Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
|
| |
ý | QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 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: 1-07533
FEDERAL REALTY INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Declaration of Trust)
|
| | |
Maryland | | 52-0782497 |
(State of Organization) | | (IRS Employer Identification No.) |
| |
1626 East Jefferson Street, Rockville, Maryland | | 20852 |
(Address of Principal Executive Offices) | | (Zip Code) |
(301) 998-8100
(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. ý Yes ¨ 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). ý Yes ¨ 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. (Check one):
|
| | | |
Large Accelerated Filer | ý | Accelerated filer | ¨ |
| | | |
Non-Accelerated Filer | o (Do not check if a smaller reporting company) | Smaller reporting company | ¨ |
| | | |
| | Emerging growth company | ¨ |
| | | |
If an emerging growth company, indicate by checkmark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ |
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes ý No
The number of Registrant’s common shares outstanding on July 27, 2018 was 73,491,303.
FEDERAL REALTY INVESTMENT TRUST
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED JUNE 30, 2018
TABLE OF CONTENTS
|
| | | |
PART I. FINANCIAL INFORMATION | |
| Item 1. | Financial Statements | |
| | Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 | |
| | Consolidated Statements of Comprehensive Income (unaudited) for the three and six months ended June 30, 2018 and 2017 | |
| | Consolidated Statement of Shareholders' Equity (unaudited) for the six months ended June 30, 2018 | |
| | Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2018 and 2017 | |
| | Notes to Consolidated Financial Statements (unaudited) | |
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
| Item 3. | Quantitative and Qualitative Disclosures about Market Risk | |
| Item 4. | Controls and Procedures | |
| | | |
PART II. OTHER INFORMATION | |
| Item 1. | Legal Proceedings | |
| Item 1A. | Risk Factors | |
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | |
| Item 3. | Defaults Upon Senior Securities | |
| Item 4. | Mine Safety Disclosures | |
| Item 5. | Other Information | |
| Item 6. | Exhibits | |
| | |
SIGNATURES | |
Federal Realty Investment Trust
Consolidated Balance Sheets
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
| (In thousands, except share and per share data) |
| (Unaudited) | | |
ASSETS | | | |
Real estate, at cost | | | |
Operating (including $1,660,403 and $1,639,486 of consolidated variable interest entities, respectively) | $ | 7,181,679 |
| | $ | 6,950,188 |
|
Construction-in-progress (including $47,251 and $43,393 of consolidated variable interest entities, respectively) | 535,658 |
| | 684,873 |
|
Assets held for sale | 27,773 |
| | — |
|
| 7,745,110 |
| | 7,635,061 |
|
Less accumulated depreciation and amortization (including $268,723 and $247,410 of consolidated variable interest entities, respectively) | (1,970,173 | ) | | (1,876,544 | ) |
Net real estate | 5,774,937 |
| | 5,758,517 |
|
Cash and cash equivalents | 56,116 |
| | 15,188 |
|
Accounts and notes receivable, net | 149,861 |
| | 209,877 |
|
Mortgage notes receivable, net | 30,429 |
| | 30,429 |
|
Investment in real estate partnerships | 22,613 |
| | 23,941 |
|
Prepaid expenses and other assets | 268,747 |
| | 237,803 |
|
TOTAL ASSETS | $ | 6,302,703 |
| | $ | 6,275,755 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY | | | |
Liabilities | | | |
Mortgages payable, net (including $447,246 and $460,372 of consolidated variable interest entities, respectively) | $ | 477,706 |
| | $ | 491,505 |
|
Capital lease obligations | 71,538 |
| | 71,556 |
|
Notes payable, net | 368,389 |
| | 320,265 |
|
Senior notes and debentures, net | 2,402,851 |
| | 2,401,440 |
|
Accounts payable and accrued expenses | 178,665 |
| | 196,332 |
|
Dividends payable | 75,757 |
| | 75,931 |
|
Security deposits payable | 17,187 |
| | 16,667 |
|
Other liabilities and deferred credits | 181,601 |
| | 169,388 |
|
Total liabilities | 3,773,694 |
| | 3,743,084 |
|
Commitments and contingencies (Note 6) |
| |
|
Redeemable noncontrolling interests | 141,417 |
| | 141,157 |
|
Shareholders’ equity | | | |
Preferred shares, authorized 15,000,000 shares, $.01 par: | | | |
5.0% Series C Cumulative Redeemable Preferred Shares, (stated at liquidation preference $25,000 per share), 6,000 shares issued and outstanding | 150,000 |
| | 150,000 |
|
5.417% Series 1 Cumulative Convertible Preferred Shares, (stated at liquidation preference $25 per share), 399,896 shares issued and outstanding | 9,997 |
| | 9,997 |
|
Common shares of beneficial interest, $.01 par, 100,000,000 shares authorized, 73,434,943 and 73,090,877 shares issued and outstanding, respectively | 737 |
| | 733 |
|
Additional paid-in capital | 2,884,771 |
| | 2,855,321 |
|
Accumulated dividends in excess of net income | (780,973 | ) | | (749,367 | ) |
Accumulated other comprehensive income | 412 |
| | 22 |
|
Total shareholders’ equity of the Trust | 2,264,944 |
| | 2,266,706 |
|
Noncontrolling interests | 122,648 |
| | 124,808 |
|
Total shareholders’ equity | 2,387,592 |
| | 2,391,514 |
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | 6,302,703 |
| | $ | 6,275,755 |
|
The accompanying notes are an integral part of these consolidated statements.
Federal Realty Investment Trust
Consolidated Statements of Comprehensive Income
(Unaudited) |
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands, except per share data) |
REVENUE | | | | | | | |
Rental income | $ | 220,476 |
| | $ | 204,246 |
| | $ | 441,057 |
| | $ | 408,693 |
|
Other property income | 3,692 |
| | 3,068 |
| | 7,759 |
| | 5,258 |
|
Mortgage interest income | 734 |
| | 735 |
| | 1,491 |
| | 1,487 |
|
Total revenue | 224,902 |
| | 208,049 |
| | 450,307 |
| | 415,438 |
|
EXPENSES | | | | | | | |
Rental expenses | 39,905 |
| | 37,128 |
| | 84,678 |
| | 78,237 |
|
Real estate taxes | 28,307 |
| | 26,522 |
| | 56,755 |
| | 51,612 |
|
General and administrative | 8,413 |
| | 8,643 |
| | 16,342 |
| | 16,910 |
|
Depreciation and amortization | 58,381 |
| | 52,666 |
| | 116,491 |
| | 104,045 |
|
Total operating expenses | 135,006 |
| | 124,959 |
| | 274,266 |
| | 250,804 |
|
OPERATING INCOME | 89,896 |
| | 83,090 |
| | 176,041 |
| | 164,634 |
|
Other interest income | 159 |
| | 68 |
| | 338 |
| | 174 |
|
Interest expense | (27,766 | ) | | (23,907 | ) | | (53,950 | ) | | (47,665 | ) |
Loss from real estate partnerships | (728 | ) | | (114 | ) | | (1,253 | ) | | (114 | ) |
INCOME FROM CONTINUING OPERATIONS | 61,561 |
| | 59,137 |
| | 121,176 |
| | 117,029 |
|
Gain on sale of real estate, net | 3,972 |
| | 18,996 |
| | 7,288 |
| | 19,174 |
|
NET INCOME | 65,533 |
| | 78,133 |
| | 128,464 |
| | 136,203 |
|
Net income attributable to noncontrolling interests | (1,938 | ) | | (1,842 | ) | | (3,622 | ) | | (3,722 | ) |
NET INCOME ATTRIBUTABLE TO THE TRUST | 63,595 |
| | 76,291 |
| | 124,842 |
| | 132,481 |
|
Dividends on preferred shares | (2,011 | ) | | (135 | ) | | (4,021 | ) | | (271 | ) |
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS | $ | 61,584 |
| | $ | 76,156 |
| | $ | 120,821 |
| | $ | 132,210 |
|
EARNINGS PER COMMON SHARE, BASIC: | | | | | | | |
Net income available for common shareholders | $ | 0.84 |
| | $ | 1.05 |
| | $ | 1.65 |
| | $ | 1.83 |
|
Weighted average number of common shares | 72,990 |
| | 72,001 |
| | 72,948 |
| | 71,928 |
|
EARNINGS PER COMMON SHARE, DILUTED: |
| |
| |
| |
|
Net income available for common shareholders | $ | 0.84 |
| | $ | 1.05 |
| | $ | 1.65 |
| | $ | 1.83 |
|
Weighted average number of common shares | 73,025 |
| | 72,124 |
| | 72,997 |
| | 72,061 |
|
| | | | | | | |
COMPREHENSIVE INCOME | $ | 65,456 |
| | $ | 78,526 |
| | $ | 128,854 |
| | $ | 137,680 |
|
| | | | | | | |
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE TRUST | $ | 63,518 |
| | $ | 76,684 |
| | $ | 125,232 |
| | $ | 133,958 |
|
The accompanying notes are an integral part of these consolidated statements.
