ACADIA REALTY TRUST (AKR) FY 2022 MD&A
This page reproduces the company's own Item 7 MD&A text from the linked SEC filing. It is filer text, not grepcent analysis, scoring, or investment advice.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
As of December 31, 2022, there were 202 properties, which we own or have an ownership interest in, within 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. See Item 2. Properties for a summary of our wholly-owned and partially-owned retail properties and their physical occupancies at December 31, 2022.
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. We focus on the following fundamentals to achieve this objective:
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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.
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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:
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value-add investments in street retail properties, located in established and “next generation” submarkets, with re-tenanting or repositioning opportunities,
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opportunistic acquisitions of well-located real-estate anchored by distressed retailers, and
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other opportunistic acquisitions which may include high-yield acquisitions and purchases of distressed debt.
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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.
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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 year ended December 31, 2022
Acquisitions
During the year ended December 31, 2022, we made four new consolidated investments in our Core Portfolio and Fund V acquired three unconsolidated properties totaling $425.0 million, inclusive of transaction costs, as described below (Note 2).
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On January 12, 2022, we acquired a retail condominium referred to as 121 Spring Street located in Soho, New York City, for $39.6 million, inclusive of transaction costs.
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On February 18, 2022, we invested $97.8 million in a group of properties referred to as the Williamsburg Collection located in Brooklyn, New York.
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On March 2, 2022, we acquired a single-tenant retail building referred to as 8833 Beverly Boulevard located in West Hollywood, California, for $24.1 million, inclusive of transaction costs.
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On March 21, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Wood Ridge Plaza located in Houston, Texas, for $49.3 million, inclusive of transaction costs.
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On March 30, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as La Frontera Village located in Round Rock, Texas, for $81.4 million, inclusive of transaction costs.
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•
On April 18, 2022, we acquired a group of properties referred to as the Henderson Portfolio located in Dallas, Texas for $85.2 million inclusive of transaction costs.
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On August 22, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Shoppes at South Hills located in Poughkeepsie, New York, for $47.6 million, inclusive of transaction costs.
On June 27, 2022, we made an $18.5 million investment in Fund II and Mervyns II increasing our ownership in each by 11.67% to 40.00%. Additionally, on August 1, 2022, we made an additional $5.8 million investment in Fund II and increased our ownership by 21.67% to 61.67% (Note 1). As the Company retained its controlling interest in Fund II and Mervyns II, we accounted for these additional investments as equity transactions.
In addition, and as discussed below, Fund III obtained the venture partner's interest in its 640 Broadway investment through a foreclosure proceeding and subsequently consolidated the property (Note 2, Note 4).
On January 27, 2023, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Mohawk Commons in Schenectady, New York, for $62.1 million, inclusive of transaction costs (Note 17).
Dispositions of Real Estate
During the year ended December 31, 2022, we disposed of one Core property and one Core land parcel, five consolidated Fund properties and one land parcel, and two unconsolidated investments, as follows:
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On January 26, 2022, Fund IV sold its consolidated Mayfair Shopping Center for $23.7 million, repaid the related mortgage of $11.3 million and recognized a gain of $7.1 million, of which the Company's proportionate share was $1.8 million (Note 2).
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On February 1, 2022, Fund V sold a land parcel at its consolidated New Town Center property for $2.2 million, and recognized a gain of $1.8 million, of which the Company’s proportionate share was $0.4 million. Fund V used a portion of the proceeds to repay $1.1 million of the property's mortgage (Note 2).
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On February 9, 2022, Fund III sold its consolidated Cortlandt Crossing property for $65.5 million and repaid the related debt of $34.5 million. Fund III recognized a gain of $13.3 million, of which the Company's proportionate share was $7.1 million (Note 2).
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On March 4, 2022, Fund IV sold its consolidated Dauphin Plaza property for $21.7 million and repaid the related debt of $12.0 million. Fund IV recognized a gain of $6.6 million, of which the Company's proportionate share was $1.7 million (Note 2).
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On March 9, 2022, we sold our interest in Self Storage Management, for $6.0 million and recognized a gain of $1.5 million (Note 4). We acquired Fund III's unconsolidated interest in Self Storage Management from the shareholders of Fund III earlier in the quarter.
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On May 25, 2022, Fund IV sold its consolidated Lincoln Place shopping center for $40.7 million, repaid the related debt of $22.7 million and recognized a gain of $12.2 million, of which the Company's proportionate share was $3.0 million (Note 2).
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On August 24, 2022, Fund IV sold its consolidated Wake Forest Crossing property for $38.9 million and repaid the related debt of $20.7 million. Fund IV recognized a gain of $8.9 million, of which the Company's proportionate share was $2.1 million (Note 2).
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On October 7, 2022, we sold a land parcel at our Henderson Avenue property for $3.0 million and recognized a loss of $0.2 million (Note 2).
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On October 13, 2022, Fund IV sold its unconsolidated Promenade at Manassas property for a total of $46.0 million and repaid the related debt of $27.3 million. Fund IV recognized a gain of $12.8 million, of which the Company's proportionate share was $3.0 million (Note 4).
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On December 13, 2022, we sold our 330-340 River Street properties for $26.4 million, repaid the related debt of $10.3 million and recognized a gain of $7.4 million (Note 2).
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We recognized aggregate gains of $57.1 million on the sales of the above properties, excluding the gain recognized on the sale of our unconsolidated interest in Self Storage Management and Promenade at Manassas, during the year ended December 31, 2022, of which our share is $23.3 million.
In addition, during the third quarter of 2022, we entered into an agreement to sell a property for approximately $18.0 million. As this disposition is deemed probable within one year, this property has been classified as "held-for-sale" on the Company's consolidated balance sheet (Note 17).
Financing Activity
During the year ended December 31, 2022, we effected the following financing activities (Note 7):
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entered into a new $175.0 million term loan (the “$175.0 Million Term Loan”) and an additional $75.0 million term loan facility (the “$75.0 Million Term Loan”);
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entered into one new mortgage at Fund properties for $42.4 million and two new mortgages at unconsolidated properties (Note 4) totaling $87.8 million;
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modified and extended ten Fund mortgages of $280.6 million, one mortgage at an unconsolidated property of $24.4 million (Note 4), the Fund IV Bridge Loan which had an outstanding balance $42.2 million (excluding principal reduction of $8.6 million) prior to modification, and the Fund V subscription line which had an outstanding balance of $52.3 million prior to modification;
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repaid two Core Portfolio mortgages of $22.6 million, six Fund mortgages in an aggregate amount of $110.0 million, and one mortgage of $27.3 million at an unconsolidated property in connection with the sales of properties (Note 2, Note 4);
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refinanced a Core loan in the third quarter with an outstanding balance of $25.4 million;
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refinanced a Fund II mortgage and unsecured note collateralized by the real estate assets of City Point in the third quarter with an outstanding balance of $257.9 million and $40.0 million, respectively, with a single $198.0 million mortgage loan and initial proceeds of $132.3 million; and
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made principal payments of $7.5 million and repaid $17.0 million on the Fund IV bridge facility.
