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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion is based on the consolidated financial statements of the Company as of June 30, 2003 and 2002 and for the three and six months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Certain amounts for the three and six months ended June 30, 2003 have been reclassified to conform to the current presentation.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in the Company’s real estate markets, including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environmental/safety requirements.
CRITICAL ACCOUNTING POLICIES
Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its 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 the 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. The Company believes the following critical accounting policies affect its significant judgments and estimates used in the preparation of its consolidated financial statements.
Valuation of Property Held for Use and Sale
On a quarterly basis, the Company reviews both the carrying value of properties held for use and for sale. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. Management does not believe that the values of its properties within the portfolio are impaired as of June 30, 2003.
Bad Debts
The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likelihood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of June 30, 2003, the Company had recorded an allowance for doubtful accounts of $2.6 million. If the financial condition of the Company’s tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2003 (“2003”) to the three months ended June 30, 2002 (“2002”)
Total revenues increased $442,000, or 3%, to $16.4 million for 2003 compared to $16.0 million for 2002.
Minimum rents increased $726,000, or 6%, to $12.6 million for 2003 compared to $11.9 million for 2002. This increase was attributable to an increase in rents following the redevelopment of the Elmwood Park and Gateway shopping centers and an increase in rents from re- tenanting activities across the portfolio. These increases were partially offset by a decrease in rents following Ames Department Stores’ bankruptcy.
In total, expense reimbursements increased $155,000, or 6%, from $2.7 million for 2002 to $2.9 million for 2003. Common area maintenance (“CAM”) expense reimbursements increased $427,000, or 43%, from $991,000 in 2002 to $1.4 million in 2003. This resulted primarily from the tenant reimbursement of higher property and liability insurance costs. Real estate tax reimbursements decreased $272,000, primarily as a result of the tenants’ share of a real estate tax refund received in 2003 related to the appeal of taxes paid in prior years at the Greenridge Plaza.
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Other income decreased $284,000 to $695,000 in 2003 compared to $979,000 for 2002. This was primarily a result of a decrease in interest income during 2003 due to lower interest earning assets, including cash on hand and notes receivable. This decrease was partially offset by an increase of $207,000 in management fee income received from ASOF in 2003.
Total operating expenses increased $225,000, or 2%, to $11.5 million for 2003, from $11.3 million for 2002.
Property operating expenses increased $721,000, or 27%, to $3.4 million for 2003 compared to $2.7 million for 2002. This was primarily a result of general increases in property and liability insurance costs throughout the portfolio for 2003 and an increase in bad debt expense in 2003.
Real estate taxes decreased $358,000, or 16%, from $2.2 million in 2002 to $1.8 million in 2003 primarily due a real estate tax refund received in 2003 related to the appeal of taxes paid in prior years at the Greenridge Plaza. This decrease was offset by higher real estate taxes experienced throughout the portfolio.
General and administrative expense decreased $353,000, or 13%, from $2.8 million for 2002 to $2.4 million for 2003. This decrease was primarily attributable to additional third party professional fees and other costs paid in 2002 related to the Company’s tender offer and repurchase of its Common Shares.
Depreciation and amortization expense increased $215,000, or 6%, from $3.7 million in 2002 to $3.9 million in 2003. Depreciation expense increased $175,000. This was a result of increased depreciation expense following the Elmwood Park and Gateway redevelopment projects being placed in service. Amortization expense increased $40,000, which was primarily attributable to the write off of deferred loan costs related to a loan refinancing.
Interest expense of $2.8 million for 2003 increased $140,000, or 5%, from $2.7 million for 2002. Of the increase, $102,000 was the result of a higher average interest rate on the portfolio debt for 2003 and $169,000 was attributable to a decrease in capitalized interest in 2003. These increases were offset by a $131,000 decrease resulting from lower average outstanding borrowings during 2003.
Operating income from discontinued operations decreased $2.1 million due to the timing of property sales in 2002.
Comparison of the six months ended June 30, 2003 (“2003”) to the six months ended June 30, 2002 (“2002”)
Total revenues decreased $959,000, or 3%, to $34.6 million for 2003 compared to $35.6 million for 2002.
Minimum rents increased $994,000, or 4%, to $24.7 million for 2003 compared to $23.7 million for 2002. The increases were attributable to those factors previously discussed for the three months ended June 30, 2003.
