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2017 ANNUAL REPORT
PMS 186
Black
299 C
60K
PMS 654 C
PMS 5415 C
turning
the page
TO OUR SHAREHOLDERS
A s I reflect on our five-year company transformation, I am
overcome with pride. While preserving shareholder value, we
transformed our portfolio, strengthened our balance sheet, and
solidified our organizational platform. We hired and retained incredibly
talented people and built a sizable, growing development pipeline.
We have materially improved our company across several indicative
quality measures: population, household income, super-zip locations,
contractual rent increases, re-leasing spreads, leverage, coverage ratios,
and unencumbered NOI. Our execution has been timely and disciplined,
but, more importantly, our high quality portfolio is well-aligned with the
new retail paradigm of owning well-located real estate in the top MSAs
driven by density, discretionary spend, convenience, and experience.
At the core of our success is a world-class team of high performers, an
empowering culture, and a vision shared across the entire organization.
Before I turn the page and discuss RPAI’s next chapter, let’s take a
moment to celebrate our tremendous accomplishments in 2017, which
capped off our five-year journey.
The Culmination of Our Efforts
In 2017, we continued to drive rents and upgrade tenancy, which was highlighted by our full year blended re-
leasing spreads of over 10%, a high-water mark for us. We began to showcase our development capabilities
and portfolio potential in the Washington, D.C./ Baltimore corridor with the completion of major construction
at our Reisterstown Road Plaza project and the groundbreaking at our Towson Circle mixed-use project. We
continued to strengthen our balance sheet by lowering our net debt to adjusted EBITDA to 5.5x and increased
our unencumbered NOI ratio to 85%. We were textbook stewards of capital, with asset sales totaling $918
million, another high-water mark for us, and we redeployed $430 million of the proceeds for asset acquisitions
and stock repurchases, while using the balance to reduce debt and redeem our preferred equity. Our balance
sheet is best in class and positions us to be opportunistic, with less than 10% of our debt coming due through
2020. Our efforts in 2017 have culminated in a company that sits near the top of several indicative quality
metrics and is well positioned to thrive in any environment.
SuperZip - % of Value
(as of 12/31/2017)
36%
33%
25%
18%
17%
14%
12% 11% 10%
8%
40%
35%
30%
25%
20%
15%
10%
5%
40%
35%
30%
25%
20%
15%
10%
5%
% Value in Lifestyle / Street-Level Retail
(as of 12/31/2017)
35% 35%
23%
6%
4%
2% 2% 2% 1% 0%
FRT RPAI REG WRI AAT KIM DDR ROIC BRX UE
RPAI FRT AAT REG DDR KIM UE WRI BRX ROIC
Source: Green Street Advisors
Source: Green Street Advisors
Today’s Economic and Retail Reality
Unemployment is low, consumer confidence is high and
lack relevance but we are confident, on a relative basis,
the new tax reform bill should offer a derivative benefit
that it will be less impactful to RPAI due to our limited
to retail. The sentiment on retail feels much better than
exposure to struggling department stores and apparel
just a year ago. Holiday sales were the strongest since
retailers. As we have demonstrated in the past, we will
2010, with bricks and mortar up 4% over last year. It is
continue to diversify our tenancy and play offense with
becoming more apparent that high-quality bricks-and-
at-risk categories, focusing on leasing to retailers that
mortar real estate locations represent the best profit
use bricks-and-mortar locations as core to their strategy.
margin for retailers. One doesn’t need to look any further
In fact, despite shrinking our retail ABR by approximately
than Amazon’s acquisition of Whole Foods to validate
20% over the past five years, we have decreased our top
this point. Early indications in 2018 are that retailers are
20 retailer concentration to 29%, a reduction of more
more focused on internal improvements such as their in-
than 9% over the same period. Our high-quality and well-
store experience and use of consumer analytics, rather
located portfolio is well-aligned with the new retail reality,
than closing locations. However, we acknowledge that
and we are confident that we can continue to upgrade
we will continue to experience attrition with retailers that
tenancy and drive rent over the long-term.