The Operating Partnership has a $700.0 million senior unsecured credit facility, as amended (the “Credit Facility”), with Bank of America, N.A. as administrative agent, comprised of a $300.0 million senior unsecured revolving credit facility (the “Revolver”) which bears interest at a floating rate based on SOFR with margins based on leverage or credit rating, and a $400.0 million senior unsecured term loan (the “Term Loan”) which bears interest at a floating rate based on SOFR with margins based on leverage or credit rating. Currently, the Revolver bears interest at SOFR + 1.50% and the Term Loan bears interest at SOFR + 1.65%. The Revolver matures on June 29, 2025, subject to two six-month extension options, and the Term Loan matures on June 29, 2026. The Credit Facility provides for an accordion feature, which allows for one or more increases in the revolving credit facility or term loan facility, for a maximum aggregate principal amount not to exceed $900.0 million. The Credit Facility is guaranteed by the Company and certain subsidiaries of the Company.
On April 6, 2022, the Operating Partnership entered into the $175.0 million term loan facility, with Bank of America, N.A. as administrative agent, which bears interest at a floating rate based on SOFR with margins based on leverage or credit rating, and which matures on April 6, 2027. The proceeds of the $175.0 million term loan were used to pay down the Revolver. Currently the $175.0 million term loan bears interest at SOFR + 1.60%. The $175.0 million term loan is guaranteed by the Company and certain subsidiaries of the Company.
On July 29, 2022, the Operating Partnership entered into the $75.0 million term loan, with TD Bank, N.A. as administrative agent, which bears interest at a floating rate based on SOFR with margins based on leverage or credit rating and which matures on July 29, 2029. Currently the $75.0 million term loan bears interest at SOFR + 2.05%. The proceeds of the $75.0 million term loan were used to pay down the Revolver. The $75.0 million term loan is guaranteed by the Company and certain subsidiaries of the Company.
Structured Financing Investments
During the year ended December 31, 2022, we:
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received full payment on a $16.0 million and a $13.5 million first mortgage loan, respectively (Note 3);
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extended one note receivable maturity date for one year (Note 3);
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•
originated a loan to other Fund II investors ("City Point Loan") of $65.9 million (Note 10). Fund V originated a temporary bridge loan of $52.0 million to an unconsolidated venture in the first quarter, which was repaid during the second quarter, and originated a temporary bridge loan of $31.7 million to an unconsolidated venture in the third quarter (Note 4);
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funded $7.5 million of a $12.8 million construction loan commitment to an unconsolidated venture (Note 4); and
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through an affiliate of Fund III foreclosed upon its $5.3 million note receivable, which had previously been in default. We have one Core Portfolio note receivable that remains in default (Note 3);
ATM Program Activity
We sold 5,525,419 Common Shares under our ATM Program during the year ended December 31, 2022 for gross proceeds of $123.9 million, or $119.5 million net of issuance costs, at a weighted-average gross price per share of $22.43 (Note 10).
Albertsons
On January 20, 2023, Mervyns II received cash dividends totaling $28.2 million related to the special dividend received from its investment in Albertsons Companies Inc. ("Albertsons") (Note 4). The special dividend was originally scheduled to be paid on November 7, 2022 and was delayed by a temporary restraining order which enjoined Albertsons from paying the special dividend. The Company's proportionate share of the special dividend was $11.3 million. The special dividend will be recognized in the first quarter of 2023 given the uncertainty that existed as of December 31, 2022, which was resolved following the lifting of the temporary restraining order by the Supreme Court of the State of Washington on January 17, 2023 (Note 17).
Fund II and City Point Refinancing
During the second and third quarter, we further increased our effective ownership in Fund II from 28.33% to 61.67% (Note 1). The purchase price of the combined 33.34% interest was $120.8 million, inclusive of $112.0 million of assumed obligations.
Additionally, in August 2022, through Fund II, we refinanced and de-levered City Point. The outstanding mortgage debt of $257.9 million and term loan of $40.0 million were refinanced with a single mortgage loan of $198.0 million, with initial proceeds of $132.2 million (Note 7). We provided a loan, through a separate lending subsidiary, to other Fund II investors in City Point, through a separate borrower subsidiary, to fund the investors' pro rata contribution necessary to complete the refinancing of the City Point debt, of which $65.9 million was funded at closing ("City Point Loan") (Note 3). In addition, the remaining partners have certain redemption rights that could enable us to further increase our ownership in Fund II (Note 10).
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RESULTS OF OPERATIONS
See Note 12 in the Notes to Consolidated Financial Statements for an overview of our three reportable segments.
