10-Q 1 akr-10q_20180930.htm 10-Q akr-10q_20180930.htm

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                  to                 

Commission File Number 1-12002

 

ACADIA REALTY TRUST

(Exact name of registrant in its charter)

 

 

 

 

 

 

MARYLAND

 (State or other jurisdiction of

 incorporation or organization)

 

23-2715194

 (I.R.S. Employer

 Identification No.)

 

 

 

411 THEODORE FREMD AVENUE, SUITE 300, RYE, NY

 (Address of principal executive offices)

10580

 (Zip Code)

(914) 288-8100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

 

 

 

YES

 

NO o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

 

 

 

 

YES

 

NO o

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

 

Large Accelerated Filer 

  Accelerated Filer

  Emerging Growth Company  

 

 

 

 

 

 

Non-accelerated Filer 

  Smaller Reporting Company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes  o No

As of October 19, 2018 there were 81,553,275 common shares of beneficial interest, par value $0.001 per share, outstanding.

 

 

 


ACADIA REALTY TRUST AND SUBSIDIARIES

FORM 10-Q

INDEX

 

 

 

 

 

 

 

 

 

Item No.

 

Description

 

Page

 

 

PART I - FINANCIAL INFORMATION

 

 

1.

 

Financial Statements

 

4

 

 

Consolidated Balance Sheets as of September 30, 2018 (Unaudited) and December 31, 2017

 

4

 

 

Consolidated Statements of Income (Unaudited) for the Three and Nine Months Ended September 30, 2018 and 2017

 

5

 

 

Consolidated Statements of Comprehensive Income (Unaudited) for the Three and Nine Months Ended September 30,
2018 and 2017

 

6

 

 

Consolidated Statements of Shareholders’ Equity (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

 

7

 

 

Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2018 and 2017

 

8

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

10

 

 

 

 

 

2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

42

3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

55

4.

 

Controls and Procedures

 

57

 

 

 

 

 

 

 

PART II - OTHER INFORMATION

 

 

1.

 

Legal Proceedings

 

57

1A.

 

Risk Factors

 

57

2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

57

3.

 

Defaults Upon Senior Securities

 

57

4.

 

Mine Safety Disclosures

 

57

5.

 

Other Information

 

57

6.

 

Exhibits

 

58

 

 

Signatures

 

59

 

2


SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Quarterly Report on Form 10-Q (the “Report”) may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”), and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to those set forth under the headings “Item 1A. Risk Factors” and “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein.

SPECIAL NOTE REGARDING CERTAIN REFERENCES

All references to “Notes” throughout the document refer to the footnotes to the consolidated financial statements of the registrant referenced in Part I, Item 1. Financial Statements.

3


 

PART I – FINANCIAL INFORMATION

ITEM 1.

FINANCIAL STATEMENTS.

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

 

December 31,

 

(dollars in thousands, except per share amounts)

 

2018

 

 

2017

 

ASSETS

 

(Unaudited)

 

 

 

 

 

Investments in real estate, at cost

 

 

 

 

 

 

 

 

Operating real estate, net

 

$

3,027,710

 

 

$

2,952,918

 

Real estate under development

 

 

189,387

 

 

 

173,702

 

Net investments in real estate

 

 

3,217,097

 

 

 

3,126,620

 

Notes receivable, net

 

 

109,410

 

 

 

153,829

 

Investments in and advances to unconsolidated affiliates

 

 

301,717

 

 

 

302,070

 

Other assets, net

 

 

209,875

 

 

 

214,959

 

Cash and cash equivalents

 

 

9,525

 

 

 

74,823

 

Rents receivable, net

 

 

58,584

 

 

 

51,738

 

Restricted cash

 

 

12,508

 

 

 

10,846

 

Assets of properties held for sale

 

 

 

 

 

25,362

 

Total assets

 

$

3,918,716

 

 

$

3,960,247

 

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

Mortgage and other notes payable, net

 

$

964,796

 

 

$

909,174

 

Unsecured notes payable, net

 

 

488,933

 

 

 

473,735

 

Unsecured line of credit

 

 

28,000

 

 

 

41,500

 

Accounts payable and other liabilities

 

 

202,893

 

 

 

210,052

 

Capital lease obligation

 

 

70,983

 

 

 

70,611

 

Dividends and distributions payable

 

 

23,711

 

 

 

24,244

 

Distributions in excess of income from, and investments in, unconsolidated affiliates

 

 

15,596

 

 

 

15,292

 