Total Stock Performance
n
r
u
t
e
R
l
a
t
o
T
d
e
x
e
d
n
I
$300
$270
$240
$210
$180
$150
$120
$90
6/17
9/17
12/17
12/12
3/13
6/13
9/13
12/13 3/14
6/14
9/14
12/14
3/15
6/15
9/15
12/15
3/16
6/16
9/16
12/16
3/17
RPAI Bloomberg REIT Shopping Center Index MSCI US REIT Index (RMS) Standard & Poor’s 500 Index
Cumulative Total Stockholder Returns for RPAI’s Class A Common Stock versus the Bloomberg REIT Shopping Center Index, MSCI US REIT Index (RMS) and the Standard & Poor’s 500
Index during the period beginning December 31, 2012 through December 31, 2017. The graph assumes a $100 investment in each of the indices on December 31, 2012, and the reinvestment
of all dividends. Source: Bloomberg
Turning the Page
After five years of portfolio recycling, where we
highly concentrated portfolio of class-A assets and
disposed of approximately 60% of our assets, the
accretive mixed-use redevelopment opportunities.
heavy lifting of our company’s transformation is
We expect to GROW earnings through
leasing,
complete. It’s time to turn the page and focus inward
redevelopment, and prudent cost management. We
on growth opportunities to drive long-term value for
expect to MAINTAIN our investment-grade balance
our shareholders. We believe the quality and relevance
sheet flexibility and low leverage in order to remain
of our portfolio in 2018 will be demonstrated through
nimble, yet disciplined, when allocating capital. We
our strong same store NOI growth and near-term
expect to INVEST in the right real estate and our
significant densification opportunities. Today, our
platform with an intense focus on talent development.
redevelopment pipeline is over $400 million, and I
These are the foundations of our strategy.
certainly expect it to grow as we refine the scope at
a handful of our mixed-use development projects. By
the end of 2018, we expect to share detailed plans
and identify residential partners for two of our mixed-
use projects, including One Loudoun Downtown and
Boulevard at the Capital Centre, both located in the
Our board of directors, executive management and
world-class team are keenly focused on the next phase
for RPAI, and I have the utmost confidence that we will
continue to be The Best in Retail. From Every Angle.
Washington, D.C. market. In 2018, we expect to spend
Sincerely,
approximately $35 million on redevelopment, with a
goal to deploy $50 to $100 million on an annualized
basis over the long-term.
Moving forward, our conviction and proven ability to
execute will ensure our continuing success. We expect
Steven P. Grimes
to CREATE long-term shareholder value through a
President & Chief Executive Officer
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-35481
RETAIL PROPERTIES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of incorporation or organization)
42-1579325
(I.R.S. Employer Identification No.)
2021 Spring Road, Suite 200, Oak Brook, Illinois
(Address of principal executive offices)
60523
(Zip Code)
(630) 634-4200
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $.001 par value
Name of each exchange on which registered
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
Title of class
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or
for such shorter period that the registrant was required to submit and post such files). Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company,
or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
(Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with
any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
No
As of June 30, 2017, the aggregate market value of the Class A common stock held by non-affiliates was approximately $2.8 billion based upon
the closing price as reported on the New York Stock Exchange on June 30, 2017 of $12.21 per share. (For this computation, the Registrant has
excluded the market value of all shares of Class A common stock reported as beneficially owned by executive officers and directors of the
Registrant. Such exclusion shall not be deemed to constitute an admission that any such person is an affiliate of the Registrant.)
Number of shares outstanding of the registrant’s classes of common stock as of February 9, 2018:
Class A common stock:
219,425,764 shares
DOCUMENTS INCORPORATED BY REFERENCE
Certain information contained in the Registrant’s Proxy Statement relating to its Annual Meeting of Stockholders to be held on May 24, 2018 is
incorporated by reference in Items 10, 11, 12, 13 and 14 of Part III. The Registrant intends to file such Proxy Statement with the Securities and
Exchange Commission no later than 120 days after the end of its fiscal year ended December 31, 2017.
RETAIL PROPERTIES OF AMERICA, INC.
TABLE OF CONTENTS
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
PART II
Item 6.