Comparison of Results for the Year Ended December 31, 2022 to the Year Ended December 31, 2021
The results of operations by reportable segment for the year ended December 31, 2022 compared to the year ended December 31, 2021 are summarized in the table below (in millions, totals may not add due to rounding):
| Year Ended | Year Ended | |||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| December 31, 2022 | December 31, 2021 | Increase (Decrease) | ||||||||||||||||||||||||||||||||||||||||||||||
| Core | Funds | SF | Total | Core | Funds | SF | Total | Core | Funds | SF | Total | |||||||||||||||||||||||||||||||||||||
| Revenues | $ | 202.5 | $ | 123.7 | $ | — | $ | 326.3 | $ | 181.3 | $ | 111.2 | $ | — | $ | 292.5 | $ | 21.2 | $ | 12.5 | $ | — | $ | 33.8 | ||||||||||||||||||||||||
| Depreciation and amortization | (75.6 | ) | (60.3 | ) | — | (135.9 | ) | (69.1 | ) | (54.3 | ) | — | (123.4 | ) | 6.5 | 6.0 | — | 12.5 | ||||||||||||||||||||||||||||||
| Property operating expenses, other operating and real estate taxes | (60.3 | ) | (41.6 | ) | — | (101.9 | ) | (57.0 | ) | (41.9 | ) | — | (98.9 | ) | 3.3 | (0.3 | ) | — | 3.0 | |||||||||||||||||||||||||||||
| General and administrative expenses | — | — | — | (44.1 | ) | — | — | — | (40.1 | ) | — | — | — | 4.0 | ||||||||||||||||||||||||||||||||||
| Impairment charges | — | (33.3 | ) | — | (33.3 | ) | — | (9.9 | ) | — | (9.9 | ) | — | 23.4 | — | 23.4 | ||||||||||||||||||||||||||||||||
| Gain on disposition of properties | 7.2 | 49.9 | — | 57.2 | 4.6 | 5.9 | — | 10.5 | 2.6 | 44.0 | — | 46.7 | ||||||||||||||||||||||||||||||||||||
| Operating income | 73.9 | 38.4 | — | 68.2 | 59.9 | 10.9 | — | 30.7 | 14.0 | 27.5 | — | 37.5 | ||||||||||||||||||||||||||||||||||||
| Interest income | — | — | 14.6 | 14.6 | — | — | 9.1 | 9.1 | — | — | 5.5 | 5.5 | ||||||||||||||||||||||||||||||||||||
| Equity in (losses) earnings of unconsolidated affiliates | (45.9 | ) | 13.0 | — | (32.9 | ) | 0.4 | 5.0 | — | 5.3 | (46.3 | ) | 8.0 | — | (38.2 | ) | ||||||||||||||||||||||||||||||||
| Interest expense | (37.9 | ) | (42.3 | ) | — | (80.2 | ) | (29.5 | ) | (38.6 | ) | — | (68.0 | ) | 8.4 | 3.7 | — | 12.2 | ||||||||||||||||||||||||||||||
| Realized and unrealized holding gains (losses) on investments and other | 1.2 | (35.6 | ) | (0.6 | ) | (35.0 | ) | — | 53.7 | (4.5 | ) | 49.1 | 1.2 | (89.3 | ) | 3.9 | (84.1 | ) | ||||||||||||||||||||||||||||||
| Income tax provision | — | — | — | — | — | — | — | (0.1 | ) | — | — | — | 0.1 | |||||||||||||||||||||||||||||||||||
| Net (loss) income | (8.8 | ) | (26.4 | ) | 14.0 | (65.3 | ) | 30.8 | 30.9 | 4.5 | 26.0 | (39.6 | ) | (57.3 | ) | 9.5 | (91.3 | ) | ||||||||||||||||||||||||||||||
| Net loss attributable to redeemable noncontrolling interests | — | 5.5 | — | 5.5 | — | — | — | — | — | (5.5 | ) | — | (5.5 | ) | ||||||||||||||||||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | 1.0 | 23.3 | — | 24.3 | (2.3 | ) | (0.2 | ) | — | (2.5 | ) | (3.3 | ) | (23.5 | ) | — | (26.8 | ) | ||||||||||||||||||||||||||||||
| Net (loss) income attributable to Acadia | $ | (7.8 | ) | $ | 2.4 | $ | 14.0 | $ | (35.4 | ) | $ | 28.5 | $ | 30.7 | $ | 4.5 | $ | 23.5 | $ | (36.3 | ) | $ | (28.3 | ) | $ | 9.5 | $ | (58.9 | ) |
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 decreased $36.3 million for the year ended December 31, 2022 compared to the prior year as a result of the changes further described below.
Revenues for our Core Portfolio increased $21.2 million for the year ended December 31, 2022 compared to the prior year primarily due to (i) $15.1 million from Core Portfolio property acquisitions in 2021 and 2022 (Note 2), (ii) $2.2 million from lease up within the Core Portfolio, (iii) $2.1 million collection of cash for a fully reserved tenant, (iv) $1.8 million from the write off of two tenant's below market leases, and (v) $0.9 million from the conversion of tenants from cash to accrual basis. These increases were offset by a $0.9 million credit loss benefit related to the collection of previously reserved tenants accounts in 2021.
Depreciation and amortization for our Core Portfolio increased $6.5 million for the year ended December 31, 2022 compared to the prior year primarily due to Core Portfolio acquisitions in 2021 and 2022.
Property operating expenses, other operating and real estate taxes for our Core Portfolio increased $3.3 million for the year ended December 31, 2022 compared to the prior year primarily due to Core Portfolio property acquisitions in 2021 and 2022.
The gain on disposition of properties for our Core Portfolio of $7.2 million for the year ended December 31, 2022 relates to the sale of 330-340 River Street of $7.4 million offset by a loss of $0.2 million for the sale of the Henderson Parcel. The gain on disposition of properties for our Core Portfolio of $4.6 million for the year ended December 31, 2021 relates to the sale of 60 Orange Street (Note 3).
Equity in (losses) earnings of unconsolidated affiliates for our Core Portfolio decreased $46.3 million for the year ended December 31, 2022 compared to the prior year primarily due to the Company's $50.8 million proportionate share of an impairment charge at 840 N. Michigan Avenue
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(Note 4). This decrease was offset by (i) a $2.2 million decrease in credit loss reserves in 2022 at unconsolidated properties related to the COVID-19 Pandemic, and (ii) $1.3 million for the acceleration of a below market tenant lease at a property in 2022.
Interest expense for our Core Portfolio increased $8.4 million for the year ended December 31, 2022 compared to the prior year primarily due to $7.1 million from higher average outstanding borrowings in 2022, and by $1.3 million higher average interest rates in 2022.
Realized and unrealized holding gains (losses) on investments and other for our Core Portfolio includes $1.2 million related to the bargain purchase gain on the acquisition of the Williamsburg Collection (Note 2).
Net loss attributable to noncontrolling interests for our Core Portfolio decreased $3.3 million for the year ended December 31, 2022 compared to the prior year based on the noncontrolling interests’ share of the variances discussed above.
Funds
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 $28.3 million for the year ended December 31, 2022 compared to the prior year as a result of the changes described below.
Revenues for the Funds increased $12.5 million for the year ended December 31, 2022 compared to the prior year primarily due to (i) $13.7 million from consolidated Fund property acquisitions in 2021 (Note 2), (ii) $4.4 million related to the completion and rent commencement from development projects placed in service during 2021, (iii) $4.0 million from new tenant lease up, and (iv) a $3.0 million increase from the consolidation of a previously unconsolidated investment. These increases were offset by a $11.4 million decrease from consolidated Fund property dispositions in 2021 and 2022 and $1.0 million decrease due to reversals of credit loss reserves in 2021.