In total, expense reimbursements increased $1.3 million, or 26%, from $5.3 million for 2002 to $6.6 million for 2003. CAM expense reimbursements, which comprise the majority of the variance between the periods, increased $1.4 million, or 70%, from $2.0 million in 2002 to $3.4 million in 2003. This resulted primarily from tenant reimbursements of greater snow removal costs following the harsh winter of 2003 as well as tenant reimbursements of increased property and liability insurance costs.
Lease termination income of $3.9 million in 2002 was primarily the result of the settlement of the Company’s claim against a former tenant.
Other income increased $694,000, or 37%, to $2.6 million in 2003 compared to $1.9 million for 2002. This was primarily due to a lump sum additional rent payment of $1.2 million received from a former tenant during 2003 in connection with the re-anchoring of the Branch Plaza offset by a decrease of $410,000 in interest income during 2003 due to lower interest earning assets, including cash on hand and notes receivable.
Total operating expenses increased $2.5 million, or 12%, to $24.4 million for 2003, from $21.9 million for 2002.
Property operating expenses increased $2.3 million, or 44%, to $7.7 million for 2003, compared to $5.4 million for 2002. This was a result primarily of higher snow removal costs following the harsh winter of 2003, increases in property and liability insurance costs across the portfolio in 2003 and in increase in bad debt expense in 2003.
Real estate taxes decreased $81,000, or 2%, from $4.1 million in 2002 to $4.0 million in 2003. This was primarily attributable to a real estate tax refund as previously discussed for the quarter offset by a 2002 adjustment of accrued real estate taxes for an acquired property. An indicated reassessment and resultant increase in taxes for this property as anticipated by the Company at the time of acquisition did not materialize.
General and administrative expense remained unchanged in 2003. This net variance was a combination of an increase in 2003 attributable to amounts paid to the former Chief Financial Officer upon his resignation offset by those 2002 costs as previously discussed for the quarter.
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Depreciation and amortization expense increased $231,000, or 3%, from $7.3 million in 2002 to $7.5 million in 2003. Depreciation expense increased $389,000. This was a result of increased depreciation expense following the Elmwood Park and Gateway redevelopment projects being placed in service. Amortization expense decreased $158,000, which was primarily attributable to the write-off of deferred leasing costs during 2002 related to certain tenant leases.
Interest expense of $5.5 million for 2003 increased $105,000, or 2%, from $5.4 million for 2002. Of the increase, $173,000 was the result of a higher average interest rate on the portfolio debt for 2003 and $194,000 was attributable to a decrease in capitalized interest in 2003. These increases were offset by a $262,000 decrease resulting from lower average outstanding borrowings during 2003.
Operating income from discontinued operations decreased $2.4 million due to the timing of property sales in 2002.
Funds from Operations
The Company considers 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 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 the performance of the Company. However, the Company’s 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 the Company’s performance or to cash flows as a measure of liquidity.
NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The reconciliation of net income to FFO for the three and six months ended June 30, 2003 and 2002 is as follows (amounts in thousands):
| | | Three months ended | | Six months ended | |
| | | June 30, | | June 30, | |
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| | | 2003 | | 2002 | | 2003 | | 2002 | |
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| Net income | | $ | 2,443 | | $ | 3,822 | | $ | 5,906 | | $ | 10,288 | |
Depreciation of real estate and amortization of
leasing costs: | | | | | | | | | | | | | |
| Wholly-owned and consolidated partnerships | | | 3,571 | | | 3,801 | | | 6,970 | | | 8,140 | |
| Unconsolidated partnerships | | | 551 | | | 159 | | | 1,010 | | | 316 | |
| Income attributable to Minority interest in | | | | | | | | | | | | | |
| Operating Partnership (1) | | | 203 | | | 588 | | | 641 | | | 1,704 | |
| Gain on sale of properties (2) | | | — | | | (1,987 | ) | | — | | | (1,832 | ) |
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| Funds from operations | | | 6,768 | | | 6,383 | | | 14,527 | | | 18,616 | |
| Less: Funds from operations – Discontinued | | | | | | | | | | | | | |
| operations (3) | | | — | | | (791 | ) | | — | | | (2,299 | ) |