Selected Financial Data
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
PART III
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions and Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Item 16. Form 10-K Summary
SIGNATURES
1
5
19
19
21
21
22
24
26
54
56
107
107
109
109
109
109
109
109
110
112
113
All dollar amounts and share amounts in this Form 10-K in Items 1. through 7A. are stated in thousands with the exception of per
share amounts. In this report, all references to “we”, “our” and “us” refer collectively to Retail Properties of America, Inc. and
its subsidiaries.
PART I
ITEM 1. BUSINESS
General
Retail Properties of America, Inc. is a real estate investment trust (REIT) that owns and operates high quality, strategically located
shopping centers in the United States. As of December 31, 2017, we owned 112 retail operating properties representing 20,265,000
square feet of gross leasable area (GLA). Our retail operating portfolio includes (i) neighborhood and community centers, (ii)
power centers, and (iii) lifestyle centers and multi-tenant retail-focused mixed-use properties, as well as single-user retail properties.
The following table summarizes our operating portfolio as of December 31, 2017:
Property Type
Operating portfolio:
Multi-tenant retail
Neighborhood and community centers
Power centers
Lifestyle centers and mixed-use properties
Total multi-tenant retail
Single-user retail
Total retail operating portfolio
Office
Total operating portfolio (b)
Number of
Properties
GLA
(in thousands)
Occupancy
Percent Leased
Including Leases
Signed (a)
58
34
15
107
5
112
1
113
8,418
7,670
3,797
19,885
380
20,265
895
21,160
93.0%
95.3%
92.8%
93.8%
100.0%
93.9%
23.8%
91.0%
93.7%
96.2%
94.4%
94.8%
100.0%
94.9%
46.1%
92.8%
(a) Includes leases signed but not commenced.
(b) Excludes one single-user retail operating property classified as held for sale as of December 31, 2017.
In addition to our operating portfolio, as of December 31, 2017, we owned two properties that were in active redevelopment and
one property where we have begun activities in anticipation of future redevelopment.
Operating History
We are a Maryland corporation formed in March 2003 and have been publicly held and subject to U.S. Securities and Exchange
Commission (SEC) reporting requirements since 2003. We were initially formed as Inland Western Retail Real Estate Trust, Inc.
and on March 8, 2012, we changed our name to Retail Properties of America, Inc.
Business Objectives and Strategies
In 2012, management began transforming our portfolio in an effort to focus the portfolio on high quality, multi-tenant retail
properties. The core objective of this effort was to become a prominent owner of multi-tenant retail properties primarily located
in certain markets. We believe that a geographically focused portfolio allows us to optimize our operating platform and enhance
our operating performance. The markets we identified include: Dallas, Washington, D.C./Baltimore, New York, Chicago, Seattle,
Atlanta, Houston, San Antonio, Phoenix and Austin, which generally feature one or more of the following characteristics:
• well-diversified local economy;
•
•
•
strong demographic profile with significant long-term population growth or above-average existing density, high
disposable income and/or a highly educated employment base;
fiscal and regulatory environment conducive to business activity and growth;
strong barriers to entry, whether topographical, regulatory or density driven; and
1
•
ability to create critical mass and realize operational efficiencies.
Since the beginning of 2012, we have sold 206 properties for aggregate consideration of $3,214,763, including our pro rata share
of unconsolidated joint ventures and three development properties, with a majority of the proceeds used for the acquisition of high
quality, multi-tenant retail assets, debt reduction and repurchases of our common stock. Since we began executing on our external
growth initiatives in the fourth quarter of 2013, we have purchased 33 properties for aggregate consideration of $1,590,647,
including our pro rata share of unconsolidated joint ventures. As a result of these efforts, we have strengthened our portfolio and
balance sheet and have geographically focused our portfolio, with approximately 84% of our multi-tenant retail annualized base
rent (ABR) as of December 31, 2017 in the top 25 metropolitan statistical areas (MSAs), as determined by the United States Census
Bureau and ranked based on the most recently available population estimates. Subject to favorable market conditions, among other
factors, we expect to effectively complete our portfolio transformation in early 2018 and moving forward, we expect to maximize
value through mixed-use redevelopment, leasing and opportunistic, accretive property recycling.
