Item 2. Management’s Discussion and Analysis
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As of March 31, 2024, we own or have an ownership interest in 201 properties held through our Core Portfolio and Funds. Our Core Portfolio consists of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through our Funds. These properties primarily consist of street and urban retail, and suburban shopping centers. Our Funds are investment vehicles through which our Operating Partnership and outside institutional investors invest in primarily opportunistic and value-add retail real estate. Currently, we have active investments in four Funds. A summary of our wholly-owned and partially-owned retail properties and their physical occupancies as of March 31, 2024 is as follows:
Number of Properties
Operating Properties
Development or
Redevelopment
Operating
GLA
Occupancy
Core Portfolio:
Chicago Metro
3
36
576,799
84.3
%
New York Metro
—
29
394,301
92.6
%
Los Angeles Metro
—
2
23,757
100.0
%
San Francisco Metro
2
—
—
0.0
%
Dallas Metro
2
14
121,386
86.0
%
Washington DC Metro
—
32
358,182
87.0
%
Boston Metro
—
1
1,050
100.0
%
Suburban
3
25
3,910,343
93.1
%
Total Core Portfolio
10
139
5,385,818
91.6
%
Acadia Share of Total Core Portfolio
10
139
5,018,615
91.8
%
Fund Portfolio:
Fund II
—
1
538,097
76.1
%
Fund III
1
1
4,637
77.6
%
Fund IV
1
25
686,023
89.1
%
Fund V
—
23
7,757,907
92.0
%
Total Fund Portfolio
2
50
8,986,664
90.8
%
Acadia Share of Total Fund Portfolio
2
50
1,946,772
89.2
%
Total Core and Funds
12
189
14,372,482
91.1
%
Acadia Share of Total Core and Funds
12
189
6,965,387
91.1
%
The majority of our operating income is derived from rental revenues from operating properties, including expense recoveries from tenants, offset by operating and overhead expenses.
Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. Generally, we focus on the following fundamentals to achieve this objective:
• Own and operate a Core Portfolio of high-quality retail properties located primarily in high-barrier-to-entry, densely populated metropolitan areas and create value through accretive development and re-tenanting activities coupled with the acquisition of high-quality assets that have the long-term potential to outperform the asset class as part of our Core asset recycling and acquisition initiative.
• Generate additional external growth through an opportunistic yet disciplined acquisition program within our Funds. We target transactions with high inherent opportunity for the creation of additional value through:
o value-add investments in street retail properties, located in established and “next generation” submarkets, with re-tenanting or repositioning opportunities,
o opportunistic acquisitions of well-located real-estate anchored by distressed retailers, and
o other opportunistic acquisitions that may include high-yield acquisitions and purchases of distressed debt.
36
• Some of these investments historically have also included, and may in the future include, joint ventures with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.
• Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth.
SIGNIFICANT DEVELOPMENTS DURING THE THREE MONTHS ENDED MARCH 31, 2024 AND SUBSEQUENT EVENTS
Financing Activity
In April 2024, the Operating Partnership entered into a Third Amended and Restated Credit Agreement, with Bank of America, N.A., as administrative agent, to amend its existing senior unsecured credit facility (the “Amended Credit Facility”). The Amended Credit Facility provides for an increase in the existing unsecured revolving credit facility from $300.0 million to $350.0 million, which includes the capacity to issue letters of credit in an amount up to $60.0 million, and the extension of the term from June 29, 2025 to April 15, 2028, with two additional six-month extension options. The Amended Credit Facility also provides for the extension of the term on the existing $400.0 million unsecured term loan from June 29, 2026 to April 15, 2028, with two additional six-month extension options. The Amended Credit Facility has an accordion feature to increase its capacity up to $900 million at the option of the Operating Partnership, subject to customary conditions. Borrowings under the revolving credit facility and the term loan will accrue interest at a floating rate based on SOFR with margins based on leverage or credit rating.
During the three months ended March 31, 2024, we ( Note 7 ):
• repaid a Core mortgage totaling $7.3 million at maturity;
• repaid the Fund V subscription line totaling $80.6 million;
• entered into a new Fund mortgage of $43.4 million;
• extended two Fund mortgages totaling $67.7 million; and
• made scheduled principal payments totaling $1.8 million.
Economic and Other Considerations
The three months ended March 31, 2024 and the year ended December 31, 2023 were impacted by significant volatility in global markets, largely driven by rising inflation, rising interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. The rate hikes enacted by the Federal Reserve have had a significant impact on interest rate indexes such as SOFR and the Prime Rate and cost of borrowing. We manage our exposure to fluctuations in interest rates primarily through the use of fixed-rate debt and interest rate swap and cap agreements. We believe we manage our properties in a cost-conscious manner to minimize recurring operational expenses and utilize multi-year contracts to alleviate the impact of inflation on our business and our tenants. We also continue to see consumer confidence and we expect to continue to add value to our portfolio by executing on our current leasing momentum, our active development and redevelopment projects, and leasing pipeline. Except for increased interest costs, we have not experienced any material negative impacts at this time, and we intend to actively manage our business to respond to the ongoing economic and social impact from such events.
