with a weighted average remaining life of 105 and 111 months as of June 30, 2013 and December 31, 2012, respectively)

     17,057         19,092   
  

 

 

    

 

 

 
   $ 75,059       $ 85,646   
  

 

 

    

 

 

 

Estimated amortization of lease intangible assets as of June 30, 2013 for each of the next five years and thereafter is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2013 (remaining six months)

   $ 9,002   

2014

     14,734   

2015

     10,524   

2016

     7,802   

2017

     6,862   

Thereafter

     26,135   
  

 

 

 

Total

   $ 75,059   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended June 30, 2013 and 2012 was $5.5 million and $4.6 million, respectively. Included in these amounts are $1.1 million and $823,000, respectively, of amortization of above-market lease intangible assets recorded against rental revenue. Amortization expense recorded on the lease intangible assets for the six months ended June 30, 2013 and 2012 was $12.8 million and $9.5 million, respectively. Included in these amounts are $2.6 million and $1.6 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 June 30, 2013 and December 31, 2012:

 

     June 30,
2013
     December 31,
2012
 
     (in thousands)  

Below-market leases, net of accumulated amortization of $6.3 million and $5.0 million as of June 30, 2013 and December 31, 2012, respectively (with a weighted average remaining life of 128 months as of June 30, 2013 and December 31, 2012)

   $ 24,444       $ 26,455   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended June 30, 2013 and 2012 was $877,000 and $767,000, respectively. Amortization recorded on the lease intangible liabilities for the six months ended June 30, 2013 and 2012 was $2.3 million and $1.7 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 June 30, 2013 for each of the next five years and thereafter is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2013 (remaining six months)

   $ 1,717   

2014

     3,090   

2015

     2,561   

2016

     2,226   

2017

     2,104   

Thereafter

     12,746   
  

 

 

 

Total

   $ 24,444   
  

 

 

 

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 June 30, 2013 and December 31, 2012, total carrying amount of assets was approximately $15.7 million and $15.9 million, respectively, which includes approximately $13.5 million and $13.6 million, respectively, of real estate assets at the end of each period. As of June 30, 2013 and December 31, 2012, the total carrying amount of liabilities was approximately $14.3 million.

Unconsolidated Variable Interest Entities

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower which has been identified as a VIE. In June 2012, the counterparty repaid the loan in full. The Company did not consolidate the VIE because it did not have the ability to control the activities that most significantly impacted the VIE’s economic performance. See Note 7 for an additional description of the nature, purposes and activities of the Company’s VIE and interests therein.

7. Mortgage Loan and Note Receivable

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower. The proceeds were used to facilitate the land acquisition and development of a shopping center anchored by Publix in Brandon, Florida. The loan was secured with a second mortgage trust deed on the property and was personally guaranteed by members of the borrower. In June 2012, the mortgage loan receivable was repaid in full, including interest accrued through the date of repayment.

In connection with the loan, the Company entered into a purchase and sale agreement to acquire this property upon completion of development, at the Company’s election. In June 2012, the Company executed an amendment whereby the closing date for the potential acquisition was extended through December 31, 2012. On October 1, 2012, the Company completed the acquisition of the retail shopping center with 68,000 square feet of GLA in Brandon, Florida for a purchase price of approximately $13.1 million.

In June 2012, the Company extended a note receivable in the amount of $750,000 to a third party. The note receivable bears interest at 10.0% per annum, with the principal and accrued interest due upon maturity in June 2014. The loan is recourse to the borrower. The balance is included in other assets on the accompanying condensed consolidated balance sheets.

 

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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 mortgage loan secured by the Red Rock Commons property, a portion of the Operating Partnership’s mortgage loan secured by the Park West Place property and the Operating Partnership’s unsecured revolving credit facility (including the letter of credit that secures the redevelopment revenue bonds at the Northside Mall property).