Competition
In seeking new investment opportunities, we compete with other real estate investors, including other REITs, pension funds,
insurance companies, foreign investors, real estate partnerships, private equity funds, private individuals and other real estate
companies.
From an operational perspective, we compete with other property owners on a variety of factors, including, but not limited to,
location, visibility, quality and aesthetic value of construction, and strength and name recognition of tenants. These factors combine
to determine the level of occupancy and rental rates that we are able to achieve at our properties. Because our revenue potential
may be linked to the success of retailers, we indirectly share exposure to the same competitive factors that our retail tenants
experience when trying to attract customers. These factors include other forms of retailing, including e-commerce and direct
consumer sales, and general competition from other regional shopping centers. To remain competitive, we evaluate all of the factors
affecting our centers and work to position them accordingly. We believe the principal factors that retailers consider in making their
leasing decisions include:
•
•
•
consumer demographics;
quality, design and location of properties;
diversity of retailers within individual shopping centers;
• management and operational expertise of the landlord; and
•
rental rates.
Based on these factors, we believe that the size and scope of our property portfolio and operating platform, as well as the overall
quality and attractiveness of our individual properties, enable us to compete effectively for retail tenants. We believe that our
geographically-focused strategy enhances our ability to drive revenue growth by more thoroughly understanding the local market
dynamics and by increasing our market relevancy.
Tax Status
We have elected to be taxed as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended, or the
Code. To maintain our qualification as a REIT, we must meet a number of organizational and operational requirements, including
a requirement that we annually distribute to our shareholders at least 90% of our REIT taxable income, determined without regard
to the dividends paid deduction and excluding net capital gains. As a REIT, we generally are not subject to U.S. federal income
tax on the taxable income we distribute to our shareholders. If we fail to qualify as a REIT in any taxable year, we will be subject
to U.S. federal income tax at the generally applicable corporate tax rate. Even if we qualify for taxation as a REIT, we may be
subject to certain state and local taxes on our income, property or net worth and U.S. federal income and excise taxes on our
undistributed income. We have one wholly-owned consolidated subsidiary that has jointly elected to be treated as a taxable REIT
subsidiary, or TRS, for U.S. federal income tax purposes. A TRS is taxed on its net income at the generally applicable corporate
tax rate. The income tax expense incurred through the TRS has not had a material impact on our consolidated financial statements.
2
Regulation
General
The properties in our portfolio, including common areas, are subject to various laws, ordinances and regulations.
Americans with Disabilities Act (ADA)
Our properties must comply with Title III of the ADA to the extent that such properties are “public accommodations” as defined
by the ADA. The ADA may require removal of structural barriers to allow access by persons with disabilities in certain public
areas of our properties where such removal is readily achievable. We believe our existing properties are substantially in compliance
with the ADA and that we will not be required to incur significant capital expenditures to address the requirements of the ADA.
Refer to Item 1A. “Risk Factors” for more information regarding compliance with the ADA.
Environmental Matters
Under various federal, state and local laws, ordinances and regulations, as a current or former owner or operator of real property,
we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste, or petroleum
products at, on, in, under or from such property, including costs for investigation, remediation, natural resource damages or third
party liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or
operator knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several.
Independent environmental consultants conducted Phase I Environmental Site Assessments or similar environmental audits for
all of our investment properties. A Phase I Environmental Site Assessment is a written report that identifies existing or potential
environmental conditions associated with a particular property. These environmental site assessments generally involve a review
of records and visual inspection of the property, but do not include soil sampling or ground water analysis. These environmental
site assessments have not revealed, nor are we aware of, any environmental liability that we believe will have a material adverse
effect on our operations. Refer to Item 1A. “Risk Factors” for more information regarding environmental matters.
Insurance
We carry comprehensive liability and property insurance coverage inclusive of fire, extended coverage, earthquakes, terrorism
and loss of income insurance covering all of the properties in our portfolio under a blanket policy. We believe the policy specifications
and insured limits are appropriate given the relative risk of loss, the cost of the coverage and industry practice. We believe that the
properties in our portfolio are adequately insured. Terrorism insurance is carried on all properties in an amount and with deductibles
that we believe are commercially reasonable. Refer to Item 1A. “Risk Factors” for more information. The terrorism insurance is
subject to exclusions for loss or damage caused by nuclear substances, pollutants, contaminants and biological and chemical
weapons. Insurance coverage is not provided for losses attributable to riots or certain acts of God.