37
RESULTS OF OPERATIONS
See Note 12 in the Notes to Condensed Consolidated Financial Statements for an overview of our three reportable segments.
Comparison of Results of operations by reportable segment for the three months ended March 31, 2024 compared to the three months ended March 31, 2023 are summarized in the table below (in millions, totals may not add due to rounding):
Three Months Ended
Three Months Ended
March 31, 2024
March 31, 2023
Increase (Decrease)
Core
Funds
SF
Total
Core
Funds
SF
Total
Core
Funds
SF
Total
Revenues
$
53.5
$
37.8
$
—
$
91.4
$
49.8
$
32.0
$
—
$
81.8
$
3.7
$
5.8
$
—
$
9.6
Depreciation and amortization
(18.3
)
(16.7
)
—
(34.9
)
(18.7
)
(14.5
)
—
(33.2
)
(0.4
)
2.2
—
1.7
Property operating expenses and real estate taxes
(17.9
)
(13.5
)
—
(31.4
)
(16.1
)
(10.5
)
—
(26.6
)
1.8
3.0
—
4.8
General and administrative expenses
—
—
—
(9.8
)
—
—
—
(9.9
)
—
—
—
(0.1
)
Loss related to a previously disposed property
—
(1.2
)
—
(1.2
)
—
—
—
—
—
(1.2
)
—
(1.2
)
Operating income
17.4
6.4
—
14.0
15.0
7.0
—
12.1
2.4
(0.6
)
—
1.9
Equity in earnings (losses) of unconsolidated affiliates
2.1
(2.4
)
—
(0.3
)
1.8
(1.8
)
—
—
0.3
(0.6
)
—
(0.3
)
Interest income
—
—
5.2
5.2
—
—
4.8
4.8
—
—
0.4
0.4
Realized and unrealized holding (losses) gains on investments and other
(1.9
)
—
(0.2
)
(2.1
)
1.5
25.0
0.3
26.8
(3.4
)
(25.0
)
(0.5
)
(28.9
)
Interest expense
(10.0
)
(13.7
)
—
(23.7
)
(10.7
)
(10.9
)
—
(21.6
)
(0.7
)
2.8
—
2.1
Income (loss) from continuing operations before income taxes
7.6
(9.7
)
5.0
(6.8
)
7.6
19.3
5.1
22.1
—
29.0
0.1
28.9
Income tax (provision) benefit
—
—
—
—
—
—
—
(0.1
)
—
—
—
0.1
Net income (loss)
7.6
(9.7
)
5.0
(6.9
)
7.6
19.3
5.1
22.0
—
(29.0
)
(0.1
)
(28.9
)
Net loss attributable to redeemable noncontrolling interests
—
2.6
—
2.6
—
2.1
—
2.1
—
0.5
—
0.5
Net (income) loss attributable to noncontrolling interests
(0.4
)
7.9
—
7.6
(0.9
)
(9.8
)
—
(10.7
)
0.5
17.7
—
18.3
Net income attributable to Acadia
$
7.2
$
0.8
$
5.0
$
3.3
$
6.7
$
11.6
$
5.1
$
13.4
$
0.5
$
(10.8
)
$
(0.1
)
$
(10.1
)
Core Portfolio
The results of operations for our Core Portfolio segment are depicted in the table above under the headings labeled “Core.” Segment net income attributable to Acadia for our Core Portfolio increased $0.5 million for the three months ended March 31, 2024 compared to the prior year period as a result of the changes further described below.
Revenues for our Core Portfolio increased $3.7 million for the three months ended March 31, 2024 compared to the prior year period primarily due to the recognition of a forfeited deposit within Other revenues in the Condensed Consolidated Statements of Income for a property previously under contract for sale.
Property operating expenses and real estate taxes increased $1.8 million for the three months ended March 31, 2024 compared to the prior year period primarily due to a $1.0 million reserve for increased legal expenses along with higher non-recurring operating expenses throughout the Core Portfolio.
Realized and unrealized holding (losses) gains on investments and other for our Core Portfolio decreased $3.4 million for the three months ended March 31, 2024 compared to the prior year period primarily due to a change in the mark-to-market adjustment on the Investment in Albertsons. In January 2023, following the expiration of the lock-up period and distribution of approximately 2.5 million shares by Mervyns II to its partners, the Company received 1.6 million shares of Albertsons, the remaining amount of which are now included in the Core Portfolio ( Note 4 , Note 8 ).