Federal Realty Investment Trust
Consolidated Statement of Shareholders’ Equity
For the Six Months Ended June 30, 2018
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shareholders’ Equity of the Trust | | | | |
| Preferred Shares | | Common Shares | | Additional Paid-in Capital | | Accumulated Dividends in Excess of Net Income | | Accumulated Other Comprehensive Income | | Noncontrolling Interests | | Total Shareholders' Equity |
| Shares | | Amount | | Shares | | Amount | | | | | |
| (In thousands, except share data) |
BALANCE AT DECEMBER 31, 2017 | 405,896 |
| | $ | 159,997 |
| | 73,090,877 |
| | $ | 733 |
| | $ | 2,855,321 |
| | $ | (749,367 | ) | | $ | 22 |
| | $ | 124,808 |
| | $ | 2,391,514 |
|
January 1, 2018 adoption of new accounting standard - See Note 2 | — |
| | — |
| | — |
| | — |
| | — |
| | (6,028 | ) | | — |
| | — |
| | (6,028 | ) |
Net income, excluding $1,998 attributable to redeemable noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | 124,842 |
| | — |
| | 1,624 |
| | 126,466 |
|
Other comprehensive income - change in fair value of interest rate swaps | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 390 |
| | — |
| | 390 |
|
Dividends declared to common shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | (146,399 | ) | | — |
| | — |
| | (146,399 | ) |
Dividends declared to preferred shareholders | — |
| | — |
| | — |
| | — |
| | — |
| | (4,021 | ) | | — |
| | — |
| | (4,021 | ) |
Distributions declared to noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (2,767 | ) | | (2,767 | ) |
Common shares issued, net | — |
| | — |
| | 148,614 |
| | 2 |
| | 18,318 |
| | — |
| | — |
| | — |
| | 18,320 |
|
Exercise of stock options | — |
| | — |
| | 93,593 |
| | 1 |
| | 4,040 |
| | — |
| | — |
| | — |
| | 4,041 |
|
Shares issued under dividend reinvestment plan | — |
| | — |
| | 9,292 |
| | — |
| | 1,086 |
| | — |
| | — |
| | — |
| | 1,086 |
|
Share-based compensation expense, net of forfeitures | — |
| | — |
| | 99,574 |
| | 1 |
| | 7,143 |
| | — |
| | — |
| | — |
| | 7,144 |
|
Shares withheld for employee taxes | — |
| | — |
| | (7,007 | ) | | — |
| | (777 | ) | | — |
| | — |
| | — |
| | (777 | ) |
Redemption of OP units | — |
| | — |
| | — |
| | — |
| | (360 | ) | | — |
| | — |
| | (4,026 | ) | | (4,386 | ) |
Contributions from noncontrolling interests | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,009 |
| | 3,009 |
|
BALANCE AT JUNE 30, 2018 | 405,896 |
| | $ | 159,997 |
| | 73,434,943 |
| | $ | 737 |
| | $ | 2,884,771 |
| | $ | (780,973 | ) | | $ | 412 |
| | $ | 122,648 |
| | $ | 2,387,592 |
|
The accompanying notes are an integral part of these consolidated statements.
Federal Realty Investment Trust
Consolidated Statements of Cash Flows
(Unaudited)
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| (In thousands) |
OPERATING ACTIVITIES | |
Net income | $ | 128,464 |
| | $ | 136,203 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 116,491 |
| | 104,045 |
|
Gain on sale of real estate, net | (7,288 | ) | | (19,174 | ) |
Loss from real estate partnerships | 1,253 |
| | 114 |
|
Other, net | 2,825 |
| | (1,761 | ) |
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | | | |
Proceeds from new market tax credit transaction, net of deferred costs | 12,353 |
| | — |
|
(Increase) decrease in accounts receivable, net | (3,805 | ) | | 3,467 |
|
Decrease in prepaid expenses and other assets | 10,077 |
| | 9,928 |
|
(Decrease) increase in accounts payable and accrued expenses | (1,286 | ) | | 1,065 |
|
Increase in security deposits and other liabilities | 4,027 |
| | 4,773 |
|
Net cash provided by operating activities | 263,111 |
| | 238,660 |
|
INVESTING ACTIVITIES | | | |
Acquisition of real estate | (1,736 | ) | | (165,065 | ) |
Capital expenditures - development and redevelopment | (150,119 | ) | | (229,198 | ) |
Capital expenditures - other | (35,654 | ) | | (33,622 | ) |
Proceeds from sale of real estate and real estate partnership interests | 121,391 |
| | 46,731 |
|
Investment in real estate partnerships | (120 | ) | | (430 | ) |
Distribution from real estate partnership in excess of earnings | 205 |
| | 1,672 |
|
Leasing costs | (12,339 | ) | | (6,273 | ) |
Issuance of mortgage and other notes receivable, net | (323 | ) | | (514 | ) |
Net cash used in investing activities | (78,695 | ) | | (386,699 | ) |
FINANCING ACTIVITIES | | | |
Net borrowings under revolving credit facility, net of costs | 48,000 |
| | — |
|
Issuance of senior notes, net of costs | — |
| | 399,410 |
|
Repayment of mortgages and capital leases | (13,408 | ) | | (53,924 | ) |
Issuance of common shares, net of costs | 22,492 |
| | 17,390 |
|
Dividends paid to common and preferred shareholders | (149,603 | ) | | (140,447 | ) |
Shares withheld for employee taxes | (777 | ) | | (4,077 | ) |
Contributions from noncontrolling interests | 1,728 |
| | 13,068 |
|
Distributions to and redemptions of noncontrolling interests | (9,086 | ) | | (10,312 | ) |
Net cash (used in) provided by financing activities | (100,654 | ) | | 221,108 |
|
Increase in cash, cash equivalents and restricted cash | 83,762 |
| | 73,069 |
|
Cash, cash equivalents, and restricted cash at beginning of year | 25,200 |
| | 34,849 |
|
Cash, cash equivalents, and restricted cash at end of period | $ | 108,962 |
| | $ | 107,918 |
|
The accompanying notes are an integral part of these consolidated statements.
Federal Realty Investment Trust
Notes to Consolidated Financial Statements
June 30, 2018
(Unaudited)
NOTE 1—BUSINESS AND ORGANIZATION
Federal Realty Investment Trust (the “Trust”) is an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of retail and mixed-use properties. Our properties are located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, California, and South Florida. As of June 30, 2018, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 105 predominantly retail real estate projects.
We operate in a manner intended to enable us to qualify as a REIT for federal income tax purposes. A REIT that distributes at least 90% of its taxable income to its shareholders each year and meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, federal income taxes on our taxable income have been and are generally expected to be immaterial. We are obligated to pay state taxes, generally consisting of franchise or gross receipts taxes in certain states. Such state taxes also have not been material.
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Trust’s latest Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation for the periods presented have been included. The results of operations for the three and six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation
Our consolidated financial statements include the accounts of the Trust, its corporate subsidiaries, and all entities in which the Trust has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). The equity interests of other investors are reflected as noncontrolling interests or redeemable noncontrolling interests. All significant intercompany transactions and balances are eliminated in consolidation. We account for our interests in joint ventures, which we do not control, using the equity method of accounting. Certain 2017 amounts have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, referred to as “GAAP,” requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.
Recently Adopted and Issued Accounting Pronouncements |
| | | | | | |
Standard | | Description | | Date of Adoption | | Effect on the financial statements or significant matters |
| | | | | | |
Recently Adopted: | | | | | | |
| | | | | | |
Revenue from Contracts with Customers (Topic 606) and related updates:
ASU 2014-09, May 2014, Revenue from Contracts with Customers
ASU 2015-14, August 2015, Revenue from Contracts with Customers: Deferral of the Effective Date
ASU 2016-08, March 2016, Revenue from Contracts with Customers: Principal versus Agent Considerations
ASU 2016-10, April 2016, Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing
ASU 2016-12, May 2016, Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients
ASU 2016-20, December 2016, Revenue from Contracts with Customers: Technical Corrections and Improvements | | In May 2014, the the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 as amended and interpreted by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, supersedes nearly all existing revenue recognition guidance under GAAP and replaces it with a core revenue recognition principle, that an entity will recognize revenue when it transfers control of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services, and creates a five-step model for revenue recognition in accordance with this principle. ASU 2014-09 also requires new disclosures in both interim and annual reporting periods. The guidance in ASU 2014-09 does not apply to contracts within the scope of ASC 840, Leases.
ASU 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent.
ASU 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation.
ASU 2016-12 adds practical expedients related to the transition for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable, and when non-cash considerations should be measured.
ASU 2016-20 corrects or improves guidance in thirteen narrowly focused aspects of the guidance.
The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the cumulative impact of applying the standard is recognized in accumulated dividends in excess of net income on the date of application. | | January 2018 | | We implemented the new revenue recognition guidance retrospectively with the cumulative effect recognized in accumulated dividends in excess of net income at the date of initial application. The primary impact relates to condominium sales. Most of our revenue is accounted for under the leasing standard, and therefore is not subject to this standard.
In 2017, gains on contracted condominium sales were recognized using the percentage-of-completion method, with the gain recognized once certain criteria were met in advance of legal closing. Under the new guidance, condominium sale gains are recognized as the condominium units are legally sold, which is typically upon closing. $5.4 million of condominium gains (net of $1.4 million of income taxes) recorded under the percentage-of-completion method in 2017 were reversed through opening accumulated dividends in excess of net income.
With the exception of condominium sales, the adoption of the standard did not have a significant impact on our consolidated financial statements, with an additional cumulative effect of $0.6 million reflected in opening accumulated dividends in excess of net income. |
| | | | | | |
|
| | | | | | |
Standard | | Description | | Date of Adoption | | Effect on the financial statements or significant matters |
ASU 2016-15, August 2016, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments | | This ASU provides classification guidance for eight specific topics including debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees. | | January 2018 | | This standard did not have an impact on our consolidated financial statements. |
| | | | | | |
ASU 2016-18, November 2016, Statement of Cash Flows (Topic 203) - Restricted Cash | | This ASU requires that the 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 cash equivalents. Amounts generally described as restricted cash and equivalents should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows. | | January 2018 | | Prior to the adoption of this standard, "net cash provided by operating activities" was $241.8 million and "net cash used in investing activities" was $390.0 million, for the six months ended June 30, 2017. After the adoption, "net cash provided by operating activities" was $238.7 million and "net cash used in investing activities" was $386.7 million, for the six months ended June 30, 2017. The reclassification is reflected in "increase in cash, cash equivalents, and restricted cash" in the Consolidated Statements of Cash Flows. See additional disclosures in "Consolidated Statement of Cash Flows - Supplemental Disclosures." |
| | | | | | |
ASU 2017-05, February 2017, Other Income - Gains and Losses from the Recognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets | | This ASU clarifies that ASC 610-20 applies to all nonfinancial assets (including real estate) for which the counterparty is not a customer and also clarifies that all businesses are derecognized using the deconsolidation guidance. Additionally, it defines an insubstance nonfinancial asset as a financial asset that is promised to a counterparty in a contract in which substantially all of the fair value of the assets promised in the contract is concentrated in nonfinancial assets, which excludes cash or cash equivalents and liabilities.