Employees
As of December 31, 2017, we had 220 employees.
Access to Company Information
We make available, free of charge, through our website and by responding to requests addressed to our investor relations group,
our Annual Report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K including exhibits and all
amendments to those reports and proxy statements filed or furnished pursuant to 13(a) or 15(d) of the Securities Exchange Act of
1934, as amended. These reports are available as soon as reasonably practical after such material is electronically filed or furnished
to the SEC. Our website address is www.rpai.com. The information contained on our website, or other websites linked to our
website, is not part of this document. Our reports may also be obtained by accessing the EDGAR database at the SEC’s website
at www.sec.gov.
Shareholders wishing to communicate directly with our board of directors or any committee thereof can do so by writing to the
attention of the Board of Directors or applicable committee in care of Retail Properties of America, Inc. at 2021 Spring Road,
Suite 200, Oak Brook, Illinois 60523.
3
Recent Tax Legislation
The recently enacted H.R. 1, informally titled as the “Tax Cuts and Jobs Act” (TCJA), generally applicable for tax years beginning
after December 31, 2017, made significant changes to the Code, including a number of provisions of the Code that affect the
taxation of businesses and their owners, including REITs and their shareholders, and, in certain cases, that modify the tax rules.
Among other changes, the TCJA made the following changes:
•
•
•
•
•
•
•
•
•
for tax years beginning after December 31, 2017 and before January 1, 2026, (i) the U.S. federal income tax rates on
ordinary income of individuals, trusts and estates have been generally reduced and (ii) non-corporate taxpayers are
permitted to take a deduction for certain pass-through business income, including dividends received from REITs that
are not designated as capital gain dividends or qualified dividend income, subject to certain limitations;
the maximum withholding rate on distributions by us to non-U.S. shareholders that are treated as attributable to gain from
the sale or exchange of a U.S. real property interest is reduced from 35% to 21%;
a U.S tax-exempt shareholder that is subject to tax on its unrelated business taxable income (UBTI) will be required to
separately compute its taxable income and loss for each unrelated trade or business activity for purposes of determining
its UBTI;
the maximum U.S. federal income tax rate for corporations has been reduced from 35% to 21% and the corporate alternative
minimum tax has been eliminated, which would generally reduce the amount of U.S. federal income tax payable by any
taxable REIT subsidiary (TRS) that we own or form and by us to the extent we were subject to corporate U.S. federal
income tax (for example, if we distributed less than 100% of our taxable income or recognized built-in gains in assets
acquired from C corporations);
certain new limitations on net operating losses now apply; such limitations may affect net operating losses generated by
us or any TRS that we own or form;
new limitations on the deductibility of interest expense may apply, including a new limitation on the deductibility of net
business interest expense of up to 30% of our adjusted taxable income, and such limitations may affect the deductibility
of interest paid or accrued by us or any TRS that we own or form. At the taxpayer’s election, the 30% of adjustable taxable
income limitation does not apply to business interest of a real property trade or business (RPTOB). If the RPTOB election
is made, it is irrevocable and the alternative depreciation system (ADS) must be used for non-residential real property,
residential rental property and qualified improvement property held by the taxpayer;
there is no change to the depreciable lives for non-residential property (remains at 40 years). It appears Congress intended
to (i) reduce the ADS recovery period of qualified improvement property to 20 years (generally previously 39 years) and
(ii) provide 100% bonus depreciation for qualified improvement property expenditures through 2022 (with such bonus
depreciation being phased down beginning in 2023 through 2026), but it also appears that unless Congress passes technical
corrections to the TCJA, such reduced ADS recovery period and 100% bonus depreciation property will not be available.