Debt of the Operating Partnership

Mortgages Payable

Mortgages payable held by the Operating Partnership at June 30, 2013 and December 31, 2012 consist of the following (dollars in thousands):

 

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

Property Pledged as Collateral

   June 30,
2013
     December 31,
2012
           

Five Forks Place

   $ —         $ 4,882         —          —        $ —           June 2013   

Grant Creek Town Center

     —           15,342         —          —          —           June 2013   

Park West Place(2)

     55,800         55,800         2.50     3.66     109         December 2013   

Edwards Theatres

     11,689         11,859         6.74     5.50     95         February 2014   

Red Rock Commons(3)

     13,903         13,800         1.90     1.90     21         March 2014   

Excel Centre

     12,150         12,284         6.08     6.08     85         May 2014   

Merchant Central

     4,419         4,468         5.94     6.75     30         July 2014   

Gilroy Crossing

     46,236         46,646         5.01     5.01     263         October 2014   

The Promenade

     48,831         49,703         4.80     4.80     344         October 2015   

5000 South Hulen

     13,540         13,655         5.60     6.90     83         April 2017   

Lake Pleasant Pavilion

     28,011         28,176         6.09     5.00     143         October 2017   

Rite Aid — Vestavia Hills

     1,101         1,184         7.25     7.25     21         October 2018   

West Broad Village(4)

     39,700         50,000         3.33     3.33     114         May 2020   

Lowe’s, Shippensburg

     13,337         13,511         7.20     7.20     110         October 2031   

Northside Mall(5)

     12,000         12,000         0.07     1.07     1         November 2035   
  

 

 

    

 

 

           
     300,717         333,310             

Plus: premium(6)

     518         625             
  

 

 

    

 

 

           

Mortgage notes payable, net

   $ 301,235       $ 333,935             
  

 

 

    

 

 

           

 

(1)

Amount represents the monthly payment of principal and interest at June 30, 2013.

 

(2)

The loan bears interest at a rate of LIBOR plus 2.25% (variable interest rate of 2.50% at each of June 30, 2013 and December 31, 2012). In December 2010, the Company entered into interest rate swap contracts, which fix LIBOR at an average of 1.41% for the term of the loan. The maturity date may be extended for an additional one-year period through December 2014 at the Company’s option and upon the satisfaction of conditions precedent and the payment of an extension fee.

 

(3)

The maturity date for the Red Rock Commons construction loan was extended to March 2014 and may be extended for an additional one-year period through March 2015 at the Company’s option and upon the satisfaction of conditions precedent and the payment of an extension fee. The construction loan bears interest at the rate of LIBOR plus a margin of 165 basis points to 225 basis points, depending on the Company’s leverage ratio (variable interest rate of 1.90% at June 30, 2013 and 2.45% at December 31, 2012).

 

(4)

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.

 

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Table of Contents
(5) 

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 0.07% at June 30, 2013 and 0.14% at December 31, 2012). 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 $107,000 and $110,000 at June 30, 2013 and December 31, 2012, respectively, will be amortized as additional interest expense through November 2035.

 

(6)

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 June 30, 2013 and 2012 was $16,000 and $29,000, respectively, and for the six months ended June 30, 2013 and 2012 was $16,000 and $139,000, respectively.

The Company’s mortgage debt maturities at June 30, 2013 for each of the next five years and thereafter are as follows (in thousands):

 

Year Ending December 31,

   Amount  

2013 (remaining six months)

   $ 57,988   

2014

     90,654   

2015

     47,381   

2016

     1,781   

2017

     40,776   

Thereafter

     62,137   
  

 

 

 
   $ 300,717   
  

 

 

 

Unsecured Revolving Credit Facility

On July 20, 2012, the Operating Partnership entered into an amended and restated credit agreement, which provided an increase in borrowings available under its credit facility to $250.0 million, decreased the fees pertaining to the unused capacity depending on utilization of the borrowing capacity, decreased the applicable interest rate and extended the maturity date. The Operating Partnership has the ability from time to time to increase the size of the unsecured revolving credit facility by up to an additional $200.0 million for a total borrowing capacity of $450.0 million, subject to receipt of lender commitments and other conditions precedent. The amended maturity date is July 19, 2016 and may be extended for one additional year 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 June 30, 2013, the Operating Partnership believes that it was in compliance with all the covenants in the credit agreement.