Under the current guidance, a partial sale is recognized and carryover basis is used for the retained interest, however, the new guidance eliminates the use of carryover basis and generally requires a full gain to be recognized for prospective disposals of nonfinancial assets. | | January 2018 | | The new guidance impacts the gain recognized when a real estate asset is sold to a non-customer and a noncontrolling interest is retained.
The adoption of this standard did not have a significant impact on our consolidated financial statements. |
| | | | | | |
ASU 2017-09, May 2017, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting | | The ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, an entity will not apply modification accounting if the awards' fair value, vesting conditions, and the classification of the award as equity or a liability are the same immediately before and after the change. The new guidance is applied prospectively to awards granted or modified after the adoption date. | | January 2018 | | The adoption of this standard did not have an impact to our financial statements, as there have been no modifications to awards for the six months ended June 30, 2018. |
| | | | | | |
|
| | | | | | |
Standard | | Description | | Date of Adoption | | Effect on the financial statements or significant matters |
Not Yet Adopted: | | | | | | |
| | | | | | |
Leases (Topic 842) and related updates: ASU 2016-02,
February 2016, Leases (Topic 842)
ASU 2018-10, July 2018, Codification improvements to Topic 842, Leases ASU 2018-11, July 2018, Leases (Topic 842) | | This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases requiring significantly more leasing related costs to be expensed upfront.
ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU 2018-11 provides the option of an additional transition method, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also provides lessors an option to not separate lease and non-lease components when certain criteria are met. | | January 2019 | | We are currently assessing the full impact of this standard to our consolidated financial statements. We have, however, identified certain areas which will be impacted as follows:
We are currently a lessee for land underneath all or a portion of 14 properties that are subject to ground leases (in addition to 4 other properties that we currently account for as capital leases). Upon adoption, we will recognize the lease obligation for the 14 ground leases and a corresponding right of use asset on our consolidated balance sheet.
Additionally, we will no longer be able to capitalize certain internal leasing and external legal leasing costs. For the six months ended June 30, 2018, we have capitalized approximately $3.6 million of internal leasing and external legal leasing costs, of which a portion will will be expensed when we adopt ASU 2016-02. |
Consolidated Statements of Cash Flows—Supplemental Disclosures
The following tables provide supplemental disclosures related to the Consolidated Statements of Cash Flows:
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
| (In thousands) |
SUPPLEMENTAL DISCLOSURES: | | | |
Total interest costs incurred | $ | 64,685 |
| | $ | 59,304 |
|
Interest capitalized | (10,735 | ) | | (11,639 | ) |
Interest expense | $ | 53,950 |
| | $ | 47,665 |
|
Cash paid for interest, net of amounts capitalized | $ | 52,997 |
| | $ | 47,995 |
|
Cash paid for income taxes | $ | 692 |
| | $ | 341 |
|
NON-CASH INVESTING AND FINANCING TRANSACTIONS: | | | |
Mortgage loan refinanced | $ | — |
| | $ | 125,000 |
|
DownREIT operating partnership units issued with acquisition of noncontrolling interest | $ | — |
| | $ | 5,918 |
|
DownREIT operating partnership units redeemed for common shares | $ | — |
| | $ | 2,569 |
|
Shares issued under dividend reinvestment plan | $ | 955 |
| | $ | 1,036 |
|
|
| | | | | | | |
| June 30, | | December 31, |
| 2018 | | 2017 |
| (In thousands) |
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | | | |
Cash and cash equivalents | $ | 56,116 |
| | $ | 15,188 |
|
Restricted cash (1) | 52,846 |
| | 10,012 |
|
Total cash, cash equivalents, and restricted cash | $ | 108,962 |
| | $ | 25,200 |
|
| |
(1) | Restricted cash balances are included in "prepaid expenses and other assets" on our consolidated balance sheets. |
NOTE 3—REAL ESTATE
On June 15, 2018, we formed a new joint venture to develop Jordan Downs Plaza which, when completed, will be an approximately 113,000 square foot grocery anchored shopping center located in Los Angeles County, California. The total investment at June 30, 2018 was $34.4 million as a result of a pre-funding requirement for equity to be advanced prior to the start of construction. We own approximately 91% of the venture, and control the 9.4 acre land parcel on which the shopping center will be constructed under a long-term ground lease that expires June 15, 2093 (including two 10-year option periods which may be exercised at our option). The Jordan Downs Plaza development is expected to generate income tax credits under the New Market Tax Credit Program ("NMTC") which was provided for in the Community Renewal Tax Relief Act of 2000 ("the Act") and is intended to induce investment in underserved areas of the United States. The Act permits taxpayers to claim credits against their Federal income taxes for qualified investments. A third party bank contributed $13.9 million to the development, and is entitled to the related tax credit benefits, but they do not have an interest in the underlying economics of the property. The transaction also includes a put/call provision whereby we may be obligated or entitled to purchase the third party bank’s interest. We believe the put will be exercised at its $1,000 strike price. Based on our assessment of control, we concluded that the project and certain other transaction related entities should be consolidated. The $13.9 million in proceeds received in exchange for the transfer of the tax credits has been deferred and will be recognized when the tax benefits are delivered to the third party bank without risk of recapture. Direct and incremental costs of $1.6 million incurred in structuring the NMTC transaction have also been deferred. The Trust anticipates recognizing the net cash received as revenue upon completion of the seven-year NMTC compliance period. Cash in escrow at June 30, 2018 of $41.6 million reflects cash that will ultimately be used for the development of the shopping center. The cash is held in escrow pursuant to the new market tax credit transaction documents and will be released as qualified development expenditures are incurred.
During the three and six months ended June 30, 2018, we closed on the sale of 86 and 159 condominium units, respectively, at our Assembly Row and Pike & Rose properties (combined) and received proceeds net of closing costs of $69.9 million and $121.4 million, respectively, resulting in a $4.0 million and $7.3 million gain, respectively, net of $0.7 million and $1.7 million of income taxes, respectively. The cost basis for remaining condominium units that are ready for their intended use as of June 30, 2018 is $27.8 million, and is included in "assets held for sale" on our consolidated balance sheets.
NOTE 4—DEBT
On March 1, 2018, we repaid the $10.5 million mortgage loan on The Grove at Shrewsbury (West) at par.
During the three and six months ended June 30, 2018, the maximum amount of borrowings outstanding under our $800.0 million revolving credit facility was $177.0 million for both periods and the weighted average interest rate, before amortization of debt fees, was 2.7% and 2.5%, respectively. During the three and six months ended June 30, 2018, the weighted average borrowings outstanding were $119.8 million and $109.9 million, respectively. At June 30, 2018, the outstanding balance was $89.0 million. Our revolving credit facility, term loan and certain notes require us to comply with various financial covenants, including the maintenance of minimum shareholders' equity and debt coverage ratios and a maximum ratio of debt to net worth. As of June 30, 2018, we were in compliance with all default related debt covenants.
NOTE 5—FAIR VALUE OF FINANCIAL INSTRUMENTS
Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. The fair value of our mortgages payable, notes payable and senior notes and debentures is sensitive to fluctuations in interest rates. Quoted market prices (Level 1) were used to estimate the fair value of our marketable senior notes and debentures and discounted cash flow analysis (Level 2) is generally used to estimate the fair value of our mortgages and notes payable. Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying amount and fair value of our mortgages payable, notes payable and senior notes and debentures is as follows:
|
| | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
(In thousands) |
Mortgages and notes payable | $ | 846,095 |
| | $ | 844,756 |
| | $ | 811,770 |
| | $ | 824,419 |
|
Senior notes and debentures | $ | 2,402,851 |
| | $ | 2,371,478 |
| | $ | 2,401,440 |
| | $ | 2,498,445 |
|
As of June 30, 2018, we have two interest rate swap agreements with a notional amount of $275.0 million that are measured at fair value on a recurring basis. The interest rate swap agreements fix the variable portion of our $275.0 million term loan at 1.72% through November 1, 2018. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into interest expense as interest is incurred on the related variable rate debt. Within the next 12 months, we expect to reclassify an estimated $0.4 million as a decrease to interest expense. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit-worthiness of the counterparty. When ineffectiveness exists, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. Hedge ineffectiveness has not impacted earnings as of June 30, 2018, and we do not anticipate it will have a significant effect in the future.
The fair values of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The fair value of our swaps at June 30, 2018 was an asset of $0.4 million and is included in "prepaid expenses and other assets" on our consolidated balance sheets. For the three and six months ended June 30, 2018, the change in valuation on our interest rate swaps resulted in a $0.1 million decrease in our derivative asset and a $0.4 million increase in our derivative asset, respectively, (including $0.2 million and $0.1 million, respectively, reclassified from other comprehensive income as a decrease to interest expense). The change in valuation on our interest rate swaps is included in "accumulated other comprehensive income."
A summary of our financial assets that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 | | December 31, 2017 |
| Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| (In thousands) |
Interest rate swaps | $ | — |
| | $ | 412 |
| | $ | — |
| | $ | 412 |
| | $ | — |
| | $ | 22 |
| | $ | — |
| | $ | 22 |
|
NOTE 6—COMMITMENTS AND CONTINGENCIES
We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us (1) as owner of the properties due to certain matters relating to the operation of the properties by the tenant, and (2) where appropriate, due to certain matters relating to the ownership of the properties prior to their acquisition by us.
Under the terms of certain partnership agreements, the partners have the right to exchange their operating partnership units for cash or the same number of our common shares, at our option. A total of 752,036 downREIT operating partnership units are outstanding which have a total fair value of $95.2 million, based on our closing stock price on June 30, 2018.