Funds (all amounts below are consolidated amounts and are not representative of our proportionate share)
The results of operations for our Funds segment are depicted in the table above under the headings labeled “Funds.” Segment net income attributable to Acadia for the Funds decreased $10.8 million for the three months ended March 31, 2024 compared to the prior year period as a result of the changes described below.
Revenues for the Funds increased $5.8 million for the three months ended March 31, 2024 compared to the prior year period primarily due (i) $4.8 million from Fund property acquisitions and (ii) $1.7 million from new tenant lease up within the Funds in 2024 and 2023.
38
Depreciation and amortization for the Funds increased $2.2 million for the three months ended March 31, 2024 compared to the prior year period primarily due to Fund property acquisitions. Property operating expenses and real estate taxes for the Funds increased $3.0 million for the three months ended March 31, 2024 compared to the prior year period primarily due to Fund property acquisitions and non-recurring property operating expenses within the Fund Portfolio.
Loss on disposition of property for the Funds increased $1.2 million for the three months ended March 31, 2024 compared to the prior year period due to a loss related to a previously disposed property ( Note 2 ).
Realized and unrealized holding (losses) gains on investments and other for the Funds decreased $25.0 million for the three months ended March 31, 2024 compared to the prior year period primarily due to a $28.2 million increase in dividend income from Albertsons in 2023 offset by a $2.0 million mark-to-market loss in 2023.
Interest expense for the Funds increased $2.8 million for the three months ended March 31, 2024 compared to the prior year period primarily due to higher average interest rates in 2024.
Net (income) loss attributable to noncontrolling interests for the Funds increased $17.7 million for the three months ended March 31, 2024 compared to the prior year period based on the noncontrolling interests’ share of the variances discussed above. Net income attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $2.4 million and $2.5 million for the three months ended March 31, 2024 and 2023, respectively.
Structured Financing
Interest and other income for the Structured Financing portfolio increased $0.4 million for the three months ended March 31, 2024 compared to the prior year period primarily due to new loans issued during the three months ended March 31, 2024.
Unallocated
The Company does not allocate general and administrative expenses and income taxes to its reportable segments. These unallocated amounts are depicted in the table above under the headings labeled “Total.”
NON-GAAP FINANCIAL MEASURES
Net Property Operating Income
The following discussion of net property operating income (“NOI”) and rent spreads on new and renewal leases includes the activity from both our consolidated and our pro-rata share of unconsolidated properties within our Core Portfolio. Our Funds invest primarily in properties that typically require significant leasing and development. Given that the Funds are finite-life investment vehicles, these properties are sold following stabilization. For these reasons, we believe NOI and rent spreads are not meaningful measures for our Fund investments.
NOI represents property revenues less property expenses. We consider NOI and rent spreads on new and renewal leases for our Core Portfolio to be appropriate supplemental disclosures of portfolio operating performance due to their widespread acceptance and use within the REIT investor and analyst communities. NOI and rent spreads on new and renewal leases are presented to assist investors in analyzing our property performance, however, our method of calculating these may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.
39
A reconciliation of consolidated operating income to net operating income - Core Portfolio follows (in thousands):
Three Months Ended March 31,
2024
2023
Consolidated operating income
$
14,008
$
12,108
Add back:
General and administrative
9,768
9,946
Depreciation and amortization
34,940
33,173
Loss related to a previously disposed property
1,198
—
Less:
Above/below-market rent, straight-line rent and other adjustments (a)
(4,608
)
(2,242
)
Consolidated NOI
55,306
52,985
Redeemable noncontrolling interest in consolidated NOI
(204
)
(1,217
)
Noncontrolling interest in consolidated NOI
(17,768
)
(14,475
)
Less: Operating Partnership's interest in Fund NOI included above
(5,341
)
(5,037
)
Add: Operating Partnership's share of unconsolidated joint ventures NOI (b)
3,961
3,959
Core Portfolio NOI
$
35,954
$
36,215
a) Includes straight-line rent reserves. See Note 11 for additional information about straight-line rent reserves and adjustments for the periods presented.
b) Does not include the Operating Partnership’s share of NOI from unconsolidated joint ventures within the Funds.
Same-Property NOI includes Core Portfolio properties that we owned for both the current and prior periods presented, but excludes those properties that we acquired, sold or expected to sell, redeveloped and developed during these periods. The following table summarizes Same-Property NOI for our Core Portfolio (dollars in thousands):
Three Months Ended March 31,
2024
2023
Core Portfolio NOI
$
35,954
$
36,215
Less properties excluded from Same-Property NOI
(3,926
)
(5,900
)
Same-Property NOI
$
32,028
$
30,315
Percent change from prior year period
5.7
%
Components of Same-Property NOI:
Same-Property Revenues
$
46,143
$
43,782
Same-Property Operating Expenses
(14,115
)
(13,467
)
Same-Property NOI
$
32,028
$
30,315
40
Rent Spreads on Core Portfolio New and Renewal Leases
The following table summarizes rent spreads on both a cash basis and straight-line basis for new and renewal leases based on leases executed within our Core Portfolio for the periods presented. Cash basis represents a comparison of rent most recently paid on the previous lease as compared to the initial rent paid on the new lease. Straight-line basis represents a comparison of rents as adjusted for contractual escalations, abated rent, and lease incentives for the same comparable leases. The table below includes embedded option renewals for which the renewed rent was equal to or approximated existing base rent.
Three Months Ended March 31, 2024
Core Portfolio New and Renewal Leases
Cash Basis
Straight-
Line Basis
Number of new and renewal leases executed
22
22
GLA commencing
187,851
187,851
New base rent
$
22.49
$
22.85
Expiring base rent
$
21.37
$
20.64
Percent growth in base rent
5.2
%
10.7
%
Average cost per square foot (a)
$
1.35
$
1.35
Weighted average lease term (years)
4.7
4.7
(a) The average cost per square foot includes tenant improvement costs, leasing commissions and tenant allowances.
41
Funds from Operations
We consider funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance due to its widespread acceptance and use within the REIT investor and analyst communities. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property, depreciation and amortization, and impairment of real estate. Our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating our performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, we define FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property and impairment of depreciable real estate, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Also consistent with NAREIT’s definition of FFO, the Company has elected to include gains and losses incidental to its main business (including those related to its RCP investments, such as Albertsons) in FFO. A reconciliation of net income (loss) attributable to Acadia to FFO follows (dollars in thousands, except per share data):
Three Months Ended March 31,
2024
2023
Net income attributable to Acadia
$
3,269
$
13,360
Depreciation of real estate and amortization of leasing costs (net of
noncontrolling interests' share)
27,087
26,444
Loss on disposition of property (net of noncontrolling interests' share)
275
—
Income attributable to Common OP Unit holders
203
794
Distributions - Preferred OP Units
123
123
Funds from operations attributable to Common Shareholders and
Common OP Unit holders - Basic and Diluted
$
30,957
$
40,721
Funds From Operations per Share - Diluted
Basic weighted-average shares outstanding, GAAP earnings
102,127,715
95,189,490
Weighted-average OP Units outstanding
7,717,578
6,885,106
Basic weighted-average shares and OP Units outstanding, FFO
109,845,293
102,074,596
Assumed conversion of Preferred OP Units to Common Shares
463,898
463,898
Assumed conversion of LTIP units and Restricted Share Units to
Common Shares
741,888
858
Diluted weighted-average number of Common Shares and Common
OP Units outstanding, FFO
111,051,079
102,539,352
Diluted Funds from operations, per Common Share and Common OP Unit
$
0.28
$
0.40
42
LIQUIDITY AND CAPITAL RESOURCES
Uses of Liquidity and Cash Requirements
Generally, our principal uses of liquidity are (i) distributions to our shareholders and OP unit holders, (ii) investments, which include the funding of our capital committed to the Funds and property acquisitions and development/re-tenanting activities within our Core Portfolio, (iii) distributions to our Fund investors, (iv) debt service and loan repayments and (v) share repurchases.
Distributions
In order to qualify as a REIT for federal income tax purposes, we must distribute at least 90% of our taxable income to our shareholders. During the three months ended March 31, 2024, we paid dividends and distributions on our Common Shares and Preferred OP Units totaling $18.6 million.
Capital Commitments
During the three months ended March 31, 2024, we made capital contributions aggregating $11.1 million to our Funds.
As of March 31, 2024, our share of the remaining capital commitments to our Funds aggregated $18.1 million as follows:
• $0.5 million to Fund III – Fund III was launched in May 2007 with total committed capital of $450.0 million, of which our original share was $89.6 million. During 2015, we acquired an additional interest, which had an original capital commitment of $20.9 million.
• $5.5 million to Fund IV – Fund IV was launched in May 2012 with total committed capital of $530.0 million, of which our original share was $122.5 million.
• $12.1 million to Fund V – Fund V was launched in August 2016 with total committed capital of $520.0 million, of which our original share was $104.5 million.
Development Activities
During the three months ended March 31, 2024, capitalized costs associated with development activities totaled $1.8 million ( Note 2 ). As of March 31, 2024, we had a total of thirteen consolidated projects under development or redevelopment, for which the estimated total cost to complete these projects through 2025 was $44.8 million to $71.2 million, and our estimated share was approximately $23.8 million to $40.2 million. Substantially all remaining development and redevelopment costs are discretionary, and could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023.