Total liabilities

 

 

1,794,912

 

 

 

1,744,608

 

Commitments and contingencies

 

 

 

 

 

 

 

 

EQUITY

 

 

 

 

 

 

 

 

Acadia Shareholders' Equity

 

 

 

 

 

 

 

 

Common shares, $0.001 par value, authorized 200,000,000 shares, issued and outstanding 81,550,171 and 83,708,140 shares, respectively

 

 

82

 

 

 

84

 

Additional paid-in capital

 

 

1,546,405

 

 

 

1,596,514

 

Accumulated other comprehensive income

 

 

13,267

 

 

 

2,614

 

Distributions in excess of accumulated earnings

 

 

(73,990

)

 

 

(32,013

)

Total Acadia shareholders’ equity

 

 

1,485,764

 

 

 

1,567,199

 

Noncontrolling interests

 

 

638,040

 

 

 

648,440

 

Total equity

 

 

2,123,804

 

 

 

2,215,639

 

Total liabilities and equity

 

$

3,918,716

 

 

$

3,960,247

 

 

 

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

4


 

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental income

 

$

51,551

 

 

$

51,707

 

 

$

153,652

 

 

$

148,760

 

Expense reimbursements

 

 

13,194

 

 

 

9,957

 

 

 

35,000

 

 

 

32,347

 

Other

 

 

1,330

 

 

 

1,014

 

 

 

4,116

 

 

 

3,074

 

Total revenues

 

 

66,075

 

 

 

62,678

 

 

 

192,768

 

 

 

184,181

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

28,676

 

 

 

26,652

 

 

 

86,755

 

 

 

77,245

 

General and administrative

 

 

7,982

 

 

 

7,953

 

 

 

24,359

 

 

 

25,286

 

Real estate taxes

 

 

11,538

 

 

 

8,822

 

 

 

27,528

 

 

 

27,462

 

Property operating

 

 

10,661

 

 

 

9,417

 

 

 

33,523

 

 

 

26,978

 

Impairment charge

 

 

 

 

 

3,840

 

 

 

 

 

 

3,840

 

Other operating

 

 

270

 

 

 

250

 

 

 

655

 

 

 

987

 

Total operating expenses

 

 

59,127

 

 

 

56,934

 

 

 

172,820

 

 

 

161,798

 

Operating income

 

 

6,948

 

 

 

5,744

 

 

 

19,948

 

 

 

22,383

 

Equity in earnings of unconsolidated affiliates inclusive of gain on disposition of properties of $0, $0, $0 and $14,771, respectively

 

 

376

 

 

 

4,001

 

 

 

7,079

 

 

 

21,044

 

Interest income

 

 

3,513

 

 

 

6,461

 

 

 

10,539

 

 

 

23,648

 

Interest expense

 

 

(18,077

)

 

 

(15,428

)

 

 

(50,882

)

 

 

(39,666

)

(Loss) income from continuing operations before income taxes

 

 

(7,240

)

 

 

778

 

 

 

(13,316

)

 

 

27,409

 

Income tax provision

 

 

(464

)

 

 

(465

)

 

 

(851

)

 

 

(1,017

)

(Loss) income from continuing operations before gain on disposition of properties

 

 

(7,704

)

 

 

313

 

 

 

(14,167

)

 

 

26,392

 

Gain on disposition of properties, net of tax

 

 

5,107

 

 

 

12,972

 

 

 

5,140

 

 

 

12,972

 

Net (loss) income

 

 

(2,597

)

 

 

13,285

 

 

 

(9,027

)

 

 

39,364

 

Net loss (income) attributable to noncontrolling interests

 

 

11,822

 

 

 

(418

)

 

 

33,336

 

 

 

1,194

 

Net income attributable to Acadia

 

$

9,225

 

 

$

12,867

 

 

$

24,309

 

 

$

40,558

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted earnings per share

 

$

0.11

 

 

$

0.15

 

 

$

0.29

 

 

$

0.48

 

 

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

5


 

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net (loss) income

 

$

(2,597

)

 

$

13,285

 

 

$

(9,027

)

 

$

39,364

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized income (loss) on valuation of swap agreements

 

 

3,973

 

 

 

(644

)

 

 

12,576

 

 

 

(2,652

)

Reclassification of realized interest on swap agreements

 

 

(55

)

 

 

734

 

 

 

417

 

 

 

2,637

 

Other comprehensive income (loss)

 

 

3,918

 

 

 

90

 

 

