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| AKR > SEC Filings for AKR > Form 10-Q on 6-Aug-2009 | All Recent SEC Filings |
6-Aug-2009
Quarterly Report
The following discussion is based on the consolidated financial statements of the Company as of June 30, 2009 and 2008 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.
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 that may cause our actual results, performance
or achievements to be materially different from any future results performance
or achievements expressed or implied by such forward-looking statements. Such
factors are set forth under the heading "Item 1A. Risk Factors" in our Form 10-K
for the year ended December 31, 2008 and include, among others, the following:
general economic and business conditions, including the current global financial
crisis, 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 our real estate markets,
including, among other things, competition with other companies; risks of real
estate development, acquisition and investment; risks related to our use of
leverage; risks related to operating through a partnership structure; our
limited control over joint venture investments; the risk of loss of key members
of management; uninsured losses; REIT distribution requirements and ownership
limitations; concentration of ownership by certain institutional investors;
governmental actions and initiatives; and environmental/safety requirements.
Except as required by law, we do not undertake any obligation to update or
revise any forward-looking statements contained in this Form 10-Q.
OVERVIEW
As of June 30, 2009, we operated 78 properties, which we own or have an ownership interest in, within our Core Portfolio or within our three Opportunity Funds. Our Core Portfolio consists of those properties either 100% owned by, or partially owned through joint venture interests by the Operating Partnership, or subsidiaries thereof, not including those properties owned through our Opportunity Funds. These 78 properties consist of commercial properties, primarily neighborhood and community shopping centers, self-storage and mixed-use properties with a retail component. The properties we operate are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States. Our Core Portfolio consists of 33 properties comprising approximately 5.0 million square feet. Fund I has 21 properties comprising approximately 1.0 million square feet. Fund II has 10 properties, seven of which (representing 1.2 million square feet) are currently operating, one is under construction, and two are in design phase. The Fund II portfolio will approximate 2.0 million square feet upon completion of all current construction and anticipated redevelopment activities. Fund III has 14 properties totaling approximately 1.8 million square feet, of which 11 locations representing 0.9 million net rentable square feet are self storage facilities. The majority of our operating income is derived from rental revenues from these 78 properties, including recoveries from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating companies, we consider these investments to be private-equity style, as opposed to real estate, investments. Since these are not traditional investments in operating rental real estate, the Operating Partnership invests in these through a taxable REIT subsidiary ("TRS").
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:
- Own and operate a Core Portfolio of community and neighborhood shopping
centers and main street retail located in markets with strong demographics and
generate internal growth within the Core Portfolio through aggressive
redevelopment, re-anchoring and or leasing activities
- Maintain a strong and flexible balance sheet through conservative financial
practices while ensuring access to sufficient capital to fund future growth
- Generate external growth through an opportunistic yet disciplined acquisition
program. The emphasis is on targeting transactions with high inherent
opportunity for the creation of additional value through redevelopment and
leasing and/or transactions requiring creative capital structuring to facilitate
the transactions. These transactions may include other types of commercial real
estate besides those types we invest in through our Core Portfolio. These may
also 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
BUSINESS OUTLOOK
The U.S. economy is currently in a recession, which has resulted in a significant decline in retail sales due to reduced consumer spending. Many financial and economic analysts are predicting that this business recession will extend through 2009 and perhaps beyond. Although the occupancy and net operating income within our portfolio has not been materially adversely affected through June 30, 2009, should retailers continue to experience deteriorating sales performance, the likelihood of additional tenant bankruptcy filings may increase, which would negatively impact our results of operations. In addition to the impact on retailers, the economic recession has had an unprecedented impact on the U.S. credit markets. Traditional sources of financing, such as the commercial-mortgage backed security market, have become severely curtailed. If these conditions continue, our ability to finance new acquisitions will be adversely affected. Accordingly, our ability to generate external growth in income could be limited.
See "Item 1A. Risk Factors," in our Form 10-K for the year ended December 31, 2008 (our "2008 Form 10-K") including the discussions under the headings "The current global financial crisis may cause us to lose tenants and may impair our ability to borrow money to purchase properties, refinance existing debt or obtain the necessary financing to complete our current redevelopment" and "The bankruptcy of, or a downturn in the business of, any of our major tenants or a significant number of our smaller tenants may adversely affect our cash flows and property values".
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. Management 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 carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our 2008 Form 10-K.