Depreciation and amortization for the Funds increased $6.0 million for the year ended December 31, 2022 compared to the prior year primarily due to Fund property acquisitions in 2021 (Note 2).
Impairment charges for the Funds increased $23.4 million for the year ended December 31, 2022 compared to the prior year (Note 8). Impairment charges totaling $33.3 million during 2022 relate to 146 Geary Street and 717 N. Michigan Avenue in Fund IV. Impairment charges totaling $9.9 million in 2021 related to 27 East 61st Street and 210 Bowery in Fund IV.
Gain on disposition of properties for the Funds increased $44.0 million for the year ended December 31, 2022 compared to the prior year due to the sales of Cortlandt Crossing at Fund III, Wake Forest Crossing, Lincoln Place, Mayfair and Dauphin at Fund IV, and a New Towne outparcel at Fund V in 2022 compared to the dispositions of 654 Broadway at Fund III, and the NE Grocer Portfolio and 110 University at Fund IV in 2021 (Note 2, Note 11).
Equity in (losses) earnings of unconsolidated affiliates for the Funds increased $8.0 million for the year ended December 31, 2022 compared to the prior year due to the $12.8 million gain on sale of Promenade at Manassas in 2022 offset by a $3.2 million gain on sale related to two land parcels at Riverdale Family Center in Fund V (Note 5) in 2021.
Interest expense for the Funds increased $3.7 million for the year ended December 31, 2022 compared to the prior year primarily due to $6.6 million from higher average rates in 2022, offset by $2.6 million from lower average outstanding borrowings in 2022.
Realized and unrealized holding gains (losses) on investments and other for the Funds decreased $89.3 million for the year ended December 31, 2022 compared to the prior year primarily due to a $38.9 million mark-to-market unrealized loss on the Investment in Albertsons offset by $ 1.5 million related to the Company's proportionate share of the gain on sale of Fund III's interest in Self Storage Management (Note 4) in 2022 compared to a $51.9 million mark-to-market unrealized gain on the Investment in Albertsons in 2021.
Net loss (income) attributable to redeemable noncontrolling interests for the Funds increased $5.5 million for the year ended December 31, 2022 compared to the prior year due to the City Point Loan in 2022 (Note 10).
Net loss attributable to noncontrolling interests for the Funds decreased $23.5 million for the year ended December 31, 2022 compared to the prior year based on the noncontrolling interests’ share of the variances discussed above. Net loss attributable to noncontrolling interests in the Funds includes asset management fees earned by the Company of $9.5 million and $11.1 million for the years ended December 31, 2022 and 2021, respectively.
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Structured Financing
The results of operations for our Structured Financing segment are depicted in the table above under the headings labeled “SF.” Interest and other income for the Structured Financing portfolio increased $5.5 million for the year ended December 31, 2022 compared to the prior year period primarily due to new notes issued in 2021 and 2022 (Note 3). Realized and unrealized holding gains (losses) on investments and other for the Structured Financing Portfolio increased $3.9 million for the year ended December 31, 2022 compared to the prior year due to a decrease in the allowance for credit loss.
Unallocated
The Company does not allocate general and administrative expense and income taxes to its reportable segments. These unallocated amounts are depicted in the table above under the headings labeled “Total.” Unallocated general and administrative expense increased $4.0 million for the year ended December 31, 2022 compared to the prior year due to $2.0 million related to acquisition costs (Note 2) and $2.0 million from an increase in salaries.
Discussions of 2020 items and comparisons between the year ended December 31, 2021 and 2020, respectively, that are not included in this Report can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
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 Core 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.
A reconciliation of consolidated operating income to net operating income (loss) - Core Portfolio follows (in thousands):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Consolidated operating income (loss) | $ | 68,230 | $ | 30,656 | $ | (115,062 | ) | |||||
| Add back: | ||||||||||||
| General and administrative | 44,066 | 40,125 | 35,798 | |||||||||
| Depreciation and amortization | 135,917 | 123,439 | 147,229 | |||||||||
| Impairment charges | 33,311 | 9,925 | 85,598 | |||||||||
| Less: | ||||||||||||
| Above/below-market rent, straight-line rent and other adjustments (a) | (20,182 | ) | (19,488 | ) | 13,581 | |||||||
| Gain on disposition of properties | (57,161 | ) | (10,521 | ) | (683 | ) | ||||||
| Consolidated NOI | 204,181 | 174,136 | 166,461 | |||||||||
| Redeemable noncontrolling interest in consolidated NOI | (1,919 | ) | — | — | ||||||||
| Noncontrolling interest in consolidated NOI | (57,957 | ) | (48,401 | ) | (46,316 | ) | ||||||
| Less: Operating Partnership's interest in Fund NOI included above | (15,310 | ) | (12,337 | ) | (11,518 | ) | ||||||
| Add: Operating Partnership's share of unconsolidated joint ventures NOI (b) | 14,965 | 13,811 | 15,659 | |||||||||
| NOI - Core Portfolio | $ | 143,960 | $ | 127,209 | $ | 124,286 |
a)
Includes straight-line rent reserves. See Note 1 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.
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Same-Property NOI includes Core Portfolio properties that we owned for both the current and prior periods presented, but excludes those properties which we acquired, sold or expected to sell, redeveloped and developed during these periods. The following table summarizes Same-Property NOI for our Core Portfolio (in thousands):
| Year Ended December 31, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| Core Portfolio NOI | $ | 143,960 | $ | 127,209 | ||||
| Less properties excluded from Same-Property NOI | (23,515 | ) | (13,954 | ) | ||||
| Same-Property NOI | $ | 120,445 | $ | 113,255 | ||||
| Percent change from prior year period | 6.3 | % | ||||||
| Components of Same-Property NOI: | ||||||||
| Same-Property Revenues | $ | 170,575 | $ | 165,841 | ||||
| Same-Property Operating Expenses | (50,130 | ) | (52,586 | ) | ||||
| Same-Property NOI | $ | 120,445 | $ | 113,255 |
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.
| Year Ended December 31, 2022 | ||||||||
|---|---|---|---|---|---|---|---|---|
| Core Portfolio New and Renewal Leases | Cash Basis | Straight- Line Basis | ||||||
| Number of new and renewal leases executed | 76 | 76 | ||||||
| GLA commencing | 713,312 | 713,312 | ||||||
| New base rent | $ | 33.80 | $ | 34.85 | ||||
| Expiring base rent | $ | 30.68 | $ | 30.09 | ||||
| Percent growth in base rent | 10.2 | % | 15.8 | % | ||||
| Average cost per square foot (a) | $ | 15.65 | $ | 15.65 | ||||
| Weighted average lease term (years) | 5.4 | 5.4 |
a)
The average cost per square foot includes tenant improvement costs, leasing commissions and tenant allowances.