The unsecured revolving credit facility bears interest at the rate of LIBOR plus a margin of 165 basis points to 225 basis points, depending on the Operating Partnership’s leverage ratio. The Operating Partnership also pays a fee of 0.25% or 0.35% for any unused portion of the unsecured revolving credit facility, depending on the Operating Partnership’s utilization of the borrowing capacity. Borrowings from the unsecured revolving credit facility were $109.0 million at June 30, 2013 at a weighted-average interest rate of 1.85%. The Operating Partnership issued a $12.1 million letter of credit from the unsecured revolving credit facility, which secures an outstanding $12.0 million bond payable for the Northside Mall. This bond is included with the mortgages payable on the Company’s condensed consolidated balance sheets. At June 30, 2013, there was approximately $128.8 million available for borrowing under the unsecured revolving credit facility.

9. Earnings Per Share of the Parent Company

Basic earnings (loss) per share 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 (losses).

 

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Table of Contents

The calculation of diluted earnings per share for the three and six months ended June 30, 2013 does not include 694,633 and 697,162 shares, respectively, of unvested restricted common stock or 1,225,115 and 1,233,143 OP units, respectively, as the effect of including these equity securities was anti-dilutive to net income or net loss attributable to the common stockholders. The calculation of diluted earnings per share for the three and six months ended June 30, 2012 does not include 933,487 and 961,704 shares, respectively, of unvested restricted common stock, 79,215 and 90,667 shares, respectively, of contingently issuable common stock related to the 2011 Edwards Theatres acquisition, or 1,205,303 and 1,299,035 OP units, respectively, as the effect of including these equity securities was anti-dilutive to net loss attributable to the common stockholders. In addition, 3,333,400 common shares 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 for the three and six months ended June 30, 2013 and 2012.

Computations of basic and diluted earnings per share for the three and six months ended June 30, 2013 and 2012 (in thousands, except share data) were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,
2013
    June 30,
2012
    June 30,
2013
    June 30,
2012
 

Basic earnings per share:

        

Income from continuing operations

   $ 3,427     $ 312     $ 3,706     $ 699  

Preferred dividends

     (2,744 )     (2,744 )     (5,488 )     (4,865 )

Allocation to participating securities

     (114 )     (149 )     (228 )     (299 )

Income from continuing operations attributable to non-controlling interests

     (105 )     —          (141 )     (3 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations applicable to the common stockholders

   $ 464     $ (2,581 )   $ (2,151 )   $ (4,468 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the common stockholders

   $ 623     $ (2,376 )   $ (1,825 )   $ (4,059 )

Allocation to participating securities

     (114 )     (149 )     (228 )     (299 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) applicable to the common stockholders

   $ 509     $ (2,525 )   $ (2,053 )   $ (4,358 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic and diluted

     47,150,296       32,785,490       46,256,359       32,273,468  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

        

Income (loss) from continuing operations per share attributable to the common stockholders

   $ 0.01     $ (0.08 )   $ (0.05 )   $ (0.14 )

Income from discontinued operations per share attributable to the common stockholders

     —          —          0.01       —     
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 0.01     $ (0.08 )   $ (0.04 )   $ (0.14 )
  

 

 

   

 

 

   

 

 

   

 

 

 

10. Earnings Per Unit of the Operating Partnership

Basic earnings (loss) per unit 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 share 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 (losses).

The calculation of diluted earnings per unit for the three and six months ended June 30, 2013 does not include 694,633 and 697,162 units, respectively, of unvested restricted OP units, as the effect of including these equity securities was anti-dilutive to net income or net loss attributable to the unitholders. The calculation of diluted earnings per share for the three and six months ended June 30, 2012 does not include 933,487 and 961,704 units, respectively, of unvested restricted OP units, or 79,215 and 90,667 units, respectively, of contingently issuable OP units related to the 2011 Edwards Theatres acquisition, respectively, as the effect of including these equity securities was anti-dilutive to net loss attributable to the common stockholders. In addition, 3,333,400 OP units 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 for the three and six months ended June 30, 2013 and 2012.