RESULTS OF OPERATIONS
Comparison of the three months ended June 30, 2009 ("2009") to the three months
ended June 30, 2008 ("2008")
Revenues 2009 2008
Core Storage Core Storage
(dollars in millions) Portfolio Opportunity Funds Portfolio Other Portfolio Opportunity Funds Portfolio Other
Minimum rents $ 12.5 $ 9.3 $ 2.1 $ - $ 12.6 $ 6.1 $ 2.4 $ -
Percentage rents 0.1 - - - 0.1 - - -
Expense reimbursements 3.2 1.8 - - 3.2 0.3 - -
Lease termination income - - - - - 24.5 - -
Other property income 0.1 0.5 0.3 - - - 0.1 -
Management fee income (1) - - - 0.4 - - - 0.4
Interest income - - - 5.0 - - - 1.9
Other income - - - - - - - -
Total revenues $ 15.9 $ 11.6 $ 2.4 $ 5.4 $ 15.9 $ 30.9 $ 2.5 $ 2.3
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(1) Includes fees earned by the Company as general partner/managing member of the Opportunity Funds that are eliminated in consolidation. Certain of these fees are adjusted in noncontrolling interests. The net balance reflected in this row represents third party fees which are not eliminated in consolidation. Reference is made to Note 14 to the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for an overview of our four reportable segments.
The increase in minimum rents in the Opportunity Funds primarily relates to additional rents following the acquisition of Cortlandt Towne Center ("2009 Fund Acquisition") of $2.1 million and Fordham Place not being in service during the comparable period of 2008.
Expense reimbursements in the Opportunity Funds increased for both real estate taxes and common area maintenance as a result of the 2009 Fund Acquisition as well as Pelham Manor Shopping Center and Fordham Place not being in service during the comparable period of 2008.
Lease termination income in the Opportunity Funds for 2008 relates to a termination fee earned from Home Depot at Canarsie Plaza.
The increase in interest income was the result of higher interest earning assets in 2009, primarily from a new preferred equity investment and a note receivable originated during the second half of 2008.
Operating Expenses 2009 2008 (dollars in Core Storage Core Storage millions) Portfolio Opportunity Funds Portfolio Other Portfolio Opportunity Funds Portfolio Other Property operating $ 3.2 $ 2.2 $ 1.9 $ - $ 2.4 $ 2.1 $ 0.9 $ - Real estate taxes 2.3 1.3 0.5 - 2.2 0.6 0.3 - General and administrative 5.5 4.0 - (4.3 ) 6.6 5.5 - (5.8 ) Depreciation and amortization 4.1 4.3 1.1 (1.0 ) 4.3 2.1 0.7 - Abandonment of project costs - 2.4 - - - - - - Reserve for notes receivable - - - 1.7 - - - - Total operating expenses $ 15.1 $ 14.2 $ 3.5 $ (3.6 ) 15.5 $ 10.3 $ 1.9 $ (5.8 ) |
The increase in property operating expenses in the Core Portfolio was primarily attributable to additional tenant receivable reserves in 2009. The increase in property operating expenses in the Storage Portfolio was primarily the result of the Company's election in 2008 to report the Storage Portfolio activity one month in arrears to enhance the accuracy and timeliness of reporting. Accordingly, the three months ended June 30, 2008 reflects two months of storage activity while the three months ended June 30, 2009 reflects three months of storage activity.
The increase in real estate taxes in the Opportunity Funds was attributable to the 2009 Fund Acquisition.
The decrease in general and administrative expense in the Core Portfolio was primarily attributable to reduced compensation expense following employee terminations in the second half of 2008 and staff reductions in 2009. The decrease in general and administrative expense in the Opportunity Funds relates to the reduction in Promote expense attributable to Fund I and Mervyns I. The increase in general and administrative expense in Other relates to the reduction in Fund I and Mervyns I Promote expense eliminated for consolidated financial statement presentation purposes.
Depreciation expense in the Core Portfolio increased $0.3 million primarily as a result of Ledgewood Mall being reclassified as a continuing operation in 2009 as opposed to being held for sale, or discontinued operation in 2008. Amortization expense in the Core Portfolio decreased $0.5 million as a result of additional amortization expense in 2008 associated with the Klaff management contracts. Depreciation expense increased $1.4 million in the Opportunity Funds due to the 2009 Fund Acquisition as well as Pelham Manor Shopping Plaza and Fordham Plaza being partially placed in service in the second half of 2008. Amortization expense increased $0.8 million in the Opportunity Funds as a result of additional amortization of loan costs related to Pelham and Fordham Plaza being partially placed in service in the second half of 2008. Depreciation expense and amortization expense increased $0.4 million in the Storage Portfolio. This increase was primarily attributable to the Company's election in 2008 to report the Storage Portfolio activity one month in arrears as previously discussed. Depreciation and amortization expense decreased $1.0 million in Other as a result of depreciation associated with the elimination of capitalizable costs within the consolidated group.
The $2.4 million abandonment of project costs in 2009 is attributable to the Company's determination that it most likely will not participate in a future development project.
The reserve for notes receivable of $1.7 million relates to the establishment of a reserve for a mezzanine loan receivable in 2009 due to the loss of an anchor tenant at the underlying collateral property.
Other 2009 2008
Core Storage Core Storage
(dollars in millions) Portfolio Opportunity Funds Portfolio Other Portfolio Opportunity Funds Portfolio Other
Equity in (losses)
earnings
of unconsolidated
affiliates $ 0.3 $ (0.2 ) $ - $ - $ - $ 4.5 $ - $ -
Interest expense (4.7 ) (1.9 ) (1.0 ) - (4.8 ) (1.8 ) (0.8 )
Gain on debt
extinguishment 3.9 - - - - - - -
Gain on sale of land - - - - 0.8 - -
Income tax provision (1.0 ) (0.1 ) - - (0.3 ) - - -
Income from
discontinued
operations - - - - - - - 7.4
Loss (income)
attributable to
noncontrolling
interests in
subsidiaries:
- Continuing
operations (0.1 ) 5.5 (0.1 ) 0.5 0.1 (18.4 ) - 1.3
- Discontinued
Operations - - - - - (0.3 ) - -
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Equity in (losses) earnings of unconsolidated affiliates in the Opportunity Funds decreased primarily as a result of our pro rata share of gain from the sale of the Haygood Shopping Center of $3.4 million in 2008 as well as a decrease in our pro-rata share of income from Mervyns in 2009.
Total interest expense in the Core Portfolio remained unchanged from 2008 to 2009. Interest expense in the Opportunity Funds increased $0.1 million in 2009. This was the result of an increase of $1.1 million due to higher average outstanding borrowings in 2009. This increase was offset by a $0.2 million decrease related to lower average interest rates in 2009 and $0.8 million of higher capitalized interest in 2009. Interest expense in the Storage Portfolio increased $0.2 million in 2009. This was the result of an increase of $0.5 million due to higher average interest rates in 2009. This increase was offset by a $0.3 million decrease attributable to higher capitalized interest in 2009.
The gain on debt extinguishment of $3.9 million is attributable to the purchase of our convertible debt at a discount in 2009.
The gain on sale of land of $0.8 million in the Core Portfolio relates to a land parcel sale at Bloomfield Town Square in 2008.
The variance in income tax provision in the Core Portfolio primarily relates to income taxes at the taxable REIT subsidiary ("TRS") level as a result of additional taxable income.
Income from discontinued operations represents activity related to a property sold in 2008.
Loss (income) attributable to noncontrolling interests in subsidiaries - Continuing operations for the Opportunity Funds primarily represents the noncontrolling interests' share of all Opportunity Fund activity and ranges from a 77.8% interest in Fund I to an 80.1% interest in Fund III. The variance between 2009 and 2008 represents the noncontrolling interests' share of all the Opportunity Funds variances discussed above. Loss (income) attributable to noncontrolling interests in subsidiaries - Continuing operations in Other relates to the noncontrolling interests' share of capitalized construction, leasing and legal fees.
Loss (income) attributable to noncontrolling interests in subsidiaries - Discontinued operations for the Opportunity Funds primarily represents the noncontrolling interests' share of activity related to a property sold in 2008.