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Funds from Operations
We consider funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be meaningful non-GAAP measure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT 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 generally accepted accounting principles (“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 attributable to Acadia to FFO follows (dollars in thousands, except per share amounts):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | 2020 | ||||||||||
| Net (loss) income attributable to Acadia | $ | (35,445 | ) | $ | 23,548 | $ | (8,976 | ) | ||||
| Depreciation of real estate and amortization of leasing costs (net of noncontrolling interests' share) | 104,910 | 93,388 | 106,220 | |||||||||
| Impairment charges (net of noncontrolling interests' share) (a) | 58,481 | 2,294 | 17,323 | |||||||||
| Gain on disposition of properties (net of noncontrolling interests' share) | (22,137 | ) | (4,163 | ) | (291 | ) | ||||||
| (Loss) Income attributable to Common OP Unit holders | (1,800 | ) | 1,584 | (370 | ) | |||||||
| Distributions - Preferred OP Units | 492 | 492 | 495 | |||||||||
| Funds from operations attributable to Common Shareholders and Common OP Unit holders | $ | 104,501 | $ | 117,143 | $ | 114,401 | ||||||
| Less: Impact of City Point share conversion (b) | (906 | ) | — | — | ||||||||
| Funds from operations attributable to Common Shareholders and Common OP Unit holders - Diluted | $ | 103,595 | $ | 117,143 | $ | 114,401 | ||||||
| Funds From Operations per Share - Diluted | ||||||||||||
| Basic weighted-average shares outstanding, GAAP earnings | 94,575,251 | 87,653,818 | 86,441,922 | |||||||||
| Weighted-average OP Units outstanding | 6,299,222 | 5,115,319 | 4,993,267 | |||||||||
| Basic weighted-average shares and OP Units outstanding, FFO | 100,874,473 | 92,769,137 | 91,435,189 | |||||||||
| Assumed conversion of Preferred OP Units to Common Shares | 463,898 | 464,623 | 464,623 | |||||||||
| Assumed conversion of LTIP units and restricted share units to Common Shares | — | — | — | |||||||||
| Diluted weighted-average number of Common Shares and Common OP Units outstanding, FFO | 101,338,371 | 93,233,760 | 91,899,812 | |||||||||
| Diluted Funds from operations, per Common Share and Common OP Unit (c) | $ | 1.02 | $ | 1.26 | $ | 1.24 |
a)
Represents the Company's total share of impairment charges from consolidated assets (Note 8) and allocated impairment charges from investments in and advances to unconsolidated affiliates (Note 4).
b)
The adjustment represents the impact of assumed conversion of dilutive convertible securities issued in connection with the City Point Loan in August 2022 that enabled the holder to convert its interest into the Company's Common Shares. The instrument was subsequently modified in the third quarter of 2022 to provide for a cash-only settlement option (Note 10).
c)
Diluted Funds from operations, per Common Share and Common OP Unit decreased for the year ended December 31, 2022 as compared to the prior year primarily related to the mark-to-market adjustment on our investment in Albertsons.
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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 currently distribute at least 90% of our taxable income to our shareholders. During the year ended December 31, 2022, we paid dividends and distributions on our Common Shares, Common OP Units and Preferred OP Units totaling $68.3 million.
Investments
During the year ended December 31, 2022, we made four new consolidated investments in our Core Portfolio and Fund V acquired three unconsolidated properties totaling $425.0 million as described below (Note 2, Note 4):
•
On January 12, 2022, we acquired a retail condominium referred to as 121 Spring Street located in Soho, New York City, for $39.6 million, inclusive of transaction costs.
•
On February 18, 2022, we invested $97.8 million in a group of properties referred to as the Williamsburg Collection located in Brooklyn, New York.
•
On March 2, 2022, we acquired a single-tenant retail building referred to as 8833 Beverly Boulevard located in West Hollywood, California, for $24.1 million, inclusive of transaction costs.
•
On March 21, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Wood Ridge Plaza located in Houston, Texas, for $49.3 million, inclusive of transaction costs.
•
On March 30, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as La Frontera Village located in Round Rock, Texas, for $81.4 million, inclusive of transaction costs.
•
On April 18, 2022, we acquired a group of properties referred to as the Henderson Portfolio located in Dallas, Texas for $85.2 million inclusive of transaction costs.
•
On August 22, 2022, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Shoppes at South Hills located in Poughkeepsie, New York, for $47.6 million, inclusive of transaction costs.
On June 27, 2022, we made an $18.5 million investment in Fund II and Mervyns II increasing our ownership in each by 11.67% to 40.00%. Additionally, on August 1, 2022, we made an additional $5.8 million investment in Fund II and increased our ownership by 21.67% to 61.67% (Note 1). As the Company retained its controlling interest in Fund II and Mervyns II, we accounted for these additional investments as equity transactions.
On January 27, 2023, Fund V acquired a 90% interest in an unconsolidated venture. The venture purchased a shopping center referred to as Mohawk Commons in Schenectady, New York, for $62.1 million, inclusive of transaction costs (Note 17).
Structured Financing Investments
On August 1, 2022, we originated the City Point Loan to other Fund II investors of $65.9 million (Note 3, Note 10). We funded $7.5 million of a $12.8 million construction loan commitment to an unconsolidated venture (Note 4). Fund V originated a temporary bridge loan of $31.7 million to an unconsolidated venture in the third quarter (Note 4).
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Capital Commitments
During the year ended December 31, 2022, we made capital contributions aggregating $25.6 million to our Funds and $106.1 million to Fund II along with the City Point Loan to other Fund II investors (see Structured Financing Investments above) (Note 10). Additionally, we made an additional $24.3 million investment in Fund II and Mervyns II, increasing our ownership from 28.33% in each to 61.67% and 40.00%, respectively (Note 1).
At December 31, 2022, our share of the remaining capital commitments to our Funds aggregated $44.8 million as follows:
•
$0.0 million to Fund II. During August 2020, a recallable distribution of $15.7 million was made by Mervyn’s II to its investors, of which our share is $4.5 million. During 2021 and 2022, Mervyn’s II recalled $11.9 million and $3.8 million, respectively, of the $15.7 million of which our share is $3.4 million and $1.2 million, respectively.