In addition, bonus depreciation is not applicable for the class lives required to use ADS (such as when the RPTOB election
is made). The changes to depreciable lives and bonus depreciation may impact our depreciation deduction;
generally starting with compensation paid in 2018, Code Section 162(m) will limit the deduction of compensation,
including performance-based compensation, in excess of $1,000 paid to anyone who serves as the principal executive
officer or chief financial officer, or who is among the three most highly compensated executive officers for any taxable
year. This change expanded the limitation to include the principal financial officer and continues after separation of
service. Therefore, there may be an increase in the amount of compensation we provide to our executive officers that may
not be deductible; and
the timing of recognition of certain income items for U.S. federal income tax purposes has changed to generally require
us to recognize income items no later than when we take the item into account for financial statement purposes, which
may accelerate our recognition of certain income items.
This summary does not purport to be a detailed discussion of the changes to U.S. federal income tax laws as a result of the enactment
of the TCJA. Technical corrections or other amendments to the TCJA or administrative guidance interpreting the TCJA may be
forthcoming at any time. We cannot predict the long-term effect of the TCJA or any future law changes on REITs or their shareholders.
Shareholders are urged to consult their own tax advisors regarding the effect of the TCJA based on their particular circumstances.
4
Taxation of Non-U.S. Holders of Debt Securities
For debt securities held by a non-U.S. debt holder that is not an individual, the IRS Form W-8BEN has been replaced by the IRS
Form W-8BEN-E. Further, the IRS Form W-8BEN or IRS Form W-8BEN-E (as applicable) is generally effective for the remainder
of the year of signature plus three full calendar years unless a change in circumstances renders any information on the form incorrect
and is effective beyond such three calendar years only if, in addition to the absence of any change in circumstances makes any
information on the form incorrect, the non-U.S. debt holder satisfies certain requirements specified in the applicable Treasury
regulations.
ITEM 1A. RISK FACTORS
In evaluating our company, careful consideration should be given to the following risk factors, in addition to the other information
included in this annual report. Each of these risk factors could adversely affect our business operating results and/or financial
condition, as well as adversely affect the value of our common stock or unsecured debt. In addition to the following disclosures,
please refer to the other information contained in this report including the accompanying consolidated financial statements and
the related notes.
RISKS RELATED TO OUR BUSINESS AND OUR PROPERTIES
There are inherent risks associated with real estate investments and the real estate industry, any of which could have an adverse
impact on our financial performance and the value of our properties.
Real estate investments are subject to various risks, many of which are beyond our control. Our operating and financial performance
and the value of our properties can be affected by many of these risks, including, but not limited to, the following:
•
•
•
•
•
•
•
•
•
national, regional and local economies, which may be negatively impacted by inflation, deflation, government deficits,
high unemployment rates, severe weather or other natural disasters, decreased consumer confidence, industry slowdowns,
reduced corporate profits, lack of liquidity and other adverse business conditions;
local real estate conditions, such as an oversupply of retail space or a reduction in demand for retail space, resulting in
vacancies or compromising our ability to rent space on favorable terms;
the convenience and quality of competing retail properties and other retailing platforms such as the internet;
adverse changes in the financial condition of tenants at our properties, including financial difficulties, lease defaults or
bankruptcies;
competition for investment opportunities from other real estate investors with significant capital, including other REITs,
real estate operating companies and institutional investment funds;
the illiquid nature of real estate investments, which may limit our ability to sell properties at the terms desired or at terms
favorable to us;
fluctuations in interest rates and the availability of financing, which could adversely affect our ability and the ability of
potential buyers and tenants at our properties to obtain financing on favorable terms or at all;
changes in, and changes in the enforcement of, laws, regulations and governmental policies, including, without limitation,
health, safety, environmental, zoning and tax laws, government fiscal policies and the ADA; and
civil unrest, acts of war, terrorist attacks and natural disasters, including earthquakes, hurricanes and floods, which may
result in uninsured and underinsured losses.
During a period of economic slowdown or recession, or the public perception that such a period may occur, declining demand for
real estate could result in a general decline in rents or an increase in the number of defaults among our existing tenants, and,
consequently, our properties may fail to generate revenues sufficient to meet operating, debt service and other expenses. As a
result, we may have to borrow funds to cover fixed costs, and our cash flow, financial condition and results of operations could
be adversely affected. As such, the per share trading price of our Class A common stock, the market price of our debt securities
and our ability to satisfy our principal and interest obligations and make distributions to our shareholders may be adversely affected.