Debt
A summary of our consolidated debt, which includes the full amount of Fund related obligations and excludes our pro rata share of debt at our unconsolidated subsidiaries, is as follows (in thousands):
March 31,
December 31,
2024
2023
Total Debt - Fixed and Effectively Fixed Rate
$
1,404,644
$
1,454,707
Total Debt - Variable Rate
329,819
426,380
1,734,463
1,881,087
Net unamortized debt issuance costs
(11,012
)
(11,186
)
Unamortized premium
228
240
Total Indebtedness
$
1,723,679
$
1,870,141
43
As of March 31, 2024, our consolidated indebtedness aggregated $1,734.5 million, excluding unamortized premium of $0.2 million and net unamortized loan costs of $11.0 million, and was collateralized by 33 properties and related tenant leases. Stated interest rates on our outstanding indebtedness ranged from 3.99% to SOFR + 3.75% with maturities that ranged from January 1, 2025 to April 15, 2035, without regard to available extension options. With respect to the debt maturing in 2024, we are actively pursuing refinancing the remaining obligations, though there can be no assurance that we can refinance such obligations on favorable terms or at all. Taking into consideration $1,207.6 million of notional principal under variable to fixed-rate swap agreements currently in effect, $1,404.6 million of the portfolio debt, or 81.0%, was fixed at a 4.77% weighted average interest rate and $329.8 million, or 19.0%, was floating at a 8.09% weighted average interest rate as of March 31, 2024. Our variable-rate debt includes $151.3 million of debt subject to interest rate caps.
Without regard to available extension options, as of March 31, 2024, we had $218.4 million of debt maturing in 2024 at a weighted-average interest rate of 4.27%; $4.4 million of scheduled principal amortization due in the remainder of 2024; and our share of scheduled remaining 2024 principal payments and maturities on our unconsolidated debt was $65.6 million. In addition, $309.8 million of our total consolidated debt and $61.0 million of our pro-rata share of unconsolidated debt will come due by March 31, 2025. With respect to the debt maturing in 2024 and 2025, we have options to extend consolidated debt aggregating $40.1 million and $438.7 million as of March 31, 2024 and; however, there can be no assurance that the Company will be able to successfully execute any or all of its available extension options. For the remaining indebtedness, we may not have sufficient cash on hand to repay such indebtedness, and, therefore, we expect to refinance at least a portion of this indebtedness or select other alternatives based on market conditions as these loans mature; however, there can be no assurance that we will be able to obtain financing on acceptable terms or at all. Our ability to obtain financing could be affected by various risks and uncertainties, including, but not limited to, the effects of the current inflationary environment, rising interest rates, and other risks detailed in Part I, Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2023.
Share Repurchase Program
We maintain a share repurchase program under which $122.5 million remains available as of March 31, 2024 ( Note 10 ). We did not repurchase any shares under this program during the three months ended March 31, 2024.
Sources of Liquidity
Our primary sources of capital for funding our short-term (less than 12 months) and long-term (12 months and longer) liquidity needs include (i) the issuance of both public equity and OP Units, (ii) the issuance of both secured and unsecured debt, (iii) unfunded capital commitments from noncontrolling interests within our Funds, (iv) future sales of existing properties, (v) repayments of structured financing investments, (vi) liquidation of marketable securities, and (vii) cash on hand and future cash flow from operating activities. Our cash on hand in our consolidated subsidiaries as of March 31, 2024 totaled $18.8 million. Our remaining sources of liquidity are described further below.
Issuance of Common Shares
In January 2024, the Company completed an underwritten offering of 6,900,000 Common Shares (inclusive of the underwriters’ option to purchase 900,000 additional shares) for net proceeds of $113.0 million.
ATM Program
We have an ATM Program ( Note 10 ) that provides us with an efficient and low-cost vehicle for raising capital through public equity issuances on an as-we-go basis to fund our capital needs. Through this program, we have been able to effectively “match-fund” the required capital for our Core Portfolio and our share of Fund acquisitions through the issuance of Common Shares over extended periods employing a price averaging strategy. In addition, from time to time, we have issued and may issue, equity in follow-on offerings separate from our ATM Program. Net proceeds raised through our ATM Program and follow-on offerings are primarily used for acquisitions, both for our Core Portfolio and our pro-rata share of Fund acquisitions, and for general corporate purposes. The Company sold 87,139 Common Shares under its ATM Program during the three months ended March 31, 2024 generating $1.5 million of net proceeds.
Fund Capital
During the three months ended March 31, 2024, Fund V called for capital contributions of $52.2 million, of which our aggregate share was $11.1 million. As of March 31, 2024, unfunded capital commitments from noncontrolling interests within Funds II, III, IV and V were zero, $1.4 million, $18.5 million and $48.3 million, respectively.