•
$0.5 million to Fund III. Fund III was launched in May 2007 with total committed capital of $450.0 million of which our share was $89.6 million. During 2015, we acquired an additional interest, which had an original capital commitment of $20.9 million.
•
$9.7 million to Fund IV. Fund IV was launched in May 2012 with total committed capital of $530.0 million of which our share was $122.5 million.
•
$34.6 million to Fund V. Fund V was launched in August 2016 with total committed capital of $520.0 million of which our share is $104.5 million.
Development Activities
During the year ended December 31, 2022, capitalized costs associated with development activities totaled $4.9 million (Note 2). At December 31, 2022, we had a total of nine consolidated projects and one unconsolidated project under development or redevelopment, for which the estimated total cost to complete these projects through 2025 was $70.8 million to $98.0 million, and our estimated share was approximately $49.7 million to $69.2 million. Substantially all remaining development and redevelopment costs are discretionary, which 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.
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):
| December 31, | December 31, | |||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | |||||||
| Total Debt - Fixed and Effectively Fixed Rate | $ | 1,440,773 | $ | 1,038,803 | ||||
| Total Debt - Variable Rate | 364,641 | 780,935 | ||||||
| 1,805,414 | 1,819,738 | |||||||
| Net unamortized debt issuance costs | (12,697 | ) | (7,946 | ) | ||||
| Unamortized premium | 343 | 446 | ||||||
| Total Indebtedness | $ | 1,793,060 | $ | 1,812,238 |
As of December 31, 2022, our consolidated indebtedness aggregated $1,805.4 million, excluding unamortized premium of $0.3 million and unamortized loan costs of $12.7 million, and were collateralized by 31 properties and related tenant leases. Stated interest rates on our outstanding indebtedness ranged from 3.35% to LIBOR + 3.65% with maturities that ranged from January 2023 to April 2035, without regard to available extension options. Taking into consideration $1,264.0 million of notional principal under variable to fixed-rate swap agreements currently in effect, $1,440.8 million of the portfolio debt, or 79.8%, was fixed at a 5.19% weighted-average interest rate and $364.6 million, or 20.2% was floating at a 6.13% weighted average interest rate as of December 31, 2022. Our variable-rate debt includes $103.8 million of debt subject to interest rate caps.
Without regard to available extension options, at December 31, 2022 there is $333.0 million of debt maturing in 2023 at a weighted-average interest rate of 6.06%; there is $7.1 million of scheduled principal amortization due in 2023; and our share of scheduled 2023 principal payments and maturities on our unconsolidated debt was $47.2 million. In addition, $251.7 million of our total consolidated debt and $45.0 million of our
53
pro-rata share of unconsolidated debt will come due in 2024. As it relates to the aforementioned maturing debt in 2023 and 2024, we have options to extend consolidated debt aggregating $51.2 million and $0.0 million at December 31, 2022, respectively; however, there can be no assurance that we will be able to successfully execute any or all of its available extension options. As it relates to the remaining maturing debt in 2023 and 2024, 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 at 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
Share Repurchase Program
We maintain a share repurchase program under which $122.5 million remains available as of December 31, 2022 (Note 10). The Company did not repurchase any of its Common Shares under this program during the year ended December 31, 2022.
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, and (vi) cash on hand and future cash flow from operating activities. Our cash on hand in our consolidated subsidiaries at December 31, 2022 totaled $17.2 million. Our remaining sources of liquidity are described further below.
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 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 intend to continue to 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. During the year ended December 31, 2022, we sold 5,525,419 shares under our ATM Program for gross proceeds of $123.9 million, or $119.5 million net of issuance costs, at a weighted-average gross price per share of $22.43.
Fund Capital
During the year ended December 31, 2022, Funds II and V called for capital contributions of $175.8 million and $121.7 million, respectively, of which our aggregate share was $131.7 million, inclusive of $106.1 million to Fund II along with the City Point Loan to other Fund II investors (see Structured Financing Investments above). At December 31, 2022, unfunded capital commitments from noncontrolling interests within our Funds II, III, IV and V were zero, $1.4 million, $32.2 million, and $137.5 million, respectively.
Asset Sales and Other Transactions
During the year ended December 31, 2022, we disposed of one Core property, five consolidated Fund properties, two land parcels and two unconsolidated investments as follows (Note 2):
•
On January 26, 2022, Fund IV sold its consolidated Mayfair Shopping Center for $23.7 million, repaid the related mortgage of $11.3 million and recognized a gain of $7.1 million, of which the Company's proportionate share was $1.8 million (Note 2).
•
On February 1, 2022, Fund V sold a land parcel at its consolidated New Towne Center property for $2.2 million, and recognized a gain of $1.8 million, of which the Company’s proportionate share was $0.4 million. Fund V used a portion of the proceeds to repay $1.1 million of the property's mortgage.
•
On February 9, 2022, Fund III sold its consolidated Cortlandt Crossing property for $65.5 million and repaid the related debt of $34.5 million. Fund III recognized a gain of $13.3 million, of which the Company's proportionate share was $7.1 million.
•
On March 4, 2022, Fund IV sold its consolidated Dauphin Plaza property for $21.7 million and repaid the related debt of $12.0 million. Fund IV recognized a gain of $6.6 million, of which the Company's proportionate share was $1.7 million.
54
•
On March 9, 2022, we sold its interest in Self Storage Management, for $6.0 million and recognized a gain of $1.5 million (Note 4). We acquired Fund III's unconsolidated interest in Self Storage Management from the shareholders of Fund III earlier in the quarter.
•
On May 25, 2022, Fund IV sold its consolidated Lincoln Place shopping center for $40.7 million, repaid the related debt of $22.7 million and recognized a gain of $12.2 million, of which the Company's proportionate share was $3.0 million.
•
On August 24, 2022, Fund IV solids its consolidated Wake Forest Crossing property for $38.9 million and repaid the related debt of $20.7 million. Fund IV recognized a gain of $8.9 million, of which the Company's proportionate share was $2.1 million.
•
On October 7, 2022, we sold a land parcel at our Henderson Avenue property for $3.0 million and recognized a loss of $0.2 million.
•
On October 13, 2022, Fund IV sold its unconsolidated Promenade at Manassas property for a total of $46.0 million and repaid the related debt of $27.3 million. Fund IV recognized a gain of $12.8 million, of which the Company's proportionate share was $3.0 million (Note 4).