5
Our financial condition and results of operations could be adversely affected by poor economic or market conditions where
our properties are located, especially in markets where we have a high concentration of properties.
The economic conditions in markets where our properties are concentrated greatly influence our financial condition and results
of operations. We are particularly susceptible to adverse economic and other developments in such areas, including increased
unemployment, industry slowdowns, corporate layoffs or downsizing, relocations of businesses, decreased consumer confidence,
adverse changes in demographics, increases in real estate and other taxes, increased regulation and natural disasters. As of
December 31, 2017, approximately 78.9% of our GLA and approximately 82.2% of our ABR in our retail operating portfolio was
from 15 of the top 25 MSAs, including amounts attributable to our redevelopments, and we may continue to increase our
concentration in these markets if favorable market conditions exist. Notably, approximately 33.6% of our GLA and approximately
34.9% of our ABR in our retail operating portfolio was located in the state of Texas as of December 31, 2017. Poor economic or
market conditions in markets where our properties are located, including those in Texas, may adversely affect our cash flow,
financial condition and results of operations.
A shift in retail shopping from brick and mortar stores to online shopping may have an adverse impact on our cash flow,
financial condition and results of operations.
Many retailers operating brick and mortar stores have made online sales a vital piece of their business. Although many of the
retailers operating at our properties sell groceries and other necessity-based soft goods or provide services, including entertainment
and dining options, the shift to online shopping may cause declines in brick and mortar sales generated by certain of our tenants
and/or may cause certain of our tenants to reduce the size or number of their retail locations in the future. As a result, our cash
flow, financial condition and results of operations could be adversely affected.
We may choose not to renew leases or be unable to renew leases, lease vacant space or re-lease space as leases expire. In
addition, rents associated with new or renewed leases may be less than expiring rents (lease roll-down) or, to facilitate leasing,
we may choose to incur significant capital expenditures to improve our properties, which could adversely affect our cash flow,
financial condition and results of operations.
Approximately 5.1% of the total GLA in our retail operating portfolio was vacant as of December 31, 2017, excluding leases
signed but not commenced. In addition, as of December 31, 2017, leases accounting for approximately 35.8% of the ABR in our
retail operating portfolio are scheduled to expire within the next three years. We may choose not to renew leases based on various
strategic factors such as operating strength of the occupying tenant, its retail category, merchandising composition of the property,
other leasing opportunities available to us or redevelopment plans for the property. In our efforts to lease space, we compete with
numerous developers, owners and operators of retail properties, many of whom own properties similar to, and in the same sub-
markets as, our properties. As a result, we cannot assure you that leases will be renewed or that current or future vacancies will
be re-leased at rental rates equal to or above the current average rental rates without significant down time, or that substantial rent
abatements, tenant improvements, lease inducements, early termination and co-tenancy rights or below-market renewal options
will not be offered to attract new tenants or retain existing tenants. Additionally, we may incur significant capital expenditures or
accommodate requests for renovations and other improvements to make our properties more attractive to tenants. If we choose
not to or are unable to renew existing leases, lease vacant space or re-lease space as leases expire, or if rents associated with new
or renewed leases are less than expiring rents or we incur significant capital expenditures to improve our properties, our cash flow,
financial condition and results of operations could be adversely affected.
Our inability to collect rents from tenants or collect balances due on our leases from any tenants in bankruptcy or experiencing
other significant financial hardship may negatively impact our cash flow, financial condition and results of operations.
Substantially all of our income is derived from rentals of real property. If sales generated by retailers operating at our properties
decline sufficiently or if tenants encounter other significant financial hardships, they may be unable to pay their existing minimum
rents or other charges. Tenants may also decline to extend or renew a lease upon its expiration on terms favorable to us, or at all,
or may even exercise early termination rights to the extent available. If a significant number of our tenants are unable to make
their rental payments to us or otherwise meet their lease obligations, our cash flow, financial condition and results of operations
may be materially adversely affected. In addition, although minimum rent is generally supported by long-term lease contracts,
tenants who file bankruptcy have the legal right to reject any or all of their leases and close their stores. In the event that a tenant
with a significant number of leases at our properties files bankruptcy and rejects its leases, we could experience a significant
reduction in our revenues and we may not be able to collect all pre-petition amounts owed, which could adversely affect our cash
flow, financial condition and results of operations.
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If any of our anchor tenants experience a downturn in their business or terminate their leases, our cash flow, financial condition
and results of operations could be adversely affected.
Anchor tenants occupy a significant amount of the square footage and pay a significant portion of the total rent in our retail operating
portfolio. Specifically, our 20 largest tenants based on ABR represent 37.5% of occupied GLA and 29.2% of ABR as of December 31,
2017. In addition, anchor tenants and “shadow” anchors, or retailers in or adjacent to our properties that occupy space we do not
own, contribute to the success of other tenants by drawing customers to a property. The bankruptcy, insolvency or downturn in
business of any of our anchor tenants could result in another tenant vacating its space, defaulting on its lease obligations, terminating
its lease, exercising co-tenancy rights or renewing its lease at lower rental rates. As a result, our cash flow, financial condition and
results of operations could be adversely affected.
If small shop tenants are not successful and, consequently, terminate their leases, our cash flow, financial condition and results
of operations could be adversely affected.
Small shop tenants, those that occupy less than 10,000 square feet, in our retail operating portfolio represent 31.7% of occupied
GLA, but 48.1% of ABR as of December 31, 2017. Such tenants may have more limited resources than larger tenants and, as a
result, may be more vulnerable to negative economic conditions. If a significant number of our small shop tenants experience
financial difficulties or are unable to remain open, our cash flow, financial condition and results of operations could be adversely
affected.
Many of the leases at our retail properties contain provisions, which, if triggered, may allow tenants to pay reduced rent, cease
operations or terminate their leases, any of which could adversely affect our cash flow, financial condition and results of
operations.
Some anchor tenants have the right to vacate their space and continue to pay rent through the end of their lease term, which inhibits
our ability to re-lease the space during that period. Additionally, many of the leases at our retail properties contain provisions that
condition a tenant’s obligation to remain open, the amount of rent payable by the tenant or potentially its obligation to remain in
the lease, on certain factors, including (i) the presence and continued operation of a certain anchor tenant or tenants, (ii) minimum
occupancy levels at the applicable property or (iii) the amount of tenant sales. If such a provision is triggered by a failure of any
of these or other applicable conditions, a tenant could have the right to cease operations at the applicable property, have its rent
reduced or terminate its lease early. A tenant ceasing operations as a result of these provisions could cause a decrease in customer
traffic and, therefore, decreased sales for other tenants at that property. To the extent these provisions result in lower revenue, our
cash flow, financial condition and results of operations could be adversely affected.
Our expenses may remain constant or increase, even if income from our properties decreases, causing our cash flow, financial
condition and results of operations to be adversely affected.
Certain costs associated with our business, such as real estate taxes, state and local taxes, insurance, utilities, mortgage payments
and corporate expenses, are relatively inflexible and generally do not decrease when (i) a property’s occupancy decreases, (ii)
rental rates decrease, (iii) a tenant fails to pay rent or (iv) other circumstances cause our revenues to decrease. If we are unable to
reduce our operating costs in response to declines in revenue, our cash flow, financial condition and results of operations could
be adversely affected. In addition, inflationary or other price increases could result in increased operating costs and increases in
assessed valuations or changes in tax rates could result in increased real estate taxes for us and our tenants. The extent to which
we are unable to fully recover such increases in operating expenses and real estate taxes from our tenants, our cash flow, financial
condition and results of operations could be adversely affected.
We depend on external sources of capital that are outside of our control, which may affect our ability to execute on strategic
opportunities, satisfy our debt obligations and make distributions to our shareholders.
In order to maintain our qualification as a REIT, under the Code, we are generally required to annually distribute to our shareholders
at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital
gains. In addition, as a REIT, we will be subject to income tax at the generally applicable corporate rate to the extent that we
distribute less than 100% of our REIT taxable income, including any net capital gains. Because of these distribution requirements,
we may not be able to fund future capital needs (including redevelