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| AKR > SEC Filings for AKR > Form 10-Q on 6-Nov-2009 | All Recent SEC Filings |
6-Nov-2009
Quarterly Report
The following discussion is based on the consolidated financial statements of the Company as of September 30, 2009 and 2008 and for the three and nine 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
recession, 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 September 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 but investments in operating businesses, 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 the balance of 2009 and perhaps beyond. Although the occupancy and net operating income within our portfolio has not been materially adversely affected through September 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 not eliminated. If these conditions continue, our ability to finance new acquisitions or refinance existing debts as they mature will be adversely affected. Accordingly, our ability to generate external growth in income, as well as maintain existing operating income, could be limited.
CRITICAL ACCOUNTING POLICIES
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 September 30, 2009 ("2009") to the three
months ended September 30, 2008 ("2008")
Revenues 2009 2008
Notes
Core Self-Storage Receivable Core Self-Storage Notes Receivable
(dollars in millions) Portfolio Opportunity Funds Portfolio and Other Portfolio Opportunity Funds Portfolio and Other
Minimum rents $ 13.8 $ 9.9 $ 2.2 $ - $ 12.2 $ 5.8 $ 0.8 $ -
Percentage rents 0.1 - - - 0.1 - - -
Expense reimbursements 3.1 1.8 - - 3.2 1.0 - -
Lease termination income 2.5 - - - - (0.5 ) - -
Other property income - - 0.4 - 0.1 (0.6 ) 0.3 0.6
Management fee income (1) - - - 0.3 - - - 0.5
Interest income - - - 5.1 - - - 4.7
Other income - - - - - - - -
Total revenues $ 19.5 $ 11.7 $ 2.6 $ 5.4 $ 15.6 $ 5.7 $ 1.1 $ 5.8
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Note:
(1) Includes fees earned by the Company as general partner/managing member of the
Opportunity Funds that are eliminated in consolidation. The Operating
Partnership's share of these fees are recognized as a reduction in
noncontrolling interests. The net balance reflected herein 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 five reportable segments.
The increase in minimum rents in the Core Portfolio is primarily attributable to the write-off of a lease intangible liability in connection with a terminated lease. 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 $2.0 million and additional leases at Fordham Place and the Pelham Manor commencing in 2009 ("Fordham and Pelham"). The increase in minimum rents in the Storage Portfolio related to the full amortization of acquired lease intangible costs during 2009.
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 Fordham and Pelham. These increases were offset primarily by the billing of $0.6 million in 2008 of previous year's overtime labor charges at 161st Street.
Lease termination income in the Core Portfolio for 2009 relates to a termination fee received from Acme at Absecon Marketplace. Lease termination income in the Opportunity Funds for 2008 relates to costs associated with the termination fee earned during the second quarter 2008 from Home Depot at Canarsie Plaza.
Operating Expenses 2009 2008
Notes Notes
Core Self-Storage Receivable Core Self-Storage Receivable and
(dollars in millions) Portfolio Opportunity Funds Portfolio and Other Portfolio Opportunity Funds Portfolio Other
Property operating $ 2.2 $ 2.5 $ 2.0 $ (0.3 ) $ 2.1 $ 1.6 $ 1.7 $ (0.1 )
Real estate taxes 2.5 1.5 0.6 - 2.2 0.5 0.5 -
General and
administrative 5.9 2.5 - (3.2 ) 6.6 3.8 - (3.6 )
Depreciation and
amortization 5.0 4.5 1.1 (0.2 ) 4.3 2.7 1.0 -
Abandonment of project
costs - 0.1 - - - - - -
Total operating
expenses $ 15.6 $ 11.1 $ 3.7 $ (3.7 ) $ 15.2 $ 8.6 $ 3.2 $ (3.7 )
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The increase in property operating expenses in the Opportunity Funds was primarily attributable to the 2009 Fund Acquisition as well as Fordham and Pelham.
The increase in real estate taxes in the Opportunity Funds was the result of the 2009 Fund Acquisition as well as Fordham and Pelham.
The decrease in general and administrative expense in the Core Portfolio was primarily attributable to reduced compensation expense following staff reductions in the second half of 2008 and in the first half of 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 and amortization expense in the Core Portfolio increased primarily as a result of increased deprecation related to the write-off of the net book value of costs related to the termination of Acme's lease at Absecon, and Ledgewood Mall being reclassified as a continuing operation in 2009 as opposed to being held for sale, or discontinued operation in 2008 . Depreciation and amortization expense increased in the Opportunity Funds due to the 2009 Fund Acquisition as well as Fordham and Pelham.
Other 2009 2008
Notes Notes
Core Self-Storage Receivable Core Self-Storage Receivable
(dollars in millions) Portfolio Opportunity Funds Portfolio and Other Portfolio Opportunity Funds Portfolio and Other
Equity in (losses)
earnings
of unconsolidated
affiliates $ - $ (3.8 ) $ - $ - $ - $ 6.7 $ - $ -
Interest expense (4.5 ) (2.0 ) (1.8 ) - (5.0 ) (2.0 ) (1.2 )
Income tax provision 0.3 - - - (0.2 ) - - -
Income from discontinued
operations - - - - - - - 0.2
Loss (income)
attributable to
noncontrolling interests
in subsidiaries:-
Continuing operations (0.1 ) 6.4 - 0.4 (0.1 ) 1.3 - 0.2
- Discontinued
operations - - - - - - - (0.1 )
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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 distributions in excess of basis from our Albertson's investment of $7.6 million in 2008 and a $3.7 million impairment charge related to a Fund I unconsolidated investment in 2009.