•
On December 13, 2022, we sold our 330-340 River Street properties for $26.4 million, repaid the related debt of $10.3 million and recognized a gain of $7.4 million.
We recognized aggregate gains of $57.1 million on the sales of the above properties during the year ended December 31, 2022, excluding the gain recognized on the sale of our unconsolidated properties, of which our share was $23.3 million.
In January 2023, we recognized cash dividends totaling $28.2 million related to the special dividend received from Mervyns II investment in Albertsons, of which our share was $11.3 million (Note 17).
Structured Financing Repayments
During the year ended December 31, 2022, we received full payment on a $16.0 million and $13.5 million first mortgage loan, respectively (Note 3). In January 2022, through an affiliate of Fund III, foreclosed on one Structured Financing loan in the amount of $10.0 million including accrued interest (exclusive of default interest and other amounts due on the loan that have not been recognized), which had previously been in default. We also have one Structured Financing investment in the amount of $21.6 million including accrued interest (exclusive of default interest and other amounts due on the loan that have not been recognized), that previously matured and has not been repaid. Scheduled maturities of Structured Financing loans include $39.3 million maturing during 2023 (Note 3).
Financing and Debt
As of December 31, 2022, we had $173.5 million of additional capacity under existing consolidated Core and Fund revolving debt facilities. In addition, at that date within our Core and Fund portfolios, we had 94 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
In the past two years, microeconomic and macroeconomic conditions, including the fallout from the COVID-19 Pandemic, the war in Ukraine, supply-chain disruptions, and the recessionary outlook of the current financial markets, has increased volatility in the market and has caused a surge in already increasing inflation and interest rates. 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. The rate hikes enacted by the Federal Reserve have had a significant impact on interest rate indexes such as LIBOR, SOFR and the Prime Rate. As of December 31, 2022, approximately 79.8% of our outstanding debt is fixed or effectively fixed interest rate with the remaining 20.2% indexed to LIBOR, SOFR or Prime plus an applicable margin per the loan agreement. As of December 31, 2022, we were counterparty to 36 interest rate swap agreements and three 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. While we have not experienced any material negative impacts at this time, we are actively managing our business to respond to the ongoing economic and social impact from such events. See Item 1A Risk Factors.
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HISTORICAL CASH FLOW
Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
The following table compares the historical cash flow for the year ended December 31, 2022 with the cash flow for the year ended December 31, 2021 (in millions, totals may not add due to rounding):
| Year Ended December 31, | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | Variance | ||||||||||
| Net cash provided by operating activities | $ | 133.2 | $ | 105.0 | $ | 28.2 | ||||||
| Net cash used in investing activities | (124.2 | ) | (198.5 | ) | 74.3 | |||||||
| Net cash (used in) provided by financing activities | (4.4 | ) | 91.3 | (95.7 | ) | |||||||
| Increase (decrease) in cash and restricted cash | $ | 4.7 | $ | (2.2 | ) | $ | 6.9 |
Operating Activities
Our operating activities provided $28.2 million more cash during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily due to Core and Fund property acquisitions and an increase in cash receipts from tenants.
Investing Activities
During the year ended December 31, 2022 as compared to the year ended December 31, 2021, our investing activities used $74.3 million less cash, primarily due to (i) $160.7 million more cash received from the disposition of properties, (ii) $60.1 million more cash received from return of capital from unconsolidated affiliates and other, (iii) $57.9 million less cash used in the issuance of notes receivable, and (iv) $29.5 million more cash received from proceeds from notes receivable. These sources of cash were primarily offset by (i)$139.9 million more cash used for investments in and advances to unconsolidated affiliate, (ii) $81.5 million more cash used to acquire properties in 2022, and (iii) $10.4 million more cash used for development, construction and property improvement costs.
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Financing Activities
Our financing activities used $95.7 million more cash during the year ended December 31, 2022 as compared to the year ended December 31, 2021, primarily from (i) $125.0 million more cash used by net borrowings, (ii) $78.6 million more cash used for the acquisition of and distributions to noncontrolling interests, and (iii) $25.1 million more cash used in dividends paid to common shareholders. These uses of cash were partially offset by (i) $79.3 million more cash provided by contributions from noncontrolling interests and (ii) $55.6 million more cash provided by the sale of Common Shares.
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 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 | December 31, 2022 | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Investment | Ownership Percentage | Pro-rata Share of Mortgage Debt | Effective Interest Rate (a) | Maturity Date | ||||||||||
| Eden Square | 22.8 | % | $ | 5.1 | 6.41 | % | Mar 2023 | |||||||
| Gotham Plaza | 49.0 | % | 8.7 | 5.09 | % | Jun 2023 | ||||||||
| Renaissance Portfolio | 20.0 | % | 32.0 | 3.81 | % | Aug 2023 | ||||||||
| 3104 M Street | 20.0 | % | 0.8 | 7.50 | % | Jan 2024 | ||||||||
| Crossroads | 49.0 | % | 29.8 | 3.94 | % | Oct 2024 | ||||||||
| Tri-City Plaza (c) | 18.1 | % | 7.0 | 3.01 | % | Oct 2024 | ||||||||
| Frederick Crossing (c) | 18.1 | % | 4.4 | 3.26 | % | Dec 2024 | ||||||||
| Paramus Plaza (b) | 11.6 | % | 3.3 | 6.43 | % | Dec 2024 | ||||||||
| Frederick County Square (c) | 18.1 | % | 4.1 | 4.00 | % | Jan 2025 | ||||||||
| 840 N. Michigan Avenue | 88.4 | % | 65.0 | 4.36 | % | Feb 2025 | ||||||||
| Wood Ridge Plaza (b) | 18.1 | % | 5.9 | 7.63 | % | Mar 2025 | ||||||||
| 650 Bald Hill Road | 20.8 | % | 3.3 | 3.75 | % | Jun 2026 | ||||||||
| La Frontera | 18.1 | % | 10.0 | 6.68 | % | Jun 2027 | ||||||||
| Family Center at Riverdale (b) | 18.0 | % | 6.1 | 5.99 | % | Nov 2027 | ||||||||
| Georgetown Portfolio | 50.0 | % | 7.5 | 4.72 | % | Dec 2027 | ||||||||
| Total | $ | 193.0 |
a)
Effective interest rates incorporate the effect of interest rate swaps and caps that were in effect at December 31, 2022, where applicable.
b)
The debt has two available 12-month extension options.
c)
The debt has one available 12-month extension option.