NOTE 7—SHAREHOLDERS’ EQUITY
The following table provides a summary of dividends declared and paid per share:
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| Declared | | Paid | | Declared | | Paid |
Common shares | $ | 2.000 |
| | $ | 2.000 |
| | $ | 1.960 |
| | $ | 1.960 |
|
5.417% Series 1 Cumulative Convertible Preferred shares | $ | 0.677 |
| | $ | 0.677 |
| | $ | 0.677 |
| | $ | 0.677 |
|
5.0% Series C Cumulative Redeemable Preferred shares (1) | $ | 0.625 |
| | $ | 0.681 |
| | $ | — |
| | $ | — |
|
| |
(1) | Amount represents dividends per depository share, each representing 1/1000th of a share. |
On May 7, 2018, we replaced our existing at-the-market (“ATM”) equity program with a new ATM program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three and six months ended June 30, 2018, we sold 199,263 common shares (of which, 50,700 settled on July 2, 2018) at a weighted average price per share of $125.46 for net cash proceeds of $24.6 million and paid $0.3 million in commissions and $0.1 million in additional offering expenses related to the sales of these common shares. As of June 30, 2018, we had the capacity to issue up to $375.0 million in common shares under our ATM equity program.
NOTE 8—COMPONENTS OF RENTAL INCOME
The principal components of rental income are as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Minimum rents | | | | | | | |
Retail and commercial | $ | 153,423 |
| | $ | 144,276 |
| | $ | 305,573 |
| | $ | 286,419 |
|
Residential | 17,105 |
| | 13,441 |
| | 33,120 |
| | 26,944 |
|
Cost reimbursement | 42,531 |
| | 39,877 |
| | 87,735 |
| | 81,395 |
|
Percentage rents | 2,707 |
| | 2,397 |
| | 5,481 |
| | 5,220 |
|
Other | 4,710 |
| | 4,255 |
| | 9,148 |
| | 8,715 |
|
Total rental income | $ | 220,476 |
| | $ | 204,246 |
| | $ | 441,057 |
| | $ | 408,693 |
|
Minimum rents include the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In millions) |
Straight-line rents | $ | 1.4 |
| | $ | 3.8 |
| | $ | 3.3 |
| | $ | 7.4 |
|
Amortization of above market leases | $ | (1.3 | ) | | $ | (1.4 | ) | | $ | (3.0 | ) | | $ | (2.8 | ) |
Amortization of below market leases | $ | 2.3 |
| | $ | 2.7 |
| | $ | 4.8 |
| | $ | 5.2 |
|
NOTE 9—SHARE-BASED COMPENSATION PLANS
A summary of share-based compensation expense included in net income is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands) |
Grants of common shares and options | $ | 3,274 |
| | $ | 2,908 |
| | $ | 7,144 |
| | $ | 6,457 |
|
Capitalized share-based compensation | (488 | ) | | (381 | ) | | (926 | ) | | (698 | ) |
Share-based compensation expense | $ | 2,786 |
| | $ | 2,527 |
| | $ | 6,218 |
| | $ | 5,759 |
|
NOTE 10—EARNINGS PER SHARE
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends declared and participation rights in undistributed earnings. For the three and six months ended June 30, 2018, we had 0.3 million weighted average unvested shares outstanding, which are considered participating securities. For the three and six months ended June 30, 2017, we had 0.2 million weighted average unvested shares outstanding, which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares; the portion of earnings allocated to the unvested shares is reflected as “earnings allocated to unvested shares” in the reconciliation below.
In the dilutive EPS calculation, dilutive stock options were calculated using the treasury stock method consistent with prior periods. There were 682 anti-dilutive stock options for the three and six months ended June 30, 2018, and no anti-dilutive stock options for the three and six months ended June 30, 2017. The conversions of downREIT operating partnership units and 5.417% Series 1 Cumulative Convertible Preferred Shares are anti-dilutive for all periods presented and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands, except per share data) |
NUMERATOR | | | | | | | |
Income from continuing operations | $ | 61,561 |
| | $ | 59,137 |
| | $ | 121,176 |
| | $ | 117,029 |
|
Less: Preferred share dividends | (2,011 | ) | | (135 | ) | | (4,021 | ) | | (271 | ) |
Less: Income from continuing operations attributable to noncontrolling interests | (1,938 | ) | | (1,660 | ) | | (3,622 | ) | | (3,432 | ) |
Less: Earnings allocated to unvested shares | (255 | ) | | (251 | ) | | (508 | ) | | (468 | ) |
Income from continuing operations available for common shareholders | 57,357 |
| | 57,091 |
| | 113,025 |
| | 112,858 |
|
Gain on sale of real estate, net | 3,972 |
| | 18,814 |
| | 7,288 |
| | 18,884 |
|
Net income available for common shareholders, basic and diluted | $ | 61,329 |
| | $ | 75,905 |
| | $ | 120,313 |
| | $ | 131,742 |
|
DENOMINATOR | | | | | | | |
Weighted average common shares outstanding—basic | 72,990 |
| | 72,001 |
| | 72,948 |
| | 71,928 |
|
Stock options | 35 |
| | 123 |
| | 49 |
| | 133 |
|
Weighted average common shares outstanding—diluted | 73,025 |
| | 72,124 |
| | 72,997 |
| | 72,061 |
|
| | | | | | | |
EARNINGS PER COMMON SHARE, BASIC: | | | | | | | |
Net income available for common shareholders | $ | 0.84 |
| | $ | 1.05 |
| | $ | 1.65 |
| | $ | 1.83 |
|
EARNINGS PER COMMON SHARE, DILUTED: | | | | | | | |
Net income available for common shareholders | $ | 0.84 |
| | $ | 1.05 |
| | $ | 1.65 |
| | $ | 1.83 |
|
Income from continuing operations attributable to the Trust | $ | 59,623 |
| | $ | 57,477 |
| | $ | 117,554 |
| | $ | 113,597 |
|
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion should be read in conjunction with the consolidated interim financial statements and notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2018.
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. When we refer to forward-looking statements or information, sometimes we use words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and “continues.” Forward-looking statements are not historical facts or guarantees of future performance and involve certain known and unknown risks, uncertainties, and other factors, many of which are outside our control, that could cause actual results to differ materially from those we describe.
Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make, including those in this Quarterly Report on Form 10-Q. Except as may be required by law, we make no promise to update any of the forward-looking statements as a result of new information, future events or otherwise. You should carefully review the risks and the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2017 and under Part II, Item 1A in this Quarterly Report on Form 10-Q, before making any investments in us.
Overview
We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, California, and South Florida. As of June 30, 2018, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 105 predominantly retail real estate projects comprising approximately 24.3 million square feet. In total, the real estate projects were 95.0% leased and 93.7% occupied at June 30, 2018.
2018 Property Acquisitions and Dispositions
On June 15, 2018, we formed a new joint venture to develop Jordan Downs Plaza which, when completed, will be an approximately 113,000 square foot grocery anchored shopping center located in Los Angeles County, California. The total investment at June 30, 2018 was $34.4 million as a result of a pre-funding requirement for equity to be advanced prior to the start of construction. We own approximately 91% of the venture, and control the 9.4 acre land parcel on which the shopping center will be constructed under a long-term ground lease that expires June 15, 2093 (including two 10-year option periods which may be exercised at our option). The Jordan Downs Plaza development is expected to generate income tax credits under the New Market Tax Credit Program ("NMTC") which was provided for in the Community Renewal Tax Relief Act of 2000 ("the Act") and is intended to induce investment in underserved areas of the United States. The Act permits taxpayers to claim credits against their Federal income taxes for qualified investments. A third party bank contributed $13.9 million to the development, and is entitled to the related tax credit benefits, but they do not have an interest in the underlying economics of the property. The transaction also includes a put/call provision whereby we may be obligated or entitled to purchase the third party bank’s interest. We believe the put will be exercised at its $1,000 strike price. Based on our assessment of control, we concluded that the project and certain other transaction related entities should be consolidated. The $13.9 million in proceeds received in exchange for the transfer of the tax credits has been deferred and will be recognized when the tax benefits are delivered to the third party bank without risk of recapture. Direct and incremental costs of $1.6 million incurred in structuring the NMTC transaction have also been deferred. The Trust anticipates recognizing the net cash received as revenue upon completion of the seven-year NMTC compliance period. Cash in escrow at June 30, 2018 of $41.6 million reflects cash that will ultimately be used for the development of the shopping center. The cash is held in escrow pursuant to the new market tax credit transaction documents and will be released as qualified development expenditures are incurred.
During the three and six months ended June 30, 2018, we closed on the sale of 86 and 159 condominium units, respectively, at our Assembly Row and Pike & Rose properties (combined) and received proceeds net of closing costs of $69.9 million and $121.4 million, respectively, resulting in a $4.0 million and $7.3 million gain, respectively, net of $0.7 million and $1.7 million of income taxes, respectively.
2018 Significant Debt and Equity Transactions
On March 1, 2018, we repaid the $10.5 million mortgage loan on The Grove at Shrewsbury (West) at par.
On May 7, 2018, we replaced our existing at-the-market (“ATM”) equity program with a new ATM program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three and six months ended June 30, 2018, we sold 199,263 common shares (of which, 50,700 settled on July 2, 2018) at a weighted average price per share of $125.46 for net cash proceeds of $24.6 million and paid $0.3 million in commissions and $0.1 million in additional offering expenses related to the sales of these common shares. As of June 30, 2018, we had the capacity to issue up to $375.0 million in common shares under our ATM equity program.
Capitalized Costs
Certain external and internal costs directly related to the development, redevelopment and leasing of real estate, including pre-construction costs, real estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalized certain external and internal costs related to both development and redevelopment activities of $137 million and $5 million, respectively, for the six months ended June 30, 2018, and $212 million and $4 million, respectively, for the six months ended June 30, 2017. We capitalized external and internal costs related to other property improvements of $28 million and $2 million, respectively, for the six months ended June 30, 2018, and $30 million and $1 million for the six months ended June 30, 2017. We capitalized external and internal costs related to leasing activities of $9 million and $3 million, respectively, for the six months ended June 30, 2018, and $3 million and $3 million, respectively, for the six months ended June 30, 2017. The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities, other property improvements, and leasing activities were $4 million, $1 million, and $3 million, for both the six months ended June 30, 2018 and 2017. Total capitalized costs were $184 million and $254 million for the six months ended June 30, 2018 and 2017, respectively.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements.