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| Funds from operations – Continuing operations | | $ | 6,768 | | $ | 5,592 | | $ | 14,527 | | $ | 16,317 | |
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| Cash flows provided by (used in) (3): | | | | | | | | | | | | | |
| Operating activities | | | — | | | — | | $ | 9,688 | | $ | 12,276 | |
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| Investing activities | | | — | | | — | | $ | (8,904 | ) | $ | (4,094 | ) |
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| Financing activities | | | — | | | — | | $ | (11,758 | ) | $ | (49,152 | ) |
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| (1) | Does not include distributions paid to Preferred OP Unitholders. |
| (2) | FFO for the six months ended June 30, 2003 and 2002 includes the gains from the sale of land of $659 and $957, net of minority interests of $553 and $573 respectively. |
| (3) | Discontinued operations represent the activity related to all properties sold since January 1, 2002. |
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LIQUIDITY AND CAPITAL RESOURCES
Uses of Liquidity
The Company’s principal uses of its liquidity are expected to be for distributions to its shareholders and OP unitholders, debt service and loan repayments, and property investment which includes funding of its joint venture commitments, acquisition, redevelopment, expansion and re-tenanting activities. In order to qualify as a REIT for Federal income tax purposes, the Company must currently distribute at least 90% of its taxable income to its shareholders. On June 25, 2003, the Board of Trustees of the Company approved and declared a cash quarterly dividend for the quarter ended June 30, 2003 of $0.145 per Common Share and Common OP Unit. The dividend was paid on July 15, 2003 to shareholders of record as of July 2, 2003. The Board of Trustees also approved a distribution of $22.50 per Preferred OP Unit, which was paid on July 15, 2003.
Acadia Strategic Opportunity Fund, LP (“ASOF”)
During 2001, the Company committed $20.0 million to a newly formed joint venture formed with four of its institutional shareholders, who committed $70.0 million, for the purpose of acquiring a total of approximately $300.0 million of community and neighborhood shopping centers on a leveraged basis. The Company is the manager and general partner of ASOF with a 22% interest. In addition to a pro-rata return on its invested equity, the Company is entitled to a profit participation in excess of its invested capital based upon certain investment return thresholds. Cash flow is to be distributed to the partners (including the Company) until they have received a 9% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 80% to the partners (including the Company) and 20% to the Company. The Company also earns a fee for asset management services equal to 1.5% of the total equity commitments, as well as market-rate fees for property management, leasing and construction services. Decisions made by the general partner as it relates to purchasing, financing and disposition of properties are subject to the unanimous disapproval of the Advisory Committee, which is comprised of representatives from each of the four institutional investors.
To date, ASOF has purchased a total of approximately $160.8 million in assets in three separate transactions, with an additional potential payment of $42.0 million to $62.0 million related to the Earnout on the Brandywine Town Center acquisition. Details of the two transactions completed during the six months ended June 30, 2003 are as follows:
Kroger/Safeway Portfolio
In January 2003, ASOF formed a joint venture (the “Kroger/Safeway JV”) with an affiliate of real estate developer and investor AmCap Incorporated (“AmCap”) for the purpose of acquiring a portfolio of twenty-five supermarket leases. The portfolio, which aggregates approximately 1.0 million square feet, consists of 25 anchor-only leases with Kroger (12 leases) and Safeway supermarkets (13 leases). The majority of the properties are free-standing and all are triple-net leases. The Kroger/Safeway JV acquired the portfolio subject to long- term ground leases with terms, including option renewal periods, averaging in excess of 80 years, which are master leased to a non-affiliated entity. The base rental renewal options for the supermarket leases at the end of their primary lease term in approximately seven years (“Primary Term”) are at an average of $5.13 per square foot. Although there is no obligation for the Kroger/Safeway JV to pay ground rent during the Primary Term, to the extent it exercises an option to renew a ground lease for a property at the end of the Primary Term, it will be obligated to pay an average ground rent of $1.55 per square foot.
Including closing and other related acquisition costs, the Kroger/Safeway JV acquired the portfolio for $47.9 million, which included the assumption of an aggregate of $34.5 million of existing fixed-rate mortgage debt, which is at a blended fixed interest rate of 6.6% and is fully amortizing over the Primary Term. The individual mortgages are secured by each individual property and are not cross-collateralized. ASOF invested 90%, or $11.3 million, of the equity capitalization, of which the Company’s share was $2.5 million. AmCap contributed 10%, or $1.2 million. Cash flow is to be distributed to the Kroger/Safeway JV partners until they have received an 11% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 75% to ASOF and 25% to AmCap. The Kroger/ Safeway JV agreement also provides for additional allocations of cash based on ASOF achieving certain minimum investment returns to be determined on a “look-back” basis.
Brandywine Portfolio
In January 2003, ASOF acquired a major open-air retail complex located in Wilmington, Delaware. The approximately 1.0 million square foot value-based retail complex consists of the following two properties:
Market Square Shopping Center is a 103,000 square foot community shopping center which is 92% leased and anchored by a T.J. Maxx and a Trader Joe’s gourmet food market.
Brandywine Town Center is a two phase open-air value retail center. The first phase (“Phase I”) is approximately 450,000 square feet and 97% occupied, with tenants including Lowe’s, Bed Bath & Beyond, Regal Cinema, Michaels, Petsmart, Old Navy, Annie Sez, Thomasville Furniture, KB Toys and Dick’s Sporting Goods. The second phase (“Phase II”) consists of approximately 420,000 square feet of existing space, of which Target occupies 138,000 square feet. The balance of Phase II, which is currently not occupied, is to be paid for on an earnout basis as it is leased and occupied.
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The initial investment for the portfolio was approximately $89.3 million; inclusive of closing and other related acquisition costs. ASOF assumed $38.1 million of fixed rate debt on the two properties at a blended rate of 8.1%. A new $30.0 million, 4.7% fixed-rate loan was also obtained in conjunction with the acquisition and is collateralized by a portion of the Brandywine Town Center. The balance of the purchase price was funded by ASOF, of which the Company’s share was $4.3 million. ASOF will also pay additional amounts in conjunction with the lease-up of the current vacant space in Phase II (the “Earnout”). The additional investment, depending on the Earnout, is projected to be between $42.0 million and $62.0 million, of which the Company’s share would be between $9.3 million and $13.8 million. To the extent ASOF places additional mortgage debt upon the lease-up of Phase II, the required equity contribution for the Earnout would be less. The Earnout is structured such that ASOF has no time requirement or payment obligation for any portion of currently vacant space which it is unable to lease. Subsequent to the initial investment, ASOF has paid approximately $1.0 million in connection with the Earnout component of this acquisition.
Property Redevelopment and Expansion
The Company’s redevelopment program focuses on selecting well-located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevelopment. During the three months ended June 2003, the Company substantially completed its redevelopment of the Gateway Shopping Center with the opening of the anchor for the center, a 72,000 square foot Shaw’s supermarket. This redevelopment project, formerly a partially enclosed mall located in South Burlington, Vermont, included the demolition of 90% of the property and the construction of the new anchor supermarket. Total costs through June 30, 2003 for this project, including the original acquisition costs, were $16.5 million. The Company expects remaining redevelopment costs of approximately $1.4 million to complete this project, which it anticipates completing in the second half of 2003.
Additionally, for the year ending December 31, 2003, the Company currently estimates that capital outlays of approximately $7.0 million to $10.0 million will be required for tenant improvements, related renovations and other property improvements for the remaining portfolio.
Share Repurchase
The Company’s repurchase of its Common Shares is an additional use of liquidity. The Company has an existing share repurchase program that authorizes management, at its discretion, to repurchase up to $20.0 million of the Company’s outstanding Common Shares. Through August 12, 2003, the Company had repurchased 1,923,598 Common Shares (net of 131,007 shares reissued) at a total cost of $11.6 million. The program may be discontinued or extended at any time and there is no assurance that the Company will purchase the full amount authorized.
Sources of Liquidity
The Company intends on using ASOF as the primary vehicle for future acquisitions. Sources of capital for funding the Company’s joint venture commitment, other property acquisitions, redevelopment, expansion and re-tenanting, as well as future repurchases of Common Shares are expected to be obtained primarily from cash on hand, additional debt financings and future sales of existing properties. As of June 30, 2003, the Company had a total of approximately $48.1 million of additional capacity with six lenders, of which the Company is required to draw $12.7 million by December 2003, or forego the ability to draw these funds at any time during the remaining term of the loans. Of the remaining capacity, approximately $3.0 million is subject to additional leasing requirements at the collateral properties and certain lender requirements, which the Company has not yet satisfied. The Company also had cash and cash equivalents on hand of $34.2 million at June 30, 2003 as well as seven properties that are currently unencumbered and therefore available as potential collateral for future borrowings. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements.
Financing and Debt
At June 30, 2003, mortgage notes payable aggregated $199.7 million and were collateralized by 24 properties and related tenant leases. Interest rates on the Company’s outstanding mortgage indebtedness ranged from 2.8% to 8.1% with maturities that ranged from August 2003 to June 2013. Taking into effect $86.9 million of notional principal under variable to fixed-rate swap agreements, $157.1 million of the portfolio, or 79%, was fixed at a 6.6% weighted average interest rate and $42.6 million, or 21% was floating at a 3.1% weighted average interest rate. Of the total outstanding debt, $73.9 million will become due by the end of 2005, with scheduled maturities of $16.1 million with a weighted average interest rate of 3.2% in 2003, none in 2004, and $57.8 million with a weighted average interest rate of 3.1% in 2005. As the Company does not anticipate having sufficient cash on hand to repay such indebtedness, it will need to refinance this indebtedness or select other alternatives based on market conditions at that time.
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The following summarizes the financing and refinancing transactions since March 31, 2003:
In April 2003, the Company extended an existing $7.4 million revolving facility with a bank through March 1, 2008. As of June 30, 2003, there were no outstanding amounts under this loan.
On May 30, 2003, the Company refinanced a $13.3 million loan with a bank, increasing the outstanding principal to $16.0 million. The loan, which is secured by one of the Company’s properties, requires monthly payment of interest at the fixed-rate of 5.2%. Payments of principal amortized over 30 years commences June 2005 with the loan maturing in May 2013.
The following table summarizes the Company’s mortgage indebtedness as of June 30, 2003 and December 31, 2002:
| | | June 30, | | December 31, | | Interest Rate | | | | Properties | | Payment | |
| | | 2003 | | 2002 | | at June 30, 2003 | | Maturity | | Encumbered | | Terms | |
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| Mortgage notes payable – variable-rate | | | | | | | | | | | | | | | | | | | |
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| First Union National Bank | | $ | — | | $ | 13,388 | | — | | | | — | | | — | | | — | |
| Fleet National Bank | | | 8,666 | | | 8,731 | | 3.07 % (LIBOR + 1.75%) | | | 08/01/03 | | | (1 | ) | | (16 | ) |
| Metropolitan Life Insurance Company | | | 7,482 | | | 7,577 | | 3.31 % (LIBOR + 2.00%) | | | 11/01/03 | | | (2 | ) | | (16 | ) |
| Washington Mutual Bank, FA | | | 51,320 | | | 56,950 | | 3.13 % (LIBOR + 1.75%) | | | 04/01/05 | | | (3 | ) | | (16 | ) |
| Sun America Life Insurance Company | | | 9,322 | | | 9,446 | | 3.02 % (LIBOR + 1.73%) | | | 10/01/05 | | | (4 | ) | | (16 | ) |
| Fleet National Bank | | | 12,098 | | | 12,187 | | 3.07 % (LIBOR + 1.75%) | | | 01/01/07 | | | (5 | ) | | (16 | ) |
| Washington Mutual | | | 20,382 | | | 15,637 | | 3.23 % (LIBOR + 1.85%) | | | 01/01/07 | | | (6 | ) | | (16 | ) |
| Fleet National Bank | | | 4,904 | | | 4,942 | | 2.84 % (LIBOR + 1.75%) | | | 03/15/07 | | | (7 | ) | | (16 | ) |
| Fleet National Bank | | | 6,300 | | | 6,300 | | 2.84 % (LIBOR +1.75 %) | | | 05/01/07 | | | (8 | ) | | (16 | ) |
| Fleet National Bank | | | 9,052 | | | 9,108 | | 3.02 % (LIBOR + 1.75%) | | | 06/01/07 | | | (9 | ) | | (16 | ) |
| Washington Mutual Bank, FA | | | — | | | — | | — (LIBOR + 1.70%) | | | 11/22/07 | | | (10 | ) | | (16 | ) |
| Fleet National Bank | | | — | | | — | | — (LIBOR + 1.50%) | | | 03/01/08 | | | (11 | ) | | (16 | ) |
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| Total variable-rate debt | | | 129,526 | | | 144,266 | | | | | | | | | | | | | |
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| Mortgage notes payable – fixed-rate | | | | | | | | | | | | | | | | | | | |
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| Anchor National Life Insurance Company | | | — | | | 3,570 | | — | | | | — | | | — | | | — | |
| SunAmerica Life Insurance Company | | | 13,554 | | | 13,648 | | 6.46% | | | | 07/01/07 | | | (12 | ) | | (16 | ) |
| Metropolitan Life Insurance Company | | | 24,308 | | | 24,495 | | 8.13% | | | | 11/01/10 | | | (13 | ) | | (16 | ) |
| Bank of America, N.A. | | | 16,303 | | | 16,382 | | 7.55% | | | | 01/01/11 | | | (14 | ) | | (16 | ) |
| RBS Greenwich Capital | | | 16,000 | | | — | | 5.19% | | | | 06/01/13 | | | (15 | ) | | (17 | ) |
| Total fixed-rate debt | | | 70,165 | | | 58,095 | | | | | | | | | | | | | |
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| Total mortgage debt | | $ | 199,691 | | $ | 202,361 | | | | | | | | | | | | | |
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| Notes: | | | | | | | | | | | | | | | | |
| (1) | | | Soundview Marketplace | | | (7) | | | Town Line Plaza | | | (13) | | | Crescent Plaza | |
| | | | | | | | | | | | | | | | East End Centre | |
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| (2) | | | Greenridge Plaza | | | (8) | | | Gateway Shopping Center | | | (14) | | | GHTApartments/ Colony Apartments | |
| | | | Luzerne Plaza | | | | | | | | | | | | | |
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| (3) | | | New Loudon Center | | | | | | | | | | | | | |
| | | | Ledgewood Mall | | | | | | | | | | | | | |
| | | | Route 6 Plaza | | | (9) | | | Smithtown Shopping Center | | | (15) | | | 239 Greenwich Avenue | |
| | | | Bradford Towne Centre | | | | | | | | | | | | | |
| | | | Berlin Shopping Center | | | | | | | | | | | | | |
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| (4) | | | Village Apartments | | | (10) | | | Elmwood Park Shopping Center; no | | | (16) | | | Monthly principal and interest | |
| | | | | | | | | | amounts outstanding under $20,000 | | | | | | | |
| | | | | | | | | | revolving facility | | | | | | | |
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| (5) | | | Branch Shopping Center | | | (11) | | | Marketplace of Absecon; no amounts | | | (17) | | | Interest only until 5/05; | |
| | | | Abington Towne Center | | | | | | outstanding under $7,400 revolving | | | | | | monthly principal and | |
| | | | Methuen Shopping Center | | | | | | facility | | | | | | interest thereafter. | |
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| (6) | | | Walnut Hill Plaza | | | (12) | | | Merrillville Plaza | | | | | | | |
| | | | Bloomfield Town Square | | | | | | | | | | | | | |
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HISTORICAL CASH FLOW
The following discussion of historical cash flow compares the Company’s cash flow for the six months ended June 30, 2003 (“2003”) with the Company’s cash flow for the six months ended June 30, 2002 (“2002”).
Cash and cash equivalents were $34.2 million and $37.1 million at June 30, 2003 and 2002, respectively. The decrease of $2.9 million was a result of the following increases and decreases in cash flows:
| | | Six months ended June 30, | |
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| | | 2003 | | 2002 | | Change | |
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| Net cash provided by operating activities | | $ | 9.7 | | $ | 12.3 | | $ | (2.6 | ) |
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| Net cash used in investing activities | | $ | (8.9 | ) | $ | (4.1 | ) | $ | (4.8 | ) |
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| Net cash used in financing activities | | $ | (11.8 | ) | $ | (49.2 | ) | $ | 37.4 | |
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| Net cash provided by discontinued operations | | $ | — | | $ | 43.9 | | $ | (43.9 | ) |
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The variance in net cash provided by operating activities resulted from a decrease of $3.2 million in operating income before non-cash expenses in 2003, which was primarily due to $3.9 million of lease termination income received in 2002 offset by an increase in rents following the redevelopment of the Elmwood Park and Gateway shopping centers. This decrease was partially offset by a net increase in cash provided by changes in operating assets and liabilities of $576,000, primarily prepaid expenses.
The variance in net cash used in investing activities was primarily the result of a $2.5 million payment of an earnout in 2003 related to a redevelopment project, a $5.9 million investment in ASOF in 2003 and a decrease of $3.0 million in net proceeds from property sales in 2003. These increases were offset by a decrease of $3.3 million in expenditures for real estate acquisitions, development and tenant installation costs in 2003 and $3.2 million of notes collected in 2003 in connection with property sales.
The decrease in net cash used in financing activities resulted primarily from $33.4 million of cash used in 2002 for the Company’s repurchase of Common Shares and $4.7 million of additional cash used in 2002 for the net repayment of debt.
The decrease in net cash provided by discontinued operations was primarily a result of $34.8 million received in 2002 from the collection of a note receivable from the sale of a property and a decrease in net proceeds in 2003.
INFLATION
The Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation on the Company’s net income. Such provisions include clauses enabling the Company to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indexes. In addition, many of the Company’s leases are for terms of less than ten years, which permits the Company to seek to increase rents upon re-rental at market rates if rents are below the then existing market rates. Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and operating expenses resulting from inflation.
Item 3. Quantitative and qualitative disclosures about market risk
The Company’s primary market risk exposure is to changes in interest rates related to the Company’s mortgage debt. See the discussion under Item 2 for certain quantitative details related to the Company’s mortgage debt.
Currently, the Company manages its exposure to fluctuations in interest rates primarily through the use of fixed-rate debt, interest rate swap agreements and LIBOR caps. The Company is a party to interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $86.9 million of LIBOR based variable-rate debt. The Company also has two interest rate swaps hedging the Company’s exposure to changes in interest rates with respect to $16.3 million of LIBOR based variable-rate debt related to its investment in Crossroads.
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The following table sets forth information as of June 30, 2003 concerning the Company’s long-term debt obligations, including principal cash flows by scheduled maturity and weighted average interest rates of maturing amounts (amounts in millions):
Consolidated mortgage debt:
Year | | Scheduled
amortization | | Maturities | | Total | | Weighted average
interest rate of
maturing debt | |
| |
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|
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| 2003 | | $ | 1.8 | | $ | 16.1 | | $ | 17.9 | | | 3.2 | % |
| 2004 | | | 3.5 | | | — | | | 3.5 | | | n/a | |
| 2005 | | | 2.7 | | | 57.8 | | | 60.5 | | | 3.1 | % |
| 2006 | | | 2.4 | | | — | | | 2.4 | | | n/a | |
| 2007 | | | 1.3 | | | 61.0 | | | 62.3 | | | 3.8 | % |
| Thereafter | | | 4.0 | | | 49.1 | | | 53.1 | | | 7.1 | % |
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| |
| |
| | | | |
| | | $ | 15.7 | | $ | 184.0 | | $ | 199.7 | | | | |
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| |
| |
| | | | |
Mortgage debt in unconsolidated partnerships (at Company’s pro rata share):
Year | | Scheduled
amortization | | Maturities | | Total | | Weighted average
interest rate of
maturing debt | |
| |
|
| |
|
| |
|
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|
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| 2003- 2006 | | $ | 4.4 | | $ | — | | $ | 4.4 | | | n/a | |
| 2007 | | | 1.3 | | | 16.0 | | | 17.3 | | | 6.9 | % |
| Thereafter | | | 4.6 | | | 14.1 | | | 18.7 | | | 6.0 | % |
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| | | $ | 10.3 | | $ | 30.1 | | $ | 40.4 | | | | |
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| | | | |
Of the Company’s total outstanding debt, $16.1 million will become due at maturity through the end of 2003. As the Company intends on refinancing some or all of such debt at the then-existing market interest rates which may be greater than the current interest rate, the Company’s interest expense would increase by approximately $161,000 annually if the interest rate on the refinanced debt increased by 100 basis points. Furthermore, interest expense on the Company’s variable debt as of June 30, 2003 would increase by $426,000 annually for a 100 basis point increase in interest rates. The Company may seek additional variable-rate financing if and when pricing and other commercial and financial terms warrant. As such, the Company 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.
Item 4. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective.
(b) Internal Control Over Financial Reporting. There have not been any changes in the Company’s internal control over financial reporting during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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Part II. Other Information
Item 1. Legal Proceedings
There have been no material legal proceedings beyond those previously disclosed in the Registrants’ filed Annual Report on Form 10-K for the year ended December 31, 2002.
Item 2. Changes in Securities
Certain limited partners converted 1,871,583 Common OP Units into Common Shares on a one-for-one basis during the six months ended June 30, 2003.
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
On June 25, 2003, the Company held its annual meeting of shareholders. The shareholders voted, in person or by proxy for the following proposals. The results of the voting are shown below:
Proposal 1 —
Election of Trustees:
| | | Votes Cast For | | Votes Withheld | |
| | |
|
| |
|
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| Kenneth F. Bernstein | | | 21,257,958 | | | 100,900 | |
| Ross Dworman | | | 21,248,215 | | | 110,643 | |
| Martin L. Edelman, Esq. | | | 20,681,466 | | | 677,392 | |
| Alan S. Forman | | | 21,262,866 | | | 95,992 | |
| Marvin J. Levine, Esq. | | | 20,681,466 | | | 677,392 | |
| Lawrence J. Longua | | | 20,689,566 | | | 669,292 | |
| Gregory A. White | | | 20,687,492 | | | 671,366 | |
| Lee S. Wielansky | | | 20,689,366 | | | 669,492 | |
Proposal 2 —
The ratification of the appointment of Ernst & Young, LLP as independent auditors for the Company for the fiscal year ending December 31, 2003:
Votes Cast For | | | Votes Against | | | Abstain |
| | |
| | |
|
| 20,662,779 | | | 691,183 | | | 4,895 |
Proposal 3 —
Approval of the Acadia Realty Trust 2003 Share Incentive Plan:
Votes Cast For | | | Votes Against | | | Abstain |
| | |
| | |
|
| 16,151,826 | | | 2,032,642 | | | 11,091 |
Proposal 4 —
Approval of the Acadia Realty Trust Employee Stock Purchase Plan:
Votes Cast For | | | Votes Against | | | Abstain |
| | |
| | |
|
| 18,023,477 | | | 159,570 | | | 12,513 |
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Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
No. | | | Description | |
| | |
| |
| 10.7 | | | Acadia Realty Trust 2003 Share Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A dated April 24, 2003) | |
| 10.8 | | | Acadia Realty Trust 2003 Employee Stock Purchase Plan (incorporated by reference to Appendix B to the Registrant’s Definitive Proxy Statement on Schedule 14A dated April 24, 2003 | ) |
| 31.1 | | | Certification of Chief Executive Officer pursuant to rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 31.2 | | | Certification of Chief Financial Officer pursuant to rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 32.1 | | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
| 32.2 | | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) | |
(b) Reports on Form 8-K
The following Form 8-K’s were filed, or furnished as noted in the applicable Form 8-K, for the quarter ended June 30, 2003:
| 1) | | Form 8-K filed April 24, 2003 (earliest event April 24, 2003), reporting in Item 5 a press release issued announcing that it had filed a Form S-3 shelf registration statement with the Securities and Exchange Commission. |
| 1) | | Form 8-K filed April 30, 2003 (earliest event April 30, 2003), reporting in Item 9 a press release announcing the consolidated financial results for the quarter ended March 31, 2003. |
| 2) | | Form 8-K filed May 2, 2003 (earliest event May 1, 2003), reporting in Item 9 certain supplemental information concerning the ownership, operations and portfolio of the Registrant as of March 31, 2003 as made available as an exhibit to the filing. |
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
ACADIA REALTY TRUST
| Dated: August 12, 2003 | |
| | | | | |
| | | | | |
| | | | /s/ Kenneth F. Bernstein | |
| | |
| |
| | | | Kenneth F. Bernstein | |
| | | | President and Chief Executive Officer | |
| | | | (Principal Executive Officer) | |
| | | | | |
| | | | /s/ Michael Nelsen | |
| | |
| |
| | | | Michael Nelsen | |
| | | | Senior Vice President and Chief Financial Officer | |
| | | | (Principal Financial and Accounting Officer) | |
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No 