 

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Table of Contents

Computations of basic and diluted earnings per unit for the three and six months ended June 30, 2013 and 2012 (in thousands, except share data) were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,
2013
    June 30,
2012
    June 30,
2013
    June 30,
2012
 

Basic earnings per unit:

        

Income from continuing operations

   $ 3,427     $ 312     $ 3,706     $ 699  

Preferred distributions

     (2,744 )     (2,744 )     (5,488 )     (4,865 )

Allocation to participating securities

     (114 )     (149 )     (228 )     (299 )

Income from continuing operations attributable to non-controlling interests

     (85 )     (75 )     (172 )     (141 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations applicable to the unitholders

   $ 484     $ (2,656 )   $ (2,182 )   $ (4,606 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to the unitholders

   $ 643     $ (2,462 )   $ (1,864 )   $ (4,216 )

Allocation to participating securities

     (114 )     (149 )     (228 )     (299 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) applicable to the unitholders

   $ 529     $ (2,611 )   $ (2,092 )   $ (4,515 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding:

        

Basic and diluted

     48,375,411       33,990,793       47,489,502       33,572,503  
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per unit:

        

Income (loss) from continuing operations per unit attributable to the unitholders

   $ 0.01     $ (0.08 )   $ (0.05 )   $ (0.14 )

Income from discontinued operations per unit attributable to the unitholders

     —          —          0.01       0.01  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) per unit attributable to the unitholders

   $ 0.01     $ (0.08 )   $ (0.04 )   $ (0.13 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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) receives the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pays such difference if the Strike Rate is greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The Company had no derivative financial instruments prior to the execution of the two swaps.

During the three months ended June 30, 2013 and 2012, the Company recorded no amounts in earnings attributable to hedge ineffectiveness. During the next twelve months, the Company estimates that an additional $307,000 will be reclassified from other comprehensive income as an increase to interest expense.

As of June 30, 2013, the Company had the following outstanding interest rate swaps and other derivatives instruments (in thousands):

 

     Fair Value(1)      Current Notional
Amount
     Strike Rate      Expiration Date

Type of Derivative Instrument

   June 30,
2013
     December 31,
2012
          

Interest rate swaps(2)

   $ 307       $ 620       $ 55,800         1.34% to 1.48%       December 2013

Other derivative instrument(3)

     —           274             March 2013
  

 

 

    

 

 

          

Total derivative instruments

   $ 307       $ 894            
  

 

 

    

 

 

          

 

(1)

Fair value of derivative instruments does not include any related accrued interest payable to the counterparty.

 

(2)

The interest rate swaps are classified within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

 

(3)

The Company’s purchase agreement executed in connection with the acquisition of the Edwards Theatres property in March 2011 contained a provision determined to be an embedded derivative instrument. The embedded derivative provided a guaranteed fair value for the OP units provided to the sellers of the property if redeemed for shares of the Parent Company’s common stock or cash, at the Company’s election, prior to its expiration in March 2013. The fair value of the embedded derivative at each period was calculated through the use of a Monte Carlo valuation model based on the historical volatility and closing price of the Parent Company’s common stock and a risk-free interest rate (see Note 19 for discussion of changes in the fair value of this derivative). The embedded derivative was classified within accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

 

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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 six months ended June 30, 2013 and 2012 (in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30,
2013
    June 30,
2012
    June 30,
2013
    June 30,
2012
 

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

        

Interest rate swaps

   $ (11 )   $ (39 )   $ (11 )   $ (212 )

Other derivatives

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (11 )   $ (39 )   $ (11 )   $ (212 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Interest rate swaps (interest expense)

   $ (163 )   $ (163 )   $ (325 )   $ (320 )