Outlook
We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:
| |
• | growth in our comparable property portfolio, |
| |
• | growth in our portfolio from property development and redevelopments, and |
| |
• | expansion of our portfolio through property acquisitions. |
Our comparable property growth is primarily driven by increases in rental rates on new leases and lease renewals, changes in portfolio occupancy, and the redevelopment of those assets. Over the long-term, the infill nature and strong demographics of our properties provide a strategic advantage allowing us to maintain relatively high occupancy and generally increase rental rates. We continue to see strong levels of interest from prospective tenants for our retail spaces; however, the time it takes to complete new lease deals is longer, as tenants have become more selective and more deliberate in their decision-making process. We have also experienced extended periods of time for some government agencies to process permits and inspections further delaying rent commencement on newly leased spaces. Additionally, we have seen an overall decrease in the number of tenants available to fill anchor spaces, and have seen an uptick in the number of retail tenants closing early and/or filing for bankruptcy. We believe the locations and nature of our centers and diverse tenant base partially mitigates any potential negative changes in the economic environment. However, any significant reduction in our tenants' abilities to pay base rent, percentage rent or other charges will adversely affect our financial condition and results of operations. We seek to maintain a mix of strong national, regional, and local retailers. At June 30, 2018, no single tenant accounted for more than 2.6% of annualized base rent.
Our properties are located primarily in densely populated and/or affluent areas with high barriers to entry which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities. We currently have redevelopment projects underway with a projected total cost of approximately $195 million that we expect to stabilize in the next several years.
We continue our ongoing redevelopment efforts at Santana Row and are under construction on an eight story 284,000 square foot office building which will include an additional 29,000 square feet of retail space and 1,300 parking spaces. The building is expected to cost between $205 million and $215 million and to be delivered in 2019. After current phases, we have approximately 4 acres remaining for further redevelopment and entitlements in place for an additional 395 residential units and
321,000 square feet of commercial space. Additionally, we control 12 acres of land across from Santana Row, which has approximately 1 million square feet of commercial space entitlements.
We continue to invest in our long-term multi-phased mixed-use development projects at Assembly Row in Somerville, Massachusetts and Pike & Rose in North Bethesda, Maryland which we expect to be involved in over the coming years.
Construction continues on Phase II of Assembly Row which will include approximately 161,000 square feet of retail space, 447 residential units, and a 158 room boutique hotel (which will be owned and operated by a joint venture in which we are a partner). Total expected costs range from $290 million to $305 million and delivery is expected through 2018. As of June 30, 2018, approximately 110,000 square feet of retail space has opened and 363 residential units have been completed. Phase II also includes 122 for-sale condominium units of which 107 units have closed as of June 30, 2018. The condominium units have an expected total cost of $80 million to $81 million. Additionally, Partners HealthCare built a 741,500 square foot office building as a part of Phase II.
Construction also continues on Phase II of Pike & Rose which will include approximately 216,000 square feet of retail space, 272 residential units, and a 177 room boutique hotel (owned and operated by a joint venture in which we are a partner). As of June 30, 2018, approximately 166,000 square feet of retail space and the 177 room hotel have opened, and all of the residential units have been completed. Total expected costs range from $200 million to $207 million and remaining delivery is expected through 2018. As of June 30, 2018, we closed on the sale of 52 of the 99 for-sale condominium units in Phase II. The condominium units have an expected cost of $60 million to $62 million.
Including costs incurred in the first six months of 2018, we expect to invest between $75 million and $100 million at Assembly Row and Pike & Rose in 2018.
The development of future phases of Assembly Row, Pike & Rose and Santana Row will be pursued opportunistically based on, among other things, market conditions, tenant demand, and our evaluation of whether those phases will generate an appropriate financial return.
We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long-term growth opportunities. Initially, some of our acquisitions do not contribute significantly to earnings growth; however, we believe they provide long-term re-leasing growth, redevelopment opportunities, and other strategic opportunities. Any growth from acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both the price that must be paid to acquire a property, as well as our ability to economically finance the property acquisition. Generally, our acquisitions are initially financed by available cash and/or borrowings under our revolving credit facility which may be repaid later with funds raised through the issuance of new equity or new long-term debt. We may also finance our acquisitions through the issuance of common shares, preferred shares, or downREIT units as well as through new or assumed mortgages and property sales.
At June 30, 2018, the leasable square feet in our properties was 95.0% leased and 93.7% occupied. The leased rate is higher than the occupied rate due to leased spaces that are being redeveloped or improved or that are awaiting permits and, therefore, are not yet ready to be occupied. Our occupancy and leased rates are subject to variability over time due to factors including acquisitions, the timing of the start and stabilization of our redevelopment projects, lease expirations and tenant closings and bankruptcies.
Lease Rollovers
For the second quarter of 2018, we signed leases for a total of 475,000 square feet of retail space including 449,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 10% on a cash basis and 20% on a straight-line basis. New leases for comparable spaces were signed for 204,000 square feet at an average rental increase of 15% on a cash basis and 28% on a straight-line basis. Renewals for comparable spaces were signed for 245,000 square feet at an average rental increase of 5% on a cash basis and 13% on a straight-line basis. Tenant improvements and incentives for comparable spaces were $38.88 per square foot, of which, $81.94 per square foot was for new leases and $3.10 per square foot was for renewals for the three months ended June 30, 2018.
For the six months ended June 30, 2018, we signed leases for a total of 880,000 square feet of retail space including 852,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 15% on a cash basis and 25% on a straight-line basis. New leases for comparable spaces were signed for 407,000 square feet at an average rental increase of 26% on a cash basis and 38% on a straight-line basis. Renewals for comparable spaces were signed for 446,000 square feet at an average rental increase of 6% on a cash basis and 15% on a straight-line basis. Tenant
improvements and incentives for comparable spaces were $29.20 per square foot, of which, $58.57 per square foot was for new leases and $2.37 per square foot was for renewals for the six months ended June 30, 2018.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum rent and in some instances, projections of first lease year percentage rent, to be paid on the new lease. In atypical circumstances, management may exercise judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars committed for the improvement (fit out) of a space as it relates to a specific lease and, except for redevelopments, may also include base building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as inducement to sign a lease that do not represent building improvements.
The leases signed in 2018 generally become effective over the following two years though some may not become effective until 2021 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, these increases do provide information about the tenant/landlord relationship and the potential increase we may achieve in rental income over time.
Historically, we have executed comparable space leases for 1.2 to 1.6 million square feet of retail space each year, and expect that volume for 2018 will be in line with overall positive increases in rental income. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if at all.
Comparable Properties
Throughout this section, we have provided certain information on a “comparable property” basis. Information provided on a comparable property basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties that are currently under development or are being repositioned for significant redevelopment and investment. For the three and six months ended June 30, 2018, all or a portion of 93 and 91 properties, respectively, were considered comparable properties and seven properties were considered non-comparable properties. For the six months ended June 30, 2018, six properties were moved from acquisitions to comparable properties and one portion of a property was moved from non-comparable to comparable properties, compared to the designations for the year ended December 31, 2017, which were 85 properties or portions of properties considered comparable and seven considered non-comparable. For the three months ended June 30, 2018, two properties were moved from acquisitions to comparable properties. While there is judgment surrounding changes in designations, we typically move non-comparable properties to comparable properties once they have stabilized, which is typically considered 90% physical occupancy or when the growth expected from the redevelopment has been included in the comparable periods. We typically remove properties from comparable properties when the repositioning of the asset has commenced and has or is expected to have a significant impact to property operating income within the calendar year. Acquisitions are moved to comparable properties once we have owned the property for the entirety of comparable periods and the property is not under development or being repositioned for significant redevelopment and investment. Comparable property information replaces our previous same center designations.