44
Other Transactions
During the three months ended March 31, 2024, we sold 175,000 shares of Albertsons, generating net proceeds of $4.0 million. As of March 31, 2024, we held 1.3 million shares with a fair value of $27.3 million ( Note 8 ). In addition, during the three months ended March 31, 2024, we recognized dividend income of $0.2 million ( Note 8 ).
Structured Financing Repayments
During the three months ended March 31, 2024, the Company received full payment on a $6.0 million Core Portfolio note.
Financing and Debt
As of March 31, 2024, we had $185.3 million of additional capacity under existing Core Portfolio debt facilities. In addition, as of that date within our Core and Fund portfolios, we had 92 unleveraged consolidated properties with an aggregate carrying value of approximately $1.8 billion, although there can be no assurance that we would be able to obtain financing for these properties at favorable terms, if at all.
Inflation and Economic Condition Considerations
The three months ended March 31, 2024, and the year ended December 31, 2023, were impacted by significant volatility in global markets, largely driven by rising inflation and interest rates, slowing economic growth, geopolitical uncertainty and instability in the banking sector following multiple bank failures. Central banks have responded to rapidly rising inflation by tightening monetary policies that are likely to create headwinds to economic growth. The Federal Reserve has raised interest rates eleven times since January 2022, and has signaled that further interest rate increases may be forthcoming in 2024. The rate hikes enacted by the Federal Reserve have had a significant impact on interest rate indexes such as SOFR and the Prime Rate. As of March 31, 2024, approximately 81.0% of our outstanding debt is fixed or effectively fixed rate with the remaining 19.0% indexed to SOFR or Prime plus an applicable margin per the loan agreement. As of March 31, 2024, we were counterparty to 36 interest rate swap agreements and four interest rate cap agreements, all of which qualify for and are designated as hedging instruments, which helps to alleviate the impact of rising interest rates on our operations.
We believe we manage our properties in a cost-conscious manner to minimize recurring operational expenses and utilize multi-year contracts to alleviate the impact of inflation on our business and our tenants. Most of our leases require tenants to pay their share of operating expenses, including common area maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. These provisions are designed to partially mitigate the impact of inflation; however, current inflation levels are much greater than the contractual rent increases we obtain from our tenant base. We also continue to see consumer confidence and we expect to continue to add value to our portfolio through executing on our current leasing momentum, our active development and redevelopment projects, and leasing pipeline.
While we have not experienced any material negative impacts at this time, we intend to actively manage our business to respond to the ongoing economic and social impact from such events. See Risk Factors in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2023.
HISTORICAL CASH FLOW
The following table compares the historical cash flow for the three months ended March 31, 2024 with the cash flow for the three months ended March 31, 2023 (in millions, totals may not add due to rounding):
Three Months Ended March 31,
2024
2023
Variance
Net cash provided by operating activities
$
26.0
$
59.4
$
(33.4
)
Net cash used in investing activities
(3.8
)
(3.6
)
(0.2
)
Net cash used in financing activities
(20.5
)
(56.7
)
36.2
Increase (decrease) in cash and restricted cash
$
1.6
$
(0.8
)
$
2.4
Operating Activities
Net cash provided by operating activities primarily consists of cash inflows from rental revenue, and cash outflows for property operating expenses, general and administrative expenses and interest and debt expense.
Our operating activities provided $33.4 million less cash for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to the $28.2 million dividend received from our investment in Albertsons in 2023.
45
Investing Activities
Net cash used in investing activities is impacted by our investments in and advances to unconsolidated affiliates, the timing and extent of our real estate development, capital improvements, and acquisition and disposition activities during the period.
Our investing activities used $0.2 million more cash for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to $32.8 million less cash received from return of capital from unconsolidated affiliates. This use of cash was offset by (i) $22.4 million less cash used in our investments in and advances to unconsolidated affiliates, (ii) $6.0 million more received from proceeds from notes receivable and (iii) $4.0 million more cash received from the sale of marketable securities.
Financing Activities
Net cash used in financing activities is impacted by the timing and extent of issuances of debt and equity securities, distributions paid to common shareholders and unitholders of the Operating Partnership, as well as principal and other payments associated with our outstanding indebtedness.
Our financing activities used $36.2 million less cash during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily from (i) $113.8 million more cash provided by the sale of Common Shares, (ii) $16.2 million less cash distributed to noncontrolling interests, and (iii) $6.3 million more cash provided by contributions from noncontrolling interests. These increases were offset by $99.4 million more cash used to pay debt.
OFF-BALANCE SHEET ARRANGEMENTS
We have the following investments made through joint ventures (that may include, among others, tenancy-in common and other similar investments) for the purpose of investing in operating properties. We account for these investments using the equity method of accounting. As such, our financial statements reflect our investment and our share of income and loss from, but not the individual assets and liabilities, of these joint ventures.