Interest expense in the Core Portfolio decreased $0.5 million in 2009 as a result of a decrease of $0.7 million due to lower average outstanding borrowings in 2009 and lower interest expense related to the purchase of the Company's convertible debt. These decreases were offset by a $0.7 million write-off of the unamortized premium related to the repayment of a mortgage note payable during 2008 and a $0.3 million increase resulting from higher average interest rates in 2009. Interest expense in the Opportunity Funds remained unchanged on a net basis from 2008 to 2009 as a result of an increase of $1.0 million due to higher average outstanding borrowings in 2009 offset by a $0.7 million decrease related to lower average interest rates in 2009 and $0.3 million of higher capitalized interest in 2009. Interest expense in the Storage Portfolio increased $0.6 million in 2009 as a result of an increase of $0.4 million due to higher average interest rates in 2009 and an increase of $0.2 million attributable to higher average outstanding borrowings in 2009.
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.
Revenues 2009 2008
Notes Notes
Core Self-Storage Receivable Core Self-Storage Receivable
(dollars in millions) Portfolio Opportunity Funds Portfolio and Other Portfolio Opportunity Funds Portfolio and Other
Minimum rents $ 38.7 $ 26.5 $ 5.8 $ - $ 37.4 $ 16.2 $ 4.5 $ -
Percentage rents 0.4 - - - 0.4 - - -
Expense reimbursements 10.3 5.0 - - 10.6 1.5 - -
Lease termination income 2.7 - - - - 24.0 - -
Other property income 0.1 0.5 0.9 - 0.2 (0.6 ) 0.6 0.6
Management fee income (1) - - - 1.5 - - - 2.9
Interest income - - - 15.2 - - - 9.4
Other income 1.7 - - - - - - -
Total revenues $ 53.9 $ 32.0 $ 6.7 $ 16.7 $ 48.6 $ 41.1 $ 5.1 $ 12.9
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Note:
(1) Includes fees earned by the Company as general partner/managing member of the
Opportunity Funds that are eliminated in consolidation. The Operating
Partnership's share of these fees are recognized as a reduction in
noncontrolling interests. The net balance reflected herein 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 five reportable segments.
The increase in minimum rents in the Core Portfolio is primarily attributable to a write-off of a lease intangible liability as previously discussed. The increase in minimum rents in the Opportunity Funds primarily relates to additional rents following the 2009 Fund Acquisition of $5.4 million and Fordham and Pelham of $4.8 million. The increase in minimum rents in the Storage Portfolio related to the items as previously discussed in the three months.
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 Fordham and Pelham.
Lease termination income in the Core Portfolio for 2009 relates to a termination fee earned from Acme at Absecon Marketplace. 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 $0.9 million from the City Point development project and lower fees from our Klaff management contracts.
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
Notes Notes
Core Self-Storage Receivable Core Self-Storage Receivable
(dollars in millions) Portfolio Opportunity Funds Portfolio and Other Portfolio Opportunity Funds Portfolio and Other
Property operating $ 8.6 $ 7.4 $ 5.8 $ (0.8 ) $ 7.7 $ 5.1 $ 3.2 $ (0.3 )
Real estate taxes 7.0 3.8 1.5 - 6.7 1.5 0.9 -
General and administrative 18.3 10.1 0.1 (11.9 ) 19.9 13.5 0.1 (14.4 )
Depreciation and amortization 13.2 12.2 3.2 (1.2 ) 12.6 6.7 2.0 -
Abandonment of project costs - 2.5 - - - - - -
Reserve for notes receivable - - - 1.7 - - - -
Total operating expenses $ 47.1 $ 36.0 $ 10.6 $ (12.2 ) $ 46.9 $ 26.8 $ 6.2 $ (14.7 )
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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 as well as Fordham and Pelham. 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 to enhance the accuracy and timeliness of reporting. Accordingly, the nine months ended September 30, 2008 reflects eight months of storage activity while the nine months ended September 30, 2009 reflects nine months of storage activity.
The increase in real estate taxes in the Opportunity Funds was attributable to the 2009 Fund Acquisition. The increase in real estate taxes in the Storage Portfolio relates to the 2008 Storage Acquisition as well as the Company's election in 2008 to report the Storage Portfolio activity one month in arrears.
The decrease in general and administrative expense in the Core Portfolio was primarily attributable to reduced compensation expense following staff reductions in the second half of 2008 and in the first half of 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 primarily 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 $1.2 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 primarily as a result of lower amortization expense in 2009 associated with the Klaff management contracts offset by increased amortization related to the write-off of lease intangible costs in connection with a terminated lease. Depreciation expense increased $3.6 million and amortization expense increased $1.9 million in the Opportunity Funds primarily due to the 2009 Fund Acquisition as well as Fordham and Pelham. Depreciation expense and amortization expense increased $1.2 million in the Storage Portfolio primarily as a result of the 2008 Storage Acquisition as . . .
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