Other derivatives

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (163 )   $ (163 )   $ (325 )   $ (320 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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)

     —          589       230       1,051  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —        $ 589     $ 230     $ 1,051  
  

 

 

   

 

 

   

 

 

   

 

 

 

Credit-risk-related Contingent Features

Under the terms of the two interest rate swaps detailed above, the Company could be declared in default on its obligations under the swap agreements in the event that it defaults on any of its indebtedness, even if repayment of the indebtedness has not been accelerated by the lender. Additionally, because the Company’s derivative counterparty is also the lender for the hedged floating rate credit agreement, the swap agreements incorporate the loan covenant provisions of the Company’s indebtedness. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

If the Company had breached any of these provisions at June 30, 2013, it could have been required to settle its obligations under the agreements at their termination value. As of June 30, 2013, the termination value defined as the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was a liability of approximately $357,000. As of June 30, 2013, the Company has not posted any collateral related to these agreements.

Although the Company’s derivative contracts are subject to a master netting arrangement, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheets.

12. Equity of the Parent Company

The Parent Company has issued restricted stock awards to senior executives, directors and employees totaling 1,133,130 shares of common stock (net of forfeitures of 23,000 shares), which are included in the total shares of common stock outstanding as of June 30, 2013.

As of June 30, 2013, the Parent Company had outstanding 2,000,000 shares of 7.00% 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 at an initial conversion rate of 1.6667 shares of common stock per share of Series A preferred stock, which is equivalent to an initial conversion price of $15.00 per share. The conversion price will be subject to customary adjustments in certain circumstances. On or after 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.

 

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As of June 30, 2013, the Parent Company had outstanding 3,680,000 shares of 8.125% 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 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 $30.0 million of its common stock in open market and negotiated purchases with no expiration date. As of June 30, 2013, approximately $23.3 million remained available under the stock repurchase program to acquire outstanding shares of the Parent Company’s common stock.

The Parent Company has entered into equity distribution agreements (the “Equity Distribution Agreements”) with four sales agents, under which it can issue and sell shares of the Parent Company’s 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. The Equity Distribution Agreements 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 of the Securities Act of 1933, as amended (the “Securities Act”). During the six months ended June 30, 2013 the Parent Company completed the issuance of 3,065,528 shares pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $39.3 million at an average stock issuance price of $13.05 per share. The Company used the net proceeds to repay outstanding indebtedness under its unsecured revolving credit facility and for other general corporate and working capital purposes. Subsequent to June 30, 2013, the Parent Company issued 146,400 shares pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $1.9 million at an average stock issuance price of $13.19 per share.

Consolidated net income is reported in the Company’s 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 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). In October 2012, the Operating Partnership issued an additional 411,184 OP units in connection with the acquisition of the Company’s West Broad Village property.

A charge/credit is recorded each period in the consolidated statements of income for the non-controlling interests’ proportionate share of the Company’s net income (loss). Ownership interests held by the Company do not include unvested restricted stock.

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 1,350,000 (of which 239,870 shares of common stock remain available for issuance as of June 30, 2013).

The following shares of restricted common stock were issued during the six months ended June 30, 2013:

 

Grant Date

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

March 6, 2013(1)

   $ 13.43         41,500         4   

May 7, 2013(2)

   $ 15.11         10,588         1   

June 7, 2013(2)

   $ 13.36         1,000         4   

 

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

 

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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 months ended June 30, 2013 and 2012 of $568,000 and $804,000, respectively, and during the six months ended June 30, 2013 and 2012 of $1.1 million and $1.6 million, respectively, related to the restricted common stock grants ultimately expected to vest. 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. Stock compensation expense is included in general and administrative expense in the accompanying condensed consolidated statements of operations.

As of June 30, 2013 and December 31, 2012, there was approximately $2.7 million and $3.4 million, respectively, of total unrecognized compensation expense related to the non-vested shares of the Parent Company’s restricted common stock. As of June 30, 2013 and December 31, 2012, this expense was expected to be recognized over a weighted-average remaining period of 1.6 and 2.0 years, respectively.