See Note 4 in the Notes to Condensed Consolidated Financial Statements, for a discussion of our unconsolidated investments. The Operating Partnership’s pro-rata share of unconsolidated non-recourse debt related to those investments is as follows (dollars in millions):
Operating Partnership
March 31, 2024
Investment
Ownership
Percentage
Pro-rata Share of
Mortgage Debt
Effective Interest Rate (a)
Maturity Date
Gotham Plaza
49.0
%
$
8.4
9.32
%
Jun 2024
Eden
20.8
%
5.0
7.60
%
Sep 2024
Crossroads
49.0
%
28.9
3.94
%
Oct 2024
Tri City Plaza (b)
18.1
%
6.9
3.04
%
Oct 2024
Frederick Crossing (b)
18.1
%
4.3
3.27
%
Dec 2024
Paramus Plaza (c)
11.6
%
3.2
7.67
%
Dec 2024
Frederick County Square (b)
18.1
%
4.3
5.56
%
Jan 2025
650 Bald Hill
20.8
%
3.2
3.75
%
Jun 2026
Renaissance (c)
20.0
%
30.4
7.15
%
Nov 2026
840 N Michigan
91.9
%
47.4
6.50
%
Dec 2026
3104 M Street (c)
20.0
%
0.8
8.50
%
Jan 2027
Wood Ridge Plaza
18.1
%
6.2
7.22
%
Mar 2027
La Frontera
18.1
%
10.0
6.11
%
Jun 2027
Riverdale
18.0
%
6.9
7.27
%
Nov 2027
Georgetown
50.0
%
7.2
4.72
%
Dec 2027
Mohawk Commons
18.1
%
7.2
5.80
%
Mar 2028
Shoppes at South Hills (b)
18.1
%
5.8
5.95
%
Mar 2028
Total
$
186.1
(a) Effective interest rates incorporate the effect of interest rate swaps and caps that were in effect as of March 31, 2024, where applicable.
(b) The debt has one available 12-month extension option.
(c) The debt has two available 12-month extension options.
46
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of condensed consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” in our 2023 Annual Report on Form 10-K.
Recently Issued and Adopted Accounting Pronouncements
Reference is made to Note 1 in the Notes to Condensed Consolidated Financial Statements for information about recently issued accounting pronouncements.
ITEM 3. QUANTITATIVE AND QUALITAT IVE DISCLOSURES ABOUT MARKET RISK.
Information as of March 31, 2024
Our primary market risk exposure is to changes in interest rates related to our mortgage and other debt. See Note 7 in the Notes to Condensed Consolidated Financial Statements, for certain quantitative details related to our mortgage and other debt.
Currently, we manage our exposure to fluctuations in interest rates primarily through the use of fixed-rate debt and interest rate swap and cap agreements. As of March 31, 2024, we had total mortgage and other notes payable of $1,734.5 million, excluding the unamortized premium of $0.2 million and net unamortized debt issuance costs of $11.0 million, of which $1,404.6 million, or 81.0% was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $329.8 million, or 19.0%, was variable-rate based upon LIBOR, SOFR or Prime rates plus certain spreads. As of March 31, 2024, we were party to 36 interest rate swaps and four interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $1,207.6 million and $151.3 million of variable-rate debt, respectively. For a discussion of the risks associated with the discontinuation of LIBOR, see Item 1A. “Risk Factors—Risks Related to Our Liquidity and Indebtedness on our Annual Report on Form 10-K for the year ended December 31, 2023 — If we decided to employ higher leverage levels, we would be subject to increased debt service requirements and a higher risk of default on our debt obligations, which could adversely affect our financial conditions, cash flows and ability to make distributions to our shareholders. In addition, increases or changes in interest rates could cause our borrowing costs to rise and may limit our ability to refinance debt.”