RESULTS OF OPERATIONS - THREE MONTHS ENDED JUNE 30, 2018 AND 2017
|
| | | | | | | | | | | | | | |
| | | | | Change |
| 2018 | | 2017 | | Dollars | | % |
| (Dollar amounts in thousands) |
Rental income | $ | 220,476 |
| | $ | 204,246 |
| | $ | 16,230 |
| | 7.9 | % |
Other property income | 3,692 |
| | 3,068 |
| | 624 |
| | 20.3 | % |
Mortgage interest income | 734 |
| | 735 |
| | (1 | ) | | (0.1 | )% |
Total property revenue | 224,902 |
| | 208,049 |
| | 16,853 |
| | 8.1 | % |
Rental expenses | 39,905 |
| | 37,128 |
| | 2,777 |
| | 7.5 | % |
Real estate taxes | 28,307 |
| | 26,522 |
| | 1,785 |
| | 6.7 | % |
Total property expenses | 68,212 |
| | 63,650 |
| | 4,562 |
| | 7.2 | % |
Property operating income (1) | 156,690 |
| | 144,399 |
| | 12,291 |
| | 8.5 | % |
General and administrative expense | (8,413 | ) | | (8,643 | ) | | 230 |
| | (2.7 | )% |
Depreciation and amortization | (58,381 | ) | | (52,666 | ) | | (5,715 | ) | | 10.9 | % |
Operating Income | 89,896 |
| | 83,090 |
| | 6,806 |
| | 8.2 | % |
Other interest income | 159 |
| | 68 |
| | 91 |
| | 133.8 | % |
Interest expense | (27,766 | ) | | (23,907 | ) | | (3,859 | ) | | 16.1 | % |
Loss from real estate partnerships | (728 | ) | | (114 | ) | | (614 | ) | | (538.6 | )% |
Total other, net | (28,335 | ) | | (23,953 | ) | | (4,382 | ) | | 18.3 | % |
Income from continuing operations | 61,561 |
| | 59,137 |
| | 2,424 |
| | 4.1 | % |
Gain on sale of real estate, net | 3,972 |
| | 18,996 |
| | (15,024 | ) | | (79.1 | )% |
Net income | 65,533 |
| | 78,133 |
| | (12,600 | ) | | (16.1 | )% |
Net income attributable to noncontrolling interests | (1,938 | ) | | (1,842 | ) | | (96 | ) | | 5.2 | % |
Net income attributable to the Trust | $ | 63,595 |
| | $ | 76,291 |
| | $ | (12,696 | ) | | (16.6 | )% |
| |
(1) | Property operating income is a non-GAAP measure that consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of property operations and we consider it to be a significant measure. Property operating income should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP. |
Property Revenues
Total property revenue increased $16.9 million, or 8.1%, to $224.9 million in the three months ended June 30, 2018 compared to $208.0 million in the three months ended June 30, 2017. The percentage occupied at our shopping centers was 93.7% at June 30, 2018 compared to 93.0% at June 30, 2017. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $16.2 million, or 7.9%, to $220.5 million in the three months ended June 30, 2018 compared to $204.2 million in the three months ended June 30, 2017 due primarily to the following:
| |
• | an increase of $8.0 million from acquisitions, primarily related to the six shopping centers acquired in Los Angeles County, California in August 2017, |
| |
• | an increase of $5.4 million at comparable properties due primarily to higher rental rates of approximately $2.8 million, higher average occupancy of approximately $1.3 million, and higher recoveries of $0.5 million, and |
| |
• | an increase of $4.6 million at non-comparable properties due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018 partially offset by lower occupancy at two of our Florida properties in the beginning stages of redevelopment, |
partially offset by
| |
• | a decrease of $1.9 million from 2017 property sales. |
Other Property Income
Other property income increased $0.6 million or 20.3% to $3.7 million in the three months ended June 30, 2018 compared to $3.1 million in the three months ended June 30, 2017. Included in other property income are items which, although recurring, inherently tend to fluctuate more than rental income from period to period, such as lease termination fees. This increase is primarily related to higher lease termination fees.
Property Expenses
Total property expenses increased $4.6 million, or 7.2%, to $68.2 million in the three months ended June 30, 2018 compared to $63.7 million in the three months ended June 30, 2017. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $2.8 million, or 7.5%, to $39.9 million in the three months ended June 30, 2018 compared to $37.1 million in the three months ended June 30, 2017. This increase is primarily due to the following:
| |
• | an increase of $1.8 million from acquisitions, primarily related to six shopping centers acquired in Los Angeles County, California in August 2017, |
| |
• | an increase of $1.1 million from non-comparable properties due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018, and |
partially offset by
| |
• | a decrease of $0.4 million from 2017 property sales. |
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 17.8% in the three months ended June 30, 2018 from 17.9% in the three months ended June 30, 2017.
Real Estate Taxes
Real estate tax expense increased $1.8 million, or 6.7%, to $28.3 million in the three months ended June 30, 2018 compared to $26.5 million in the three months ended June 30, 2017 due primarily to the following:
| |
• | an increase of $1.2 million from acquisitions, primarily related to our acquisition of six shopping centers in Los Angeles County, California in August 2017, and |
| |
• | an increase of $1.1 million at non-comparable properties due primarily to increases in assessments as a result of our redevelopment activities, |
partially offset by
| |
• | a decrease of $0.3 million from 2017 property sales. |
Property Operating Income
Property operating income increased $12.3 million, or 8.5%, to $156.7 million in the three months ended June 30, 2018 compared to $144.4 million in the three months ended June 30, 2017. This increase is primarily due to our acquisition of six shopping centers in Los Angeles County, California in August 2017, growth in earnings at comparable properties, and the opening of Phase II at Assembly Row and Pike & Rose, partially offset by 2017 property sales.
Other Operating Expenses
Depreciation and Amortization
Depreciation and amortization expense increased $5.7 million, or 10.9%, to $58.4 million in the three months ended June 30, 2018 from $52.7 million in the three months ended June 30, 2017. This increase is primarily due to our acquisition of six shopping centers in Los Angeles County, California in August 2017, portions of Phase II of Assembly Row and Pike & Rose being placed in service, and investment in comparable properties, partially offset by 2017 property sales.
Operating Income
Operating income increased $6.8 million, or 8.2%, to $89.9 million in the three months ended June 30, 2018 compared to $83.1 million in the three months ended June 30, 2017. This increase is primarily due to growth in earnings at our comparable properties, our acquisition of six shopping centers in Los Angeles County, California in August 2017, and the opening of Phase II of Assembly Row and Pike & Rose.
Other
Interest Expense
Interest expense increased $3.9 million, or 16.1%, to $27.8 million in the three months ended June 30, 2018 compared to $23.9 million in the three months ended June 30, 2017. This increase is due primarily to the following:
| |
• | an increase of $2.8 million due to higher borrowings primarily attributable to the $475 million issuance of 3.25% senior notes ($300 million issued in June 2017 and $175 million issued in December 2017) and the $100 million reopening in June 2017 of the 4.50% senior notes, partially offset by the early redemption of our $150 million 5.90% senior notes in December 2017, and |
| |
• | a decrease of $1.5 million in capitalized interest, |
partially offset by
| |
• | a decrease of $0.5 million due to a lower overall weighted average borrowing rate. |
Gross interest costs were $32.4 million and $30.1 million in the three months ended June 30, 2018 and 2017, respectively. Capitalized interest was $4.6 million and $6.2 million in the three months ended June 30, 2018 and 2017, respectively.
Loss from Real Estate Partnerships
The $0.7 million loss from real estate partnerships for the three months ended June 30, 2018 is due primarily to our share of losses related to the hotel joint venture at our Pike & Rose property (hotel opened in March 2018).
Gain on Sale of Real Estate, Net
The $4.0 million net gain for the three months ended June 30, 2018 is related to condominium unit sales that have closed at our Assembly Row and Pike and Rose properties.
The $19.0 million gain for the three months ended June 30, 2017 is primarily due to the following:
| |
• | $15.4 million gain related to the sale of ground lease parcels at our Assembly Row property in Somerville, Massachusetts, and |
| |
• | $3.3 million net percentage-of-completion gain, related to condominiums under binding contract at our Assembly Row property (see discussion in Note 2 to the Consolidated Financial Statements with respect to the change in accounting for condominium gains). |
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 2018 AND 2017
|
| | | | | | | | | | | | | | |
| | | | | Change |
| 2018 | | 2017 | | Dollars | | % |
| (Dollar amounts in thousands) |
Rental income | $ | 441,057 |
| | $ | 408,693 |
| | $ | 32,364 |
| | 7.9 | % |
Other property income | 7,759 |
| | 5,258 |
| | 2,501 |
| | 47.6 | % |
Mortgage interest income | 1,491 |
| | 1,487 |
| | 4 |
| | 0.3 | % |
Total property revenue | 450,307 |
| | 415,438 |
| | 34,869 |
| | 8.4 | % |
Rental expenses | 84,678 |
| | 78,237 |
| | 6,441 |
| | 8.2 | % |
Real estate taxes | 56,755 |
| | 51,612 |
| | 5,143 |
| | 10.0 | % |
Total property expenses | 141,433 |
| | 129,849 |
| | 11,584 |
| | 8.9 | % |
Property operating income (1) | 308,874 |
| | 285,589 |
| | 23,285 |
| | 8.2 | % |
General and administrative expense | (16,342 | ) | | (16,910 | ) | | 568 |
| | (3.4 | )% |
Depreciation and amortization | (116,491 | ) | | (104,045 | ) | | (12,446 | ) | | 12.0 | % |
Operating Income | 176,041 |
| | 164,634 |
| | 11,407 |
| | 6.9 | % |
Other interest income | 338 |
| | 174 |
| | 164 |
| | 94.3 | % |
Interest expense | (53,950 | ) | | (47,665 | ) | | (6,285 | ) | | 13.2 | % |
Loss from real estate partnerships | (1,253 | ) | | (114 | ) | | (1,139 | ) | | 999.1 | % |
Total other, net | (54,865 | ) | | (47,605 | ) | | (7,260 | ) | | 15.3 | % |
Income from continuing operations | 121,176 |
| | 117,029 |
| | 4,147 |
| | 3.5 | % |
Gain on sale of real estate and change in control of interests, net | 7,288 |
| | 19,174 |
| | (11,886 | ) | | (62.0 | )% |
Net income | 128,464 |
| | 136,203 |
| | (7,739 | ) | | (5.7 | )% |
Net income attributable to noncontrolling interests | (3,622 | ) | | (3,722 | ) | | 100 |
| | (2.7 | )% |
Net income attributable to the Trust | $ | 124,842 |
| | $ | 132,481 |
| | $ | (7,639 | ) | | (5.8 | )% |
| |
(1) | Property operating income is a non-GAAP measure that consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of property operations and we consider it to be a significant measure. Property operating income should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP. |
Property Revenues
Total property revenue increased $34.9 million, or 8.4%, to $450.3 million in the six months ended June 30, 2018 compared to $415.4 million in the six months ended June 30, 2017. The percentage occupied at our shopping centers was 93.7% at June 30, 2018 compared to 93.0% at June 30, 2017. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $32.4 million, or 7.9%, to $441.1 million in the six months ended June 30, 2018 compared to $408.7 million in the six months ended June 30, 2017 due primarily to the following:
| |
• | an increase of $17.6 million from acquisitions, primarily related to the six shopping centers acquired in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, |
| |
• | an increase of $10.7 million at comparable properties due primarily to higher rental rates of approximately $6.0 million, higher average occupancy of approximately $2.6 million, and higher recoveries of $1.4 million, and |
| |
• | an increase of $7.9 million at non-comparable properties due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018 and the lease-up of two other redevelopments, partially offset by lower occupancy at two of our Florida properties in the beginning stages of redevelopment, |
partially offset by
| |
• | a decrease of $3.9 million from 2017 property sales. |
Other Property Income
Other property income increased $2.5 million, or 47.6%, to $7.8 million in the six months ended June 30, 2018 compared to $5.3 million in the six months ended June 30, 2017. Included in other property income are items which, although recurring, inherently tend to fluctuate more than rental income from period to period, such as lease termination fees. This increase is primarily related to higher lease termination fees.