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CRITICAL ACCOUNTING ESTIMATES
Management’s discussion and analysis of financial condition and results of operations is based upon our Consolidated Financial Statements, which have been prepared in accordance with GAAP. The preparation of these 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 the following critical accounting policies affect the significant judgments and estimates used by us in the preparation of our Consolidated Financial Statements.
Impairment of Properties and Investments in and Advances to Unconsolidated Affiliates
On a periodic basis, we assess whether there are any indicators that the value of real estate assets, including undeveloped land and construction in progress, may be impaired. A property’s value is impaired only if the estimate of the aggregate future cash flows (undiscounted and without interest charges) to be generated by the property are less than the carrying value of the property. The determination of undiscounted cash flows requires significant estimates by management. In management’s estimate of cash flows, it considers factors such as expected future sale of an asset or development alternatives, capitalization rates and the undiscounted future cash flows analysis, which is probability-weighted based upon management’s best estimate of the likelihood of the alternative courses of action. Expected future cash flows and recoverability conclusions could be materially impacted by changes in items such as future leasing activity, occupancy, property operating costs, market pricing, our view or strategy relative to a tenant’s business or industry, the manner in which a property is used and the expected hold period of an asset. Subsequent changes in estimated undiscounted cash flows arising from changes in anticipated actions could affect the determination of whether an impairment exists and whether the effects could have a material impact on the Company’s net income. To the extent an impairment has occurred, the loss will be measured as the excess of the carrying amount of the property over the fair value of the property.
The Company is required to make subjective assessments as to whether there are impairments in the value of its real estate properties and other investments. These assessments have a direct impact on the Company’s estimates of the projected future cash flows, anticipated holding periods or market conditions change, its evaluation of the impairment charges may be different, and such differences could be material to the Company’s consolidated financial statements. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
We periodically review our investment in unconsolidated joint ventures and other cost-method investments for other-than-temporary declines in market value. An impairment charge is recorded for a decline that is considered to be other-than-temporary as a reduction in the carrying value of the investment.
During 2022 and 2021, the Company recognized impairment charges on properties of $33.3 million and $9.9 million, respectively. See Note 8 for a discussion of impairments recognized during the periods presented.
Additionally, during 2022, the Company impaired its unconsolidated investment in 840 N. Michigan Avenue resulting in a charge of $50.8 million. See Note 4 for a discussion of impairments recognized during the periods presented.
Bad Debts
We assess the collectability of our accounts receivable related to tenant revenues under ASC Topic 842 “Leases” (“ASC 842”). Management exercises judgment in assessing collectability and considers customer credit worthiness, assessment of risk associated with the tenant, and current economic trends, among other factors. In addition to the lease-specific collectability assessment performed under ASC 842, the Company may also recognize a general reserve based on the Company’s historical collection experience, as provided under ASC 450-20, as a reduction to Lease income for its portfolio of operating lease receivables which are not expected to be fully collectible. Billed tenant receivables, and receivables arising from the straight-lining of rents, are reserved when management deems the collectability of substantially all future lease payments from a specific lease is not probable, at which point, the Company will begin recognizing revenue from such leases prospectively on a cash basis, based on actual amounts received. If the Company subsequently determines that it is probable it will collect substantially all of the lessee’s remaining lease payments under the lease term, the Company will reinstate the receivables balance, including those arising from the straight-lining of rents, adjusting for the amount related to the period when the lease was accounted for on a cash basis.
Rents receivable at December 31, 2022 and 2021 are shown net of an allowance for doubtful accounts of $32.1 million and $38.5 million, respectively (Note 11). Rental income for the years ended December 31, 2022, 2021 and 2020 are reported net of adjustments to allowances for doubtful accounts of $(0.4) million, $(0.1) million, and $46.4 million, respectively.
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Real Estate
Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Construction in progress includes costs for significant property expansion and development. Depreciation is computed on the straight-line basis over estimated useful lives of 40 years for buildings, the shorter of the useful life or lease term for tenant improvements and five years for furniture, fixtures, and equipment. Expenditures for maintenance and repairs are charged to operations as incurred.
Upon acquisitions of real estate, we assess the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below-market leases and acquired in-place leases) and acquired liabilities in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805 “Business Combinations” and ASC Topic 350 “Intangibles – Goodwill and Other,” and allocate purchase price based on their relative fair values. When acquisitions of properties do not meet the criteria for business combinations, as is the case for the majority of the Company’s acquisitions, no goodwill is recorded, and acquisition costs are capitalized. We assess fair value based on estimated cash flow projections that utilize appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property.
Revenue Recognition and Accounts Receivable
Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the non-cancelable term of the respective leases. Certain of these leases also provide for percentage rents based upon the level of sales achieved by the tenant. Percentage rent is recognized in the period when the tenants’ sales breakpoint is met. In addition, leases typically provide for the reimbursement to us of real estate taxes, insurance, and other property operating expenses. These reimbursements are recognized as revenue in the period the expenses are incurred.
We assess the collectability of our accounts receivable related to tenant revenues as described under the heading “Bad Debts” above.
Structured Financings
Real estate notes receivable investments and preferred equity investments (“Structured Financings”) are intended to be held to maturity and are carried at cost less an allowance for credit loss. Interest income from Structured Financings is recognized on the effective interest method over the expected life of the loan. Under the effective interest method, interest or fees to be collected at the origination of the Structured Financing investment is recognized over the term of the loan as an adjustment to yield. Changes in cash flows from previous estimates are included in future interest income on a prospective basis and a new effective interest rate is computed based on the current cost basis of the instrument and remaining cash flows.
Allowances for credit loss related to our Structured Financing investments are established based upon management’s quarterly review of the investments. In performing this review, management considers the estimated net recoverable value of the investment as well as other factors, including the fair value of any collateral, the amount and status of any senior debt, and the prospects for the borrower. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the Structured Financings may differ materially from the carrying value at the balance sheet date. Interest income recognition is generally suspended for investments when, in the opinion of management, a full recovery of income and principal becomes doubtful. Income recognition is resumed when the suspended investment becomes contractually current, and performance is demonstrated to be resumed.
Notes receivable at December 31, 2022 and 2021 are reported net of an allowance for credit loss of $0.9 million and $5.8 million, respectively (Note 3).
Recently Issued Accounting Pronouncements
Reference is made to Note 1 for information about recently issued and recently adopted accounting pronouncements.
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