The following table sets forth information as of March 31, 2024 concerning our long-term debt obligations, including principal cash flows by scheduled maturity (without regard to available extension options) and weighted average effective interest rates of maturing amounts (dollars in millions):
Core Consolidated Mortgage and Other Debt
Year
Scheduled
Amortization
Maturities
Total
Weighted Average
Interest Rate
2024 (Remainder)
$
1.3
$
—
$
1.3
—
%
2025
2.0
174.7
176.7
4.1
%
2026
2.4
400.0
402.4
4.7
%
2027
2.3
200.1
202.4
4.6
%
2028
1.8
67.9
69.7
4.5
%
Thereafter
2.5
93.7
96.2
5.5
%
$
12.3
$
936.4
$
948.7
47
Fund Consolidated Mortgage and Other Debt
Year
Scheduled
Amortization
Maturities
Total
Weighted Average
Interest Rate
2024 (Remainder)
$
3.1
$
218.4
$
221.5
4.3
%
2025
1.2
406.0
407.2
7.3
%
2026
0.3
51.7
52.0
6.5
%
2027
0.4
43.4
43.8
8.2
%
2028
0.2
61.1
61.3
6.0
%
Thereafter
—
—
—
—
%
$
5.2
$
780.6
$
785.8
Mortgage Debt in Unconsolidated Partnerships (at our Pro-Rata Share)
Year
Scheduled
Amortization
Maturities
Total
Weighted Average
Interest Rate
2024 (Remainder)
$
9.5
$
56.1
$
65.6
5.1
%
2025
6.0
4.3
10.3
5.6
%
2026
6.1
61.5
67.6
6.7
%
2027
0.6
29.7
30.3
6.3
%
2028
—
12.3
12.3
5.9
%
Thereafter
—
—
—
—
%
$
22.2
$
163.9
$
186.1
Without regard to available extension options, in the remainder of 2024, $222.8 million of our total consolidated debt and $65.6 million of our pro-rata share of unconsolidated outstanding debt will become due. In addition, $583.9 million of our total consolidated debt and $10.3 million of our pro-rata share of unconsolidated debt will become due in 2025. As it relates to the aforementioned maturing debt in 2024 and 2025, we have options to extend consolidated debt aggregating $40.1 million and $438.7 million, respectively; however, there can be no assurance that the Company will be able successfully execute any or all of its available extension options. As we intend on refinancing some or all of such debt at the then-existing market interest rates, which may be greater than the current interest rates, our interest expense would increase by approximately $8.7 million annually if the interest rate on the refinanced debt increased by 100 basis points. After giving effect to noncontrolling interests, our share of this increase would be $4.3 million. Interest expense on our variable-rate debt of $329.8 million, net of variable to fixed-rate swap agreements currently in effect, as of March 31, 2024, would increase $3.3 million if corresponding rate indices increased by 100 basis points. After giving effect to noncontrolling interests, our share of this increase would be $1.0 million. We may seek additional variable-rate financing if and when pricing and other commercial and financial terms warrant. As such, we would consider hedging against the interest rate risk related to such additional variable-rate debt through interest rate swaps and protection agreements, or other means.
Based on our outstanding debt balances as of March 31, 2024, the fair value of our total consolidated outstanding debt would decrease by approximately $5.7 million if interest rates increased by 1%. Conversely, if interest rates decreased by 1%, the fair value of our total outstanding debt would increase by approximately $5.9 million.
As of March 31, 2024, and December 31, 2023, we had consolidated notes receivable of $118.9 million and $124.9 million, respectively. We determined the estimated fair value of our notes receivable by discounting future cash receipts utilizing a discount rate equivalent to the rate at which similar notes receivable would be originated under conditions then existing.
Based on our outstanding notes receivable balances as of March 31, 2024, the fair value of our total outstanding notes receivable would decrease by approximately $0.8 million if interest rates increased by 1%. Conversely, if interest rates decreased by 1%, the fair value of our total outstanding notes receivable would increase by approximately $0.8 million.
48
Summarized Information as of December 31, 2023
As of December 31, 2023, we had total mortgage and other notes payable of $1,881.1 million, excluding the unamortized premium of $0.2 million and unamortized debt issuance costs of $11.2 million, of which $1,454.7 million, or 77.3%, was fixed-rate, inclusive of debt with rates fixed through the use of derivative financial instruments, and $426.4 million, or 22.7%, was variable-rate based upon LIBOR rates plus certain spreads. As of December 31, 2023, we were party to 36 interest rate swap and three interest rate cap agreements to hedge our exposure to changes in interest rates with respect to $1,249.8 million and $151.4 million of LIBOR or SOFR-based variable-rate debt, respectively.
Interest expense on our variable-rate debt of $426.4 million as of December 31, 2023, would have increased $4.3 million if corresponding rate indices increased by 100 basis points. Based on our outstanding debt balances as of December 31, 2023, the fair value of our total outstanding debt would have decreased by approximately $6.9 million if interest rates increased by 1%. Conversely, if interest rates decreased by 1%, the fair value of our total outstanding debt would have increased by approximately $6.6 million.
Changes in Market Risk Exposures from December 31, 2023 to March 31, 2024
Our interest rate risk exposure from December 31, 2023, to March 31, 2024, has decreased on an absolute basis, as the $426.4 million of variable-rate debt as of December 31, 2023 has decreased to $329.8 million as of March 31, 2024. As a percentage of our overall debt, our interest rate exposure has decreased as our variable-rate debt accounted for 22.7% of our consolidated debt as of December 31, 2023 compared to 19.0% as of March 31, 2024.
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.