Property Expenses
Total property expenses increased $11.6 million, or 8.9%, to $141.4 million in the six months ended June 30, 2018 compared to $129.8 million in the six months ended June 30, 2017. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $6.4 million, or 8.2%, to $84.7 million in the six months ended June 30, 2018 compared to $78.2 million in the six months ended June 30, 2017. This increase is primarily due to the following:
| |
• | an increase of $4.1 million from acquisitions, primarily related to six shopping centers acquired in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, |
| |
• | an increase of $2.1 million from non-comparable properties, due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018, partially offset by lower expenses at two of our Florida properties in the beginning stages of redevelopment, and |
| |
• | an increase of $0.8 million from comparable properties, primarily due to higher bad debt expense, |
partially offset by
| |
• | a decrease of $0.7 million from 2017 property sales. |
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income was 18.9% for both the six months ended June 30, 2018 and 2017.
Real Estate Taxes
Real estate tax expense increased $5.1 million, or 10.0%, to $56.8 million in the six months ended June 30, 2018 compared to $51.6 million in the six months ended June 30, 2017 due primarily to:
| |
• | an increase of $3.2 million from acquisitions, primarily related to our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, |
| |
• | an increase of $1.7 million at non-comparable properties due primarily to increases in assessments as a result of our redevelopment activities, |
| |
• | an increase of $1.0 million at comparable properties due to higher assessments, |
partially offset by
| |
• | a decrease of $0.8 million from 2017 property sales. |
Property Operating Income
Property operating income increased $23.3 million, or 8.2%, to $308.9 million in the six months ended June 30, 2018 compared to $285.6 million in the six months ended June 30, 2017. This increase is primarily due to our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, growth in earnings at comparable properties, and the opening of Phase II at Assembly Row and Pike & Rose, partially offset by 2017 property sales.
Other Operating Expenses
General and Administrative
General and administrative expense decreased $0.6 million, or 3.4%, to $16.3 million in the six months ended June 30, 2018 from $16.9 million in the six months ended June 30, 2017. The decrease is primarily due to lower costs from 2017 acquisitions and other transactions.
Depreciation and Amortization
Depreciation and amortization expense increased $12.4 million, or 12.0%, to $116.5 million in the six months ended June 30, 2018 from $104.0 million in the six months ended June 30, 2017. This increase is primarily due to our acquisition of six shopping centers in Los Angeles County, California in August 2017, Phase II of Assembly Row and Pike & Rose being placed in service, and investment in comparable properties, partially offset by 2017 property sales.
Operating Income
Operating income increased $11.4 million, or 6.9%, to $176.0 million in the six months ended June 30, 2018 compared to $164.6 million in the six months ended June 30, 2017. This increase is primarily due to growth in earnings at comparable properties, our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, and the opening of Phase II at Assembly Row and Pike & Rose, partially offset by 2017 property sales.
Other
Interest Expense
Interest expense increased $6.3 million, or 13.2%, to $54.0 million in the six months ended June 30, 2018 compared to $47.7 million in the six months ended June 30, 2017. This increase is due primarily to the following:
| |
• | an increase of $7.2 million due to higher borrowings primarily attributable to the $475 million issuance of 3.25% senior notes ($300 million issued in June 2017 and $175 million issued in December 2017) and the $100 million reopening in June 2017 of the 4.50% senior notes, partially offset by the early redemption of our $150 million 5.90% senior notes in December 2017, and |
| |
• | a decrease of $0.9 million in capitalized interest, |
partially offset by
| |
• | a decrease of $1.9 million due to a lower overall weighted average borrowing rate. |
Gross interest costs were $64.7 million and $59.3 million in the six months ended June 30, 2018 and 2017, respectively. Capitalized interest was $10.7 million and $11.6 million in the six months ended June 30, 2018 and 2017, respectively.
Loss from Real Estate Partnerships
The $1.3 million loss from real estate partnerships for the six months ended June 30, 2018 is due primarily to our share of losses related to start-up expenses and the initial opening of the hotel joint venture at our Pike & Rose property (hotel opened in March 2018).
Gain on Sale of Real Estate and Change in Control of Interests, Net
The $7.3 million net gain on sale of real estate and change in control of interests, net for the six months ended June 30, 2018 is related to condominium unit sales that have closed at our Assembly Row and Pike and Rose properties.
The $19.2 million gain on sale of real estate and change in control of interests, net for the six months ended June 30, 2017 is primarily due to the following:
| |
• | $15.4 million gain related to the sale transactions on our ground lease parcels at our Assembly Row property in Somerville, Massachusetts, and |
| |
• | $3.3 million net percentage-of-completion gain, related to condominiums under binding contract at our Assembly Row property (see discussion in Note 2 to the Consolidated Financial Statements with respect to the change in accounting for condominium gains). |
Liquidity and Capital Resources
Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations. The cash generated from operations is largely paid to our common and preferred shareholders in the form of dividends. As a REIT, we must generally make annual distributions to shareholders of at least 90% of our taxable income.
Our short-term liquidity requirements consist primarily of normal recurring operating expenses, obligations under our capital and operating leases, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring expenditures, non-recurring expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.
We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. In the short and long term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, joint venture relationships relating to existing properties or new acquisitions, and property dispositions that are consistent with this conservative structure.
At June 30, 2018, we had cash and cash equivalents of $56.1 million and $89.0 million outstanding on our $800.0 million unsecured revolving credit facility which matures on April 20, 2020, subject to two six-month extensions at our option. In addition, we have an option (subject to bank approval) to increase the credit facility through an accordion feature to $1.5 billion. For the six months ended June 30, 2018, the maximum amount of borrowings outstanding under our revolving credit facility was $177.0 million, the weighted average amount of borrowings outstanding was $109.9 million and the weighted average interest rate, before amortization of debt fees, was 2.5%. Our only remaining debt maturing in 2018 is our $275.0 million unsecured term loan which matures on November 21, 2018, subject to a one-year extension at our option. During the first six months of 2018, we raised $24.6 million, after fees and other costs, under our ATM equity program, which as of June 30, 2018, had the capacity to issue up to $375.0 million in common shares. We currently believe that cash flows from operations, cash on hand, our ATM program, our revolving credit facility and our general ability to access the capital markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures.
Our overall capital requirements for the remainder of 2018 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of Assembly Row, Pike & Rose and future phases of Santana Row. While the amount of future expenditures will depend on numerous factors, we expect to to see a reduced level of capital investments in our properties under development and redevelopment compared to recent years, which is the result of completing construction on Phase II at both Assembly Row and Pike & Rose in 2018. With respect to other capital investments related to our existing properties, we expect to incur levels consistent with prior years. Our capital investments will be funded on a short-term basis with cash flow from operations, cash on hand and/or our revolving credit facility, and on a long-term basis, with long-term debt or equity including shares issued under our ATM equity program. If necessary, we may access the debt or equity capital markets to finance significant acquisitions. Given our past ability to access the capital markets, we expect debt or equity to be available to us. Although there is no intent at this time, if market conditions deteriorate, we may delay the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.
In addition to conditions in the capital markets which could affect our ability to access those markets, the following factors could affect our ability to meet our liquidity requirements:
| |
• | restrictions in our debt instruments or preferred shares may limit us from incurring debt or issuing equity at all, or on acceptable terms under then-prevailing market conditions; and |
| |
• | we may be unable to service additional or replacement debt due to increases in interest rates or a decline in our operating performance. |
Summary of Cash Flows
|
| | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
| (In thousands) |
Cash provided by operating activities | $ | 263,111 |
| | $ | 238,660 |
|
Cash used in investing activities | (78,695 | ) | | (386,699 | ) |
Cash (used in) provided by financing activities | (100,654 | ) | | 221,108 |
|
Increase in cash, cash equivalents and restricted cash | 83,762 |
| | 73,069 |
|
Cash, cash equivalents and restricted cash, beginning of year | 25,200 |
| | 34,849 |
|
Cash, cash equivalents and restricted cash, end of period | $ | 108,962 |
| | $ | 107,918 |
|
Net cash provided by operating activities increased $24.5 million to $263.1 million during the six months ended June 30, 2018 from $238.7 million during the six months ended June 30, 2017. The increase was primarily attributable to higher net income before certain non-cash items and $12.4 million in net proceeds from the Jordan Downs new market tax credit transaction (see Note 3 to the Consolidated Financial Statements for further discussion), partially offset by timing of cash receipts.