 

12,993

 

 

 

(15

)

Comprehensive income

 

 

1,321

 

 

 

13,375

 

 

 

3,966

 

 

 

39,349

 

Comprehensive loss (income) attributable to noncontrolling interests

 

 

11,033

 

 

 

(541

)

 

 

30,996

 

 

 

1,454

 

Comprehensive income attributable to Acadia

 

$

12,354

 

 

$

12,834

 

 

$

34,962

 

 

$

40,803

 

 

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

6


 

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2018 and 2017

 

 

 

Acadia Shareholders

 

 

 

 

 

 

 

 

 

(in thousands, except per share amounts)

 

Common

Shares

 

 

Share

Amount

 

 

Additional

Paid-in

Capital

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Distributions

in Excess of

Accumulated

Earnings

 

 

Total

Common

Shareholders’

Equity

 

 

Noncontrolling

Interests

 

 

Total

Equity

 

Balance at January 1, 2018

 

 

83,708

 

 

$

84

 

 

$

1,596,514

 

 

$

2,614

 

 

$

(32,013

)

 

$

1,567,199

 

 

$

648,440

 

 

$

2,215,639

 

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership

 

 

111

 

 

 

 

 

 

1,957

 

 

 

 

 

 

 

 

 

1,957

 

 

 

(1,957

)

 

 

 

Repurchase of Common Shares

 

 

(2,294

)

 

 

(2

)

 

 

(55,055

)

 

 

 

 

 

 

 

 

(55,057

)

 

 

 

 

 

(55,057

)

Dividends/distributions declared ($0.81 per Common Share/OP Unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(66,286

)

 

 

(66,286

)

 

 

(5,126

)

 

 

(71,412

)

Employee and trustee stock compensation, net

 

 

25

 

 

 

 

 

 

408

 

 

 

 

 

 

 

 

 

408

 

 

 

7,924

 

 

 

8,332

 

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(24,654

)

 

 

(24,654

)

Noncontrolling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

46,990

 

 

 

46,990

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

10,653

 

 

 

24,309

 

 

 

34,962

 

 

 

(30,996

)

 

 

3,966

 

Reallocation of noncontrolling interests

 

 

 

 

 

 

 

 

2,581

 

 

 

 

 

 

 

 

 

2,581

 

 

 

(2,581

)

 

 

 

Balance at September 30, 2018

 

 

81,550

 

 

$

82

 

 

$

1,546,405

 

 

$

13,267

 

 

$

(73,990

)

 

$

1,485,764

 

 

$

638,040

 

 

$

2,123,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at January 1, 2017

 

 

83,598

 

 

$

84

 

 

$

1,594,926

 

 

$

(798

)

 

$

(5,635

)

 

$

1,588,577

 

 

$

589,548

 

 

$

2,178,125

 

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership

 

 

61

 

 

 

 

 

 

1,086

 

 

 

 

 

 

 

 

 

1,086

 

 

 

(1,086

)

 

 

 

Dividends/distributions declared ($0.78 per Common Share/OP Unit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(65,248

)

 

 

(65,248

)

 

 

(4,805

)

 

 

(70,053

)

Employee and trustee stock compensation, net

 

 

21

 

 

 

 

 

 

425

 

 

 

 

 

 

 

 

 

425

 

 

 

8,704

 

 

 

9,129

 

Noncontrolling interest distributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,278

)

 

 

(7,278

)

Noncontrolling interest contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20,522

 

 

 

20,522

 

Comprehensive income

 

 

 

 

 

 

 

 

 

 

 

245

 

 

 

40,558

 

 

 

40,803

 

 

 

(1,454

)

 

 

39,349

 

Reallocation of noncontrolling interests

 

 

 

 

 

 

 

 

(2,105

)

 

 

 

 

 

 

 

 

(2,105

)

 

 

2,105

 

 

 

 

Balance at September 30, 2017

 

 

83,680

 

 

$

84

 

 

$

1,594,332

 

 

$

(553

)

 

$

(30,325

)

 

$

1,563,538

 

 

$

606,256

 

 

$

2,169,794

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

7


 

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended September 30,

 

(in thousands)

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(9,027

)

 

$

39,364

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Gain on disposition of properties

 

 

(5,140

)

 

 

(12,972

)

Depreciation and amortization

 

 

86,755

 

 

 

77,245

 

Distributions of operating income from unconsolidated affiliates

 

 

12,906

 

 

 

13,727

 