 

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

Balance - January 1, 2013

     701,396      $ 10.02   

Grants

     53,088      $ 13.76   

Forfeitures

     (20,000   $ 13.43   

Vested

     (62,951   $ 12.38   
  

 

 

   

 

 

 

Balance - June 30, 2013

     671,533      $ 9.99   
  

 

 

   

 

 

 

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 June 30, 2013. Costs related to the matching portion of the plan for the three months ended June 30, 2013 and 2012 were approximately $38,000 and $30,000, respectively, and for the six months ended June 30, 2013 and 2012 were approximately $73,000 and $57,000, respectively.

13. Equity of the Operating Partnership

As of June 30, 2013, the Operating Partnership had outstanding 49,251,488 OP units. The Parent Company owned 97.5% of the partnership interests in the Operating Partnership at June 30, 2013, 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.

In addition, as of June 30, 2013, the Operating Partnership had outstanding 2,000,000 7.00% 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 distribution rates, exchange or redemption provisions, etc.).

 

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In connection with the Parent Company’s Equity Distribution Agreements, during the six months ended June 30, 2013 the Operating Partnership issued 3,065,528 OP units to the Parent Company in exchange for net proceeds of approximately $36.3 million (not including an amount due from the Parent Company of $2.9 million representing proceeds from equity offerings not yet contributed in exchange for common OP units), which were used to repay outstanding indebtedness under its unsecured revolving credit facility and for other general corporate and working capital purposes. Subsequent to June 30, 2013, the Operating Partnership issued an additional 146,400 OP units in exchange for net proceeds of approximately $1.9 million resulting from sale of the Parent Company’s common stock under the Equity Distribution Agreements.

Consolidated net income is reported in the Operating Partnership’s 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). In October 2012, the Operating Partnership issued an additional 411,184 OP units in connection with the acquisition of the Company’s West Broad Village property.

The following table shows the vested partnership interests in the Operating Partnership as of June 30, 2013 and December 31, 2012:

 

     June 30, 2013     December 31, 2012  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     47,354,840         97.5     44,204,287         97.3

Non-controlling interests consisting of:

          

OP units held by employees and third parties

     1,225,115         2.5     1,245,019         2.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     48,579,955         100.0     45,449,306         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

14. Investment in Unconsolidated Entities

On September 7, 2012, the Company contributed the La Costa Town Center property to a limited liability company (the “La Costa LLC”) with GEM Realty Capital, Inc. (“GEM”) in which the Company and GEM hold 20% and 80% ownership interests, respectively. The Company received approximately $21.2 million in exchange for the 80% ownership interest acquired by GEM. The Company’s remaining interest is reflected in the accompanying balance sheets at the Company’s historical cost basis as an investment in a profit-sharing arrangement. The contribution was not considered a sale of real estate due to terms in the La Costa LLC formation documents that could require the Company’s continuing participation in the future under certain circumstances. 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 will bear the majority of any losses incurred. The Company will receive 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 19, 2012, the Company acquired a 50% tenant-in-common ownership interest in a property (The Fountains at Bay Hill, or “Bay Hill”) for a purchase price of approximately $19.8 million as a part of a larger acquisition. 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 will receive 50% of the cash flow distributions and recognize 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 June 30, 2013 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

 

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(1) 

At June 30, 2013, La Costa LLC had real estate assets of $23.4 million, total assets of $25.4 million, mortgages payable of $14.1 million and total liabilities of $14.9 million. At December 31, 2012, La Costa LLC had real estate assets of $23.4 million, total assets of $26.3 million, mortgages payable of $14.1 million and total liabilities of $16.0 million. For the three months ended June 30, 2013, total revenues were $393,000, total expenses were $567,000 and net loss was $451,000. For the six months ended June 30, 2013, total revenues were $2.3 million, total expenses were $2.0 million and net loss was $264,000. The mortgage note was assumed with the contribution of the property. The mortgage note bears interest at the rate of LIBOR plus a margin of 575 basis points (6.0% at each of June 30, 2013 and December 31, 2012). The mortgage note has a maturity date of October 1, 2014, which may be extended for three additional one-year periods at the LLC’s election and upon the satisfaction of certain conditions (including the payment of an extension fee upon the exercise of the 2nd and 3rd 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 June 30, 2013 and December 31, 2012, there were $23.6 million and $23.9 million, respectively, in outstanding borrowings on the mortgage note assumed with the acquisition of the Bay Hill property. The mortgage note bears interest at the rate of LIBOR plus a margin of 325 basis points (3.4% at June 30, 2013 and 3.5% at December 31, 2012). 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 (part of the retail properties segment – see Note 21). As of June 30, 2013, the the property was classified as held for sale with the aggregated assets reflected as real estate held for sale, net of accumulated depreciation on the accompanying condensed consolidated balance sheets (there were no material liabilities at the time of the disposition):

 

     (in thousands)                

Property

   Sales Price      Gain on Sale      Date of Sale      Acquisition Date  

Walgreens — Corbin (North)

   $ 4,514       $ 1,287         7/19/2013         5/24/2010   

The results of operations for the property is 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 (in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,
2013
     June 30,
2012
     June 30,
2013
     June 30,
2012
 

Total revenues

   $ 70      $ 70      $ 141      $ 141  

Total expenses

     25        25        51        50  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     45        45        90        91  

Gain on sale of real estate assets

     —           —           —           —     

Non-controlling interest in discontinued operations(1)

     —           11        8        19  
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to the common stockholders

   $ 45      $ 56      $ 98      $ 110  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 consolidated financial statements of the Operating Partnership).

The following table summarizes the composition of the aggregated assets as reported on the accompanying condensed consolidated financial statements (in thousands):

 

     June 30, 2013  

Assets:

  

Property, net

   $ 2,849  

Intangible assets

     377  

Other assets

     —     
  

 

 

 

Total real estate held for sale, net of accumulated depreciation

   $ 3,226  
  

 

 

 

 

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16. Related Party Transactions

Many of the employees of Excel Realty Holdings, LLC (“ERH”) became employees of the Company subsequent to the Company’s initial public offering. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. In the three months ended June 30, 2013 and 2012, approximately $65,000 and $79,000, respectively, and in each of the six months ended June 30, 2013 and 2012, approximately $148,000 was reimbursed to the Company from ERH and included in other income in the condensed consolidated statements of operations.

At June 30, 2013, the Operating Partnership had recognized an amount due from the Parent Company of approximately $2.9 million (classified within other assets in the consolidated balance sheets) relating to proceeds from the issuance of the Parent Company’s common stock (with the issuance of an equivalent number of common OP units to the Parent Company), which had not yet been contributed to the Operating Partnership. The Operating Partnership collected the receivable in July 2013.

17. Income Taxes

Income Taxes of the Parent Company

The Parent Company elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (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 requirement that it distribute currently at least 90% of its REIT taxable income to its stockholders. 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 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 general partner. In general, the TRS may perform non-customary services for tenants, hold assets that the general partner 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. There is no tax provision for the TRS for the periods presented in the accompanying consolidated statements of income due to net operating losses incurred. No tax benefits have been recorded since it is not considered more likely than not that the deferred tax asset related to the net operating loss carry-forwards will be utilized.

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 condensed 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.

 

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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 (including the Company’s proportionate share of costs related to the redevelopment of the unconsolidated La Costa Town Center property).

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.

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 (in thousands):

 

     Balance at
June 30,
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(1)

   $ 721      $ —         $ —        $ 721   
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest rate swaps (see Note 11)

   $ (307   $ —         $ (307   $ —     

Contingent consideration related to business combinations(2)

     (235   $ —           —          (235
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (542   $ —         $ (307   $ (235
  

 

 

   

 

 

    

 

 

   

 

 

 

 

 

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     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(1)

   $ 992      $ —         $ —