Net cash used in investing activities decreased $308.0 million to $78.7 million during the six months ended June 30, 2018 from $386.7 million during the six months ended June 30, 2017. The decrease was primarily attributable to:
| |
• | a $163.3 million decrease in acquisitions of real estate, primarily due to the 2017 acquisitions of our Riverpoint Center, Hastings Ranch, and Fourth Street properties, |
| |
• | a $77.0 million decrease in capital expenditures as we complete portions of Phase II of both our Assembly Row and Pike & Rose projects, and |
| |
• | a $74.7 million increase in proceeds from sale of real estate primarily due to the sale of condominiums at our Assembly Row and Pike & Rose properties in 2018. |
Net cash used in financing activities increased $321.8 million to $100.7 million used during the six months ended June 30, 2018 from $221.1 million provided during the six months ended June 30, 2017. The increase was primarily attributable to:
| |
• | $399.4 million in net proceeds from the June 2017 issuance of $300.0 million of 3.25% senior unsecured notes and $100.0 million of 4.50% notes, |
| |
• | an $11.3 million decrease in contributions from noncontrolling interests primarily due to contributions to fund the $50.0 million repayment of the Plaza El Segundo mortgage loan in June 2017, and |
| |
• | a $9.2 million increase in dividends paid to shareholders due to an increase in the common share dividend rate, an increase in the number of common shares outstanding, and preferred dividends related to the issuance of our Series C Preferred Shares in September 2017, |
partially offset by
| |
• | a $48.0 million increase in net borrowings on our revolving credit facility, and |
| |
• | a $40.5 million decrease in repayment of mortgages and capital leases due to the $10.5 million payoff of the mortgage loan on the Grove at Shrewsbury (West) in March 2018, as compared to the $50.0 million paydown of the Plaza El Segundo mortgage loan in June 2017. |
Debt Financing Arrangements
The following is a summary of our total debt outstanding as of June 30, 2018:
|
| | | | | | | | | | | | |
Description of Debt | Original Debt Issued | | Principal Balance as of June 30, 2018 | | Stated Interest Rate as of June 30, 2018 | | Maturity Date |
| (Dollar amounts in thousands) | | | | |
Mortgages payable | | | | | | | |
Secured fixed rate | | | | | | | |
Rollingwood Apartments | $ | 24,050 |
| | $ | 20,578 |
| | 5.54 | % | | May 1, 2019 |
The Shops at Sunset Place | Acquired |
| | 65,538 |
| | 5.62 | % | | September 1, 2020 |
29th Place | Acquired |
| | 4,231 |
| | 5.91 | % | | January 31, 2021 |
Sylmar Towne Center | Acquired |
| | 17,185 |
| | 5.39 | % | | June 6, 2021 |
Plaza Del Sol | Acquired |
| | 8,496 |
| | 5.23 | % | | December 1, 2021 |
The AVENUE at White Marsh | 52,705 |
| | 52,705 |
| | 3.35 | % | | January 1, 2022 |
Montrose Crossing | 80,000 |
| | 70,191 |
| | 4.20 | % | | January 10, 2022 |
Azalea | Acquired |
| | 40,000 |
| | 3.73 | % | | November 1, 2025 |
Bell Gardens | Acquired |
| | 13,061 |
| | 4.06 | % | | August 1, 2026 |
Plaza El Segundo | 125,000 |
| | 125,000 |
| | 3.83 | % | | June 5, 2027 |
The Grove at Shrewsbury (East) | 43,600 |
| | 43,600 |
| | 3.77 | % | | September 1, 2027 |
Brook 35 | 11,500 |
| | 11,500 |
| | 4.65 | % | | July 1, 2029 |
Chelsea | Acquired |
| | 6,105 |
| | 5.36 | % | | January 15, 2031 |
Subtotal | | | 478,190 |
| | | | |
Net unamortized premium and debt issuance costs | | | (484 | ) | | | | |
Total mortgages payable, net | | | 477,706 |
| | | | |
Notes payable | | | | | | | |
Unsecured fixed rate | | | | | | | |
Term loan (1) | 275,000 |
| | 275,000 |
| | LIBOR + 0.90% |
| | November 21, 2018 |
Various | 7,239 |
| | 4,672 |
| | 11.31% |
| | Various through 2028 |
Unsecured variable rate | | | | | | | |
Revolving credit facility (2) | 800,000 |
| | 89,000 |
| | LIBOR + 0.825% |
| | April 20, 2020 |
Subtotal | | | 368,672 |
| | | | |
Net unamortized debt issuance costs | | | (283 | ) | | | | |
Total notes payable, net | | | 368,389 |
| | | | |
| | | | | | | |
Senior notes and debentures | | | | | | | |
Unsecured fixed rate | | | | | | | |
2.55% notes | 250,000 |
| | 250,000 |
| | 2.55 | % | | January 15, 2021 |
3.00% notes | 250,000 |
| | 250,000 |
| | 3.00 | % | | August 1, 2022 |
2.75% notes | 275,000 |
| | 275,000 |
| | 2.75 | % | | June 1, 2023 |
3.95% notes | 300,000 |
| | 300,000 |
| | 3.95 | % | | January 15, 2024 |
7.48% debentures | 50,000 |
| | 29,200 |
| | 7.48 | % | | August 15, 2026 |
3.25% notes | 475,000 |
| | 475,000 |
| | 3.25 | % | | July 15, 2027 |
6.82% medium term notes | 40,000 |
| | 40,000 |
| | 6.82 | % | | August 1, 2027 |
4.50% notes | 550,000 |
| | 550,000 |
| | 4.50 | % | | December 1, 2044 |
3.625% notes | 250,000 |
| | 250,000 |
| | 3.625 | % | | August 1, 2046 |
Subtotal | | | 2,419,200 |
| | | | |
Net unamortized discount and debt issuance costs | | | (16,349 | ) | | | | |
Total senior notes and debentures, net | | | 2,402,851 |
| | | | |
Capital lease obligations | | | | | | | |
Various | | | 71,538 |
| | Various |
| | Various through 2106 |
Total debt and capital lease obligations, net | | | $ | 3,320,484 |
| | | | |
_____________________ | |
1) | We entered into two interest rate swap agreements that fix the LIBOR portion of the interest rate on the term loan at 1.72%. The spread on the term loan is 90 basis points resulting in a fixed rate of 2.62%. |
| |
2) | The maximum amount drawn under our revolving credit facility during the six months ended June 30, 2018 was $177.0 million, and the weighted average interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 2.5%. |
Our revolving credit facility, term loan and other debt agreements include financial and other covenants that may limit our operating activities in the future. As of June 30, 2018, we were in compliance with all financial and other covenants related to our revolving credit facility, term loan and senior notes. Additionally, as of June 30, 2018, we were in compliance with all of
the financial and other covenants that could trigger loan default on our mortgage loans. If we were to breach any of these financial and other covenants and did not cure the breach within an applicable cure period, our lenders could require us to repay the debt immediately and, if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes, term loan and our revolving credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can put us in default and require immediate repayment of their debt if we breach and fail to cure a default under certain of our other debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of operations, our ability to meet our obligations and the market value of our shares. Our organizational documents do not limit the level or amount of debt that we may incur.
The following is a summary of our scheduled principal repayments as of June 30, 2018:
|
| | | | | | | | | | | | | | | | |
| Unsecured | | Secured | | Capital Lease | | Total | |
| (In thousands) | |
2018 | $ | 275,359 |
| (1) | $ | 2,857 |
| | $ | 23 |
| | $ | 278,239 |
| |
2019 | 563 |
| | 25,820 |
| | 42 |
| | 26,425 |
| |
2020 | 89,624 |
| (2) | 65,539 |
| | 46 |
| | 155,209 |
| |
2021 | 250,694 |
| | 30,541 |
| | 51 |
| | 281,286 |
| |
2022 | 250,771 |
| | 117,018 |
| | 56 |
| | 367,845 |
| |
Thereafter | 1,920,861 |
| | 236,415 |
| | 71,320 |
| | 2,228,596 |
| |
| $ | 2,787,872 |
| | $ | 478,190 |
| | $ | 71,538 |
| | $ | 3,337,600 |
| (3) |
_____________________
| |
1) | Our $275.0 million unsecured term loan matures on November 21, 2018, subject to a one-year extension at our option. |
| |
2) | Our $800.0 million revolving credit facility matures on April 20, 2020, subject to two six-month extensions at our option. As of June 30, 2018, there was $89.0 million outstanding under this credit facility. |
| |
3) | The total debt maturities differ from the total reported on the consolidated balance sheet due to the unamortized net premium/discount and debt issuance costs on mortgage loans, notes payable, and senior notes as of June 30, 2018. |
Interest Rate Hedging
We may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. We enter into derivative instruments that qualify as cash flow hedges and do not enter into derivative instruments for speculative purposes.
The interest rate swaps associated with our cash flow hedges are recorded at fair value on a recurring basis. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in other comprehensive income/loss which is included in accumulated other comprehensive loss on our consolidated balance sheet and our consolidated statement of shareholders' equity. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit-worthiness of the counterparty which includes reviewing debt ratings and financial performance. However, management does not anticipate non-performance by the counterparty. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected.
As of June 30, 2018, we are party to two interest rate swap agreements that effectively fixed the rate on the term loan at 2.62%. Both swaps were designated and qualified as cash flow hedges and were recorded at fair value. Hedge ineffectiveness has not impacted earnings as of June 30, 2018, and we do not anticipate it will have a significant effect in the future.
REIT Qualification
We intend to maintain our qualification as a REIT under Section 856(c) of the Code. As a REIT, we generally will not be subject to corporate federal income taxes on income we distribute to our shareholders as long as we satisfy certain technical requirements of the Code, including the requirement to distribute at least 90% of our taxable income to our shareholders.
Funds From Operations
Funds from operations (“FFO”) is a supplemental non-GAAP financial measure of real estate companies’ operating performance. The National Association of Real Estate Investment Trusts (“NAREIT”) defines FFO as follows: net income, computed in accordance with U.S. GAAP, plus real estate related depreciation and amortization and excluding extraordinary items, gains and losses on the sale of real estate, and impairment write-downs of depreciable real estate. We compute FFO in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in addition to our net income and net cash provided by operating activities. It should be noted that FFO:
| |
• | does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); |
| |
• | should not be considered an alternative to net income as an indication of our performance; and |
| |
• | is not necessarily indicative of cash flow as a measure of liquidity or ability to fund cash needs, including the payment of dividends. |
We consider FFO available for common shareholders a meaningful, additional measure of operating performance primarily because it excludes the assumption that the value of the real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation. We use FFO primarily as one of several means of assessing our operating performance in comparison with other REITs. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs.
An increase or decrease in FFO available for common shareholders does not necessarily result in an increase or decrease in aggregate distributions because our Board of Trustees is not required to increase distributions on a quarterly basis unless necessary for us to maintain REIT status. However, we must distribute at least 90% of our taxable income to remain qualified as a REIT. Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders although not necessarily on a proportionate basis.
The reconciliation of net income to FFO available for common shareholders is as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
| (In thousands, except per share data) |
Net income | $ | 65,533 |
| | $ | 78,133 |
| | $ | 128,464 |
| | $ | 136,203 |
|
Net income attributable to noncontrolling interests | (1,938 | ) | | (1,842 | ) | |