Equity in earnings and gains of unconsolidated affiliates

 

 

(7,079

)

 

 

(21,044

)

Stock compensation expense

 

 

8,332

 

 

 

9,129

 

Amortization of financing costs

 

 

4,350

 

 

 

3,996

 

Impairment charge

 

 

 

 

 

3,840

 

Other, net

 

 

(6,331

)

 

 

(8,435

)

Changes in assets and liabilities:

 

 

 

 

 

 

 

 

Other liabilities

 

 

(61

)

 

 

(1,556

)

Prepaid expenses and other assets

 

 

(4,860

)

 

 

(8,723

)

Rents receivable, net

 

 

(7,452

)

 

 

(6,646

)

Accounts payable and accrued expenses

 

 

(5,210

)

 

 

(736

)

Net cash provided by operating activities

 

 

67,183

 

 

 

87,189

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Acquisition of real estate

 

 

(104,902

)

 

 

(138,429

)

Development, construction and property improvement costs

 

 

(66,238

)

 

 

(84,554

)

Issuance of or advances on notes receivable

 

 

(3,002

)

 

 

(10,449

)

Proceeds from the disposition of properties, net

 

 

52,759

 

 

 

47,025

 

Investments in and advances to unconsolidated affiliates

 

 

(3,481

)

 

 

(4,555

)

Return of capital from unconsolidated affiliates and other

 

 

23,777

 

 

 

31,720

 

Proceeds from notes receivable

 

 

26,000

 

 

 

12,000

 

Return of deposits for properties under contract

 

 

1,750

 

 

 

 

Payment of deferred leasing costs

 

 

(2,981

)

 

 

(5,381

)

Net cash used in investing activities

 

 

(76,318

)

 

 

(152,623

)

 

8


 

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended September 30,

 

(Continued)

 

2018

 

 

2017

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Principal payments on mortgage and other notes

 

 

(69,050

)

 

 

(130,736

)

Principal payments on unsecured debt

 

 

(578,600

)

 

 

(143,215

)

Proceeds received on mortgage and other notes

 

 

122,332

 

 

 

120,252

 

Proceeds from unsecured debt

 

 

578,800

 

 

 

267,200

 

Payments for repurchase of Common Shares

 

 

(55,057

)

 

 

 

Capital contributions from noncontrolling interests

 

 

46,990

 

 

 

20,522

 

Distributions to noncontrolling interests

 

 

(29,731

)

 

 

(12,813

)

Dividends paid to Common Shareholders

 

 

(66,869

)

 

 

(77,770

)

Deferred financing and other costs

 

 

(3,316

)

 

 

(4,987

)

Net cash (used in) provided by financing activities

 

 

(54,501

)

 

 

38,453

 

 

 

 

 

 

 

 

 

 

Decrease in cash and restricted cash

 

 

(63,636

)

 

 

(26,981

)

Cash of $74,823 and $71,805 and restricted cash of $10,846 and $22,904, respectively, beginning of period

 

 

85,669

 

 

 

94,709

 

Cash of $9,525 and $48,255 and restricted cash of $12,508 and $19,473, respectively, end of period

 

$

22,033

 

 

$

67,728

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information

 

 

 

 

 

 

 

 

Cash paid during the period for interest, net of capitalized interest of $4,366 and $12,246 respectively

 

$

45,251

 

 

$

39,626

 

Cash paid for income taxes, net of (refunds)

 

$

1,227

 

 

$

773

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Assumption of accounts payable and accrued expenses through acquisition of real estate

 

$

1,014

 

 

$

2,161

 

Acquisition of real estate through conversion of note receivable

 

$

 

 

$

9,142

 

Acquisition of undivided interest in a property through conversion of notes receivable

 

$

22,201

 

 

$

16,005

 

 

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

 

 

 

9


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. Organization, Basis of Presentation and Summary of Significant Accounting Policies

Organization

Acadia Realty Trust and subsidiaries (collectively, the “Company”) is a fully-integrated equity real estate investment trust (“REIT”) focused on the ownership, acquisition, development, and management of retail properties located primarily in high-barrier-to-entry, supply-constrained, densely-populated metropolitan areas in the United States.

All of the Company’s assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and entities in which the Operating Partnership owns an interest. As of September 30, 2018 and December 31, 2017, the Company controlled approximately 94% and 95%, respectively, of the Operating Partnership as the sole general partner and is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”) and employees who have been awarded restricted Common OP Units (“LTIP Units”) as long-term incentive compensation (Note 13). Limited partners holding Common OP and LTIP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Company (“Common Shares”). This structure is referred to as an umbrella partnership REIT or “UPREIT.”