Revenues 2009 2008
Core Storage Core Storage
(dollars in millions) Portfolio Opportunity Funds Portfolio Other Portfolio Opportunity Funds Portfolio Other
Minimum rents $ 25.1 $ 16.6 $ 3.5 $ - $ 25.4 $ 10.4 $ 3.7 $ -
Percentage rents 0.3 - - - 0.2 - - -
Expense reimbursements 7.3 3.2 - - 7.4 0.6 - -
Lease termination income - - - - - 24.5 - -
Other property income 0.3 0.5 0.6 0.2 - 0.2
Management fee income (1) - - - 1.2 - - - 2.4
Interest income 10.2 - - - 4.7
Other income 1.7 - - - - - - -
Total revenues $ 34.7 $ 20.3 $ 4.1 $ 11.4 $ 33.2 $ 35.5 $ 3.9 $ 7.1
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(1) Includes fees earned by the Company as general partner/managing member of the Opportunity Funds that are eliminated in consolidation. Certain of these fees are adjusted in noncontrolling interests. The net balance reflected in this row represents third party fees which are not eliminated in consolidation. Reference is made to Note 14 to the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for an overview of our four reportable segments.
The increase in minimum rents in the Opportunity Funds primarily relates to additional rents following the acquisition of Cortlandt Towne Center ("2009 Fund Acquisition") of $3.4 million and Fordham Place being partially placed in service in the second half of 2008 of $3.0 million.
Expense reimbursements in the Opportunity Funds increased for both real estate taxes and common area maintenance as a result of the 2009 Fund Acquisition as well as Pelham Manor Shopping Center and Fordham Place being partially placed in service in the second half of 2008.
Lease termination income in the Opportunity Funds for 2008 relates to a termination fee earned from Home Depot at Canarsie Plaza.
Management fee income decreased primarily as a result of lower fees earned of $1.1 million from the City Point development project.
The increase in interest income was the result of higher interest earning assets in 2009 as previously discussed.
Other income of $1.7 million in the Core Portfolio was the result of a sales contract deposit forfeited during 2009.
Operating Expenses 2009 2008
Core Storage Core Storage
(dollars in millions) Portfolio Opportunity Funds Portfolio Other Portfolio Opportunity Funds Portfolio Other
Property operating $ 6.5 $ 4.4 $ 3.7 $ - $ 5.7 $ 3.3 $ 1.5 $ -
Real estate taxes 4.6 2.2 1.0 - 4.4 1.0 0.4 -
General and
administrative 12.4 8.1 0.1 (9.2 ) 13.3 10.0 0.1 (11.0 )
Depreciation and
amortization 8.3 7.7 2.1 (1.0 ) 8.2 4.0 1.1 -
Abandonment of
project costs - 2.4 - - - - - -
Reserve for notes
receivable - - - 1.7 - - - -
Total operating
expenses $ 31.8 $ 24.8 $ 6.9 $ (8.5 ) $ 31.6 $ 18.3 $ 3.1 $ (11.0 )
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The increase in property operating expenses in the Core Portfolio was primarily attributable to additional tenant receivable reserves in 2009. The increase in property operating expenses in the Opportunity Funds was primarily the result of the 2009 Fund Acquisition. The increase in property operating expenses in the Storage Portfolio relates to the February 2008 acquisition of the Storage Post Portfolio ("2008 Storage Acquisition") as well as the Company's election in 2008 to report the Storage Portfolio activity one month in arrears as previously discussed.
The decrease in general and administrative expense in the Core Portfolio was primarily attributable to reduced compensation expense following employee terminations in the second half of 2008 and staff reductions in 2009. The decrease in general and administrative expense in the Opportunity Funds relates to the reduction in Promote expense attributable to Fund I and Mervyns I. The increase in general and administrative expense in Other relates to the reduction in Fund I and Mervyns I Promote expense eliminated for consolidated financial statement presentation purposes
Depreciation expense in the Core Portfolio increased $0.7 million as a result of Ledgewood Mall being reclassified as a continuing operation in 2009 as opposed to being held for sale, or discontinued operation in 2008. Amortization expense in the Core Portfolio decreased $0.6 million as a result of additional amortization expense in 2008 associated with the Klaff management contracts. Depreciation expense increased $2.4 million in the Opportunity Funds primarily due to the 2009 Fund Acquisition as well as Pelham Manor Shopping Plaza and Fordham Plaza being partially placed in service in the second half of 2008. Amortization expense increased $1.3 million in the Opportunity Funds primarily as a result of additional amortization of loan costs related to Pelham and Fordham Plaza being partially placed in service in the second half of 2008. Depreciation expense and amortization expense increased $1.0 million in the Storage Portfolio primarily as a result of the 2008 Storage Acquisition as well as the Company's election in 2008 to report the Storage Portfolio activity . . .
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