As of September 30, 2018, the Company has ownership interests in 118 properties within its core portfolio, which consist of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through its funds (“Core Portfolio”). The Company also has ownership interests in 52 properties within its opportunity funds, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), Acadia Strategic Opportunity Fund III LLC (“Fund III”), Acadia Strategic Opportunity Fund IV LLC (“Fund IV”), and Acadia Strategic Opportunity Fund V LLC (“Fund V”). Acadia Strategic Opportunity Fund I, LP (“Fund I,” together with Funds II, III, IV, and V, the “Funds”) was liquidated in 2015. The 170 Core Portfolio and Fund properties primarily consist of street and urban retail, and suburban shopping centers. In addition, the Company, together with the investors in the Funds, invest or invested in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I,” which was liquidated in 2018), Acadia Mervyn Investors II, LLC (“Mervyns II”) and Fund II, all on a non-recourse basis. The Company consolidates the Funds as it has (i) the power to direct the activities that most significantly impact the Funds’ economic performance, (ii) is obligated to absorb the Funds’ losses and (iii) has the right to receive benefits from the Funds that could potentially be significant.

The Operating Partnership is the sole general partner or managing member of the Funds and Mervyns I and II and earns fees or priority distributions for asset management, property management, construction, development, leasing, and legal services. Cash flows from the Funds and Mervyns I and II are distributed pro-rata to their respective partners and members (including the Operating Partnership) until each receives a certain cumulative return (“Preferred Return”) and the return of all capital contributions. Thereafter, remaining cash flow is distributed 20% to the Operating Partnership (“Promote”) and 80% to the partners or members (including the Operating Partnership). All transactions between the Funds and the Operating Partnership have been eliminated in consolidation.

The following table summarizes the general terms and Operating Partnership’s equity interests in the Funds and Mervyns II (dollars in millions):

 

Entity

 

Formation

Date

 

Operating

Partnership

Share of

Capital

 

 

Capital Called as of September 30, 2018

 

 

Unfunded

Commitment

 

 

Equity Interest

Held By

Operating

Partnership (a)

 

 

Preferred

Return

 

 

Total Distributions

as of

September 30, 2018 (b)

 

Fund II and Mervyns II (c)

 

6/2004

 

 

28.33

%

 

$

347.1

 

 

$

 

 

 

28.33

%

 

 

8

%

 

$

146.6

 

Fund III

 

5/2007

 

 

24.54

%

 

 

423.9

 

 

 

26.1

 

 

 

24.54

%

 

 

6

%

 

 

551.9

 

Fund IV

 

5/2012

 

 

23.12

%

 

 

420.8

 

 

 

109.2

 

 

 

23.12

%

 

 

6

%

 

 

147.4

 

Fund V

 

8/2016

 

 

20.10

%

 

 

85.1

 

 

 

434.9

 

 

 

20.10

%

 

 

6

%

 

 

 

 

(a)

Amount represents the current economic ownership at September 30, 2018, which could differ from the stated legal ownership based upon the cumulative preferred returns of the respective fund.

(b)

Represents the total for the Funds, including the Operating Partnership and noncontrolling interests’ shares.

(c)

During April 2018, a distribution of $15.0 million was made to the Fund II investors, including $4.3 million to the Operating Partnership. This amount remains subject to re-contribution to Fund II until April 2021.

10


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Basis of Presentation

Segments

At September 30, 2018, the Company had three reportable operating segments: Core Portfolio, Funds and Structured Financing. The Company’s chief operating decision maker may review operational and financial data on a property basis and does not differentiate properties on a geographical basis for purposes of allocating resources or capital. Each property is considered a separate operating segment; however, each property on a stand-alone basis represents less than 10% of revenues, profit or loss, and assets of the combined reported operating segment and meets the majority of the aggregation criteria under the applicable standard.

Principles of Consolidation

The interim consolidated financial statements include the consolidated accounts of the Company and its investments in partnerships and limited liability companies in which the Company has control in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC Topic 810”). The ownership interests of other investors in these entities are recorded as noncontrolling interests. All significant intercompany balances and transactions have been eliminated in consolidation. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or losses) of these entities are included in consolidated net income.

The interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Operating results for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods. Such adjustments consisted of normal recurring items.

These interim consolidated financial statements should be read in conjunction with the Company’s 2017 Annual Report on Form 10-K, as filed with the SEC on February 27, 2018.

Use of Estimates

GAAP requires the Company’s management to make estimates and assumptions that affect the amounts reported in the interim consolidated financial statements and accompanying notes. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, revenue recognition and the collectability of notes receivable and rents receivable. Application of these estimates and assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates.

Recently Adopted Accounting Pronouncements

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers. ASU 2014-09 is a comprehensive new revenue recognition model requiring a company to recognize revenue to depict the transfer of goods or services to a customer at an amount reflecting the consideration it expects to receive in exchange for those goods or services. ASU 2014-09 does not apply to the Company’s lease revenues, but does apply to certain reimbursed tenant costs. Additionally, this guidance modifies disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, the FASB issued ASU 2015-14, which defers the effective date of ASU 2014-09 for all entities by one year, until years beginning in 2018, with early adoption permitted but not before 2017. Substantially all of the Company’s revenue is derived from its leases and therefore falls outside of the scope of this guidance. The Company implemented the standard effective January 1, 2018, using the modified retrospective approach; however, there was no cumulative effect required to be recognized in retained earnings at the date of application. With respect to its fee-derived revenue, the Company had no changes to the timing of the revenue recognition. However, the recognition of gains on dispositions of properties may be impacted prospectively in limited circumstances under which collectability may not be reasonably assured or if the Company has continuing involvement with a sold property. 

11


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows—Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 provides guidance on certain specific cash flow issues, including, but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. The Company adopted ASU 2016-15 effective January 1, 2018 and elected the “cumulative distribution approach” whereby distributions received from equity method investments are classified as cash flows from operations to the extent of equity earnings and then as cash flows from investing activities thereafter. Accordingly, the Company has reclassified $6.3 million of its cash inflows from investing activities to cash flows from operating activities in its historical presentation of cash flows related to its equity method investments for the nine months ended September 30, 2017.

In November 2016, the FASB issued ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this guidance effective January 1, 2018. Accordingly, the Company has reclassified $3.5 million of its cash inflows from operating activities and $0.1 million of its cash outflows from financing activities to change in cash and restricted cash in its historical presentation of cash flows for the nine months ended September 30, 2017.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations—Clarifying the Definition of a Business. ASU 2017-01 clarifies that to be considered a business, the elements must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output. The new standard illustrates the circumstances under which real estate with in-place leases would be considered a business and provides guidance for the identification of assets and liabilities in purchase accounting. ASU 2017-01 is effective for periods beginning after December 15, 2017 and has been adopted by the Company effective January 1, 2018. It is expected that the new standard will reduce the number of future real estate acquisitions that will be accounted for as business combinations and, therefore, reduce the amount of acquisition costs that will be expensed. Accordingly, the Company capitalized $0.2 million of acquisition costs during the nine months ended September 30, 2018 and expensed $0.9 million of acquisition costs during the nine months ended September 30, 2017.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments— Equity Method and Joint Ventures (Topic 323). ASU 2017-03 amends certain SEC guidance in the FASB Accounting Standards Codification in response to SEC staff announcements made during 2016 Emerging Issues Task Force (“EITF”) meetings which addressed (i) the additional qualitative disclosures that a registrant is expected to provide when it cannot reasonably estimate the impact that ASUs 2014-09, 2016-02 and 2016-13 will have in applying the guidance in Staff Accounting Bulletin Topic 11.M and (ii) guidance in ASC 323 related to the amendments made by ASU 2014-01 regarding use of the proportional amortization method in accounting for investments in qualified affordable housing projects (announcement made at the November 17, 2016, EITF meeting). The Company adopted 2017-03 effective January 1, 2018. The adoption of ASU 2017-03 did not have a material impact on the Company’s consolidated financial statements.

In February 2017, the FASB issued ASU No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets, which amends the guidance on nonfinancial assets in ASC 610-20. The amendments clarify that (i) a financial asset is within the scope of ASC 610-20 if it meets the definition of an in substance nonfinancial asset and may include nonfinancial assets transferred within a legal entity to a counter-party, (ii) an entity should identify each distinct nonfinancial asset or in substance nonfinancial asset promised to a counter-party and de-recognize each asset when a counter-party obtains control of it, and (iii) an entity should allocate consideration to each distinct asset by applying the guidance in ASC 606 on allocating the transaction price to performance obligations. Further, ASU 2017-05 provides guidance on accounting for partial sales of nonfinancial assets. The amendments are effective at the same time as the amendments in ASU 2014-09. The Company adopted ASU 2017-05 effective January 1, 2018. The adoption of ASU 2017-05 did not have a material impact on the Company's consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting, which clarifies the scope of modification accounting with respect to changes to the terms or conditions of a share-based payment award. Modification accounting would not apply if a change to an award does not affect the total current fair value (or other applicable measurement), vesting conditions, or the classification of the award. For all entities, ASU 2017-09 is effective prospectively for awards modified in fiscal years beginning after December 15, 2017. The Company adopted ASU 2017-09 effective January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company's consolidated financial statements because the Company has not had significant modifications of its awards.

12


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

In August 2017, the FASB issued ASU No. 2017-12, Derivatives and Hedging: Targeted Improvements to Accounting for Hedging Activities. The purpose of this updated guidance is to better align a company’s financial reporting for hedging activities with the economic objectives of those activities. ASU 2017-12 is effective for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company early adopted ASU 2017-12 effective January 1, 2018 and the adoption of ASU 2017-12 did not have a material impact on the Company's consolidated financial statements.

In March 2018, the FASB issued ASU No. 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118, which allowed public companies to record provisional amounts in earnings for the year ended December 31, 2017 due to the complexities involved in accounting for the enactment of the Tax Cuts and Jobs Act. ASU 2018-05 was effective upon issuance. The Company recognized the estimated income tax effects of the Tax Cuts and Jobs Act in its 2017 Consolidated Financial Statements in accordance with SEC Staff Accounting Bulletin No. 118.

Recently Issued Accounting Pronouncements

Lease Accounting

In February 2016, the FASB issued ASU No. 2016-02, Leases. ASU 2016-02 outlines a new model for accounting by lessees, whereby their rights and obligations under substantially all leases, existing and new, will be capitalized and recorded on the balance sheet. For lessors, however, the accounting remains largely unchanged from the current model, with the distinction between operating, sales-type and direct-financing leases retained, but updated to align with certain changes to the lessee model and the new revenue recognition standard discussed above. Under the new guidance, contract consideration will be allocated to its lease components (such as the lease of our retail properties) and non-lease components (such as maintenance). For us as a lessor, any non-lease components will be accounted for under ASC Topic 606, Revenue from Contracts with Customers, unless the Company elects a lessor practical expedient to not separate the nonlease components from the associated lease component (see discussion below). The new guidance also includes a definition of initial direct costs that is narrower than the prior definition in current GAAP (Topic 840, Leases). This will result in a change to the accounting for our internal leasing costs, which will be expensed as incurred, as opposed to being capitalized and deferred. Commissions subsequent to successful lease execution will continue to be capitalized. ASU 2016-02 is effective for the Company beginning January 1, 2019 and will require extensive quantitative and qualitative disclosures.

ASU 2016-02 initially provided for one retrospective transition method; however, a second transition method was later added with ASU 2018-11 as described below. To ease the transition, the new lease accounting guidance permits companies to utilize certain practical expedients in their implementation of the new standard:

 

A package of three practical expedients that must be elected together for all leases and includes: (i) not reassessing expired or existing contracts as to whether they are or contain leases; (ii) not reassessing lease classification of existing leases and (iii) not reassessing the amount of capitalized initial direct costs for existing leases;

 

ASU 2016-02 also includes a practical expedient to use hindsight in determining the lease term or assessing purchase options for existing leases and in assessing impairment of right of use assets;

 

ASU 2018-01, Land Easements Practical Expedient for Transition to Topic 842 added a transition practical expedient to not reassess existing or expired land easement agreements not previously accounted for as leases; and

 

A new practical expedient under ASU 2018-11, described below.

In July 2018, the FASB issued ASU No. 2018-10, Codification Improvements to Topic 842, Leases. These amendments provide minor clarifications and corrections to ASU 2016-02, Leases (Topic 842).

In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements. The amendments in this Update provide entities with an additional optional transition method to adopt ASU 2016-02. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting under this additional transition method for the comparative periods presented in the financial statements in which it adopts the new leases standard would continue to be in accordance with current GAAP (Topic 840, Leases). The amendments in this Update also provide lessors with a practical expedient, by class of underlying asset, to make a policy election to not separate non-lease components from the associated lease component and, instead, to account for those components as a single component if the non-lease components otherwise would be accounted for under the new revenue guidance (Topic 606). Conditions are required to elect the practical expedient, and if met, the single component will be accounted for under either under Topic 842 or Topic 606 depending on which component(s) are predominant. The lessor practical expedient to not separate nonlease components from the associated component must be elected for all existing and new leases.

 

13


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

The Company will adopt ASU No. 2016-02 (as amended by subsequent ASUs) effective January 1, 2019 utilizing the new transition method described in ASU 2018-11 and will avail itself of all the available practical expedients described above except it will not use hindsight in determining the lease term or assessing purchase options for existing leases and in assessing impairment of right of use assets. As lessor, the Company expects that post-adoption substantially all existing leases will have no change in the timing of revenue recognition until their expiration or termination. For common area maintenance income, currently reported within expense reimbursements, while this will be considered a nonlease component within the scope of Topic 606 for new leases, we expect to elect the lessor practical expedient to not separate maintenance from the associated lease for all existing and new leases and to account for the combined component as a single lease component. The Company is still evaluating the effect of electing this lessor practical expedient on the presentation within the statement of income. The timing of revenue recognition is expected to be the same for the majority of the Company’s new leases as compared to similar existing leases. After adoption, the Company will no longer capitalize a significant portion of internal leasing costs that were previously capitalized (the Company capitalized $1.4 million and $1.3 million of internal leasing costs during the nine months ended September 30, 2018 and the year ended December 31, 2017, respectively).

As a lessee, the Company is party to several equipment, ground, and office leases with future payment obligations aggregating approximately $204.0 million at September 30, 2018 for which the Company expects to record right-of-use assets and lease liabilities at the present value of the remaining minimum rental payments upon adoption of ASU 2016-02. As lessee, the Company will apply the following practical expedients in the implementation ASU 2016-02: (i) to not separate non-lease components from the associated lease component as described above and (ii) to not apply the right-of-use recognition requirements to short-term leases.

Other Accounting Topics

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. These amendments provide financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recorded. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods therein. Early adoption is permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. These amendments provide specific guidance for transactions for acquiring goods and services from nonemployees and specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (i) financing to the issuer or (ii) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. This guidance is effective for fiscal years beginning after December 15, 2018, and interim periods beginning after December 15, 2020. Early adoption is permitted but not earlier than the adoption of Topic 606. The Company does not believe that this guidance will have a material effect on its consolidated financial statements as it has not historically issued share-based payments in exchange for goods or services to be consumed within its operations.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. These amendments provide clarifications and corrections to certain ASC subtopics including the following: 220-10 (Income Statement - Reporting Comprehensive Income - Overall), 470-50 (Debt - Modifications and Extinguishments), 480-10 (Distinguishing Liabilities from Equity - Overall), 718-740 (Compensation - Stock Compensation - Income Taxes), 805-740 (Business Combinations - Income Taxes), 815-10 (Derivatives and Hedging - Overall), and 820-10 (Fair Value Measurement - Overall). Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance; however, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-13, Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement which removes, modifies, and adds certain disclosure requirements related to fair value measurements in ASC 820. This guidance is effective for public companies in fiscal years beginning after December 15, 2019 with early adoption permitted. The Company is currently assessing the impact this guidance will have on its consolidated financial statements.

In August 2018, the FASB issued ASU No. 2018-15 Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract to provide guidance on implementation costs incurred in a cloud computing arrangement that is a service contract. The ASU aligns the accounting for such costs with the guidance on capitalizing costs associated with developing or obtaining internal-use software. Specifically, the ASU amends ASC 350 to include in its scope implementation costs of such arrangements that are service contracts and clarifies that a customer should apply ASC 350-40 to determine which implementation costs should be capitalized. This ASU,

14


ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

which is effective for fiscal years beginning after December 15, 2019, is not expected to have a material impact on the Company’s financial statements as the Company has not incurred any significant costs associated with cloud computing arrangements.

In August 2018, the Securities and Exchange Commission issued a final rule that amends certain of its disclosure requirements. The rule simplifies various disclosure requirements for public companies including primarily that it (i) eliminates the requirement for public companies to disclose in their filings a schedule of earnings to fixed charges, (ii) requires an analysis of changes in stockholders’ equity for the current and comparative year-to-date interim periods in interim reports, and (iii) reduces the requirements for market price information disclosures in annual reports. These changes are effective for public companies beginning on November 5, 2018. The Company will comply with these new requirements beginning with its 2018 Annual Report on Form 10-K.

 

2. Real Estate

The Company’s consolidated real estate is comprised of the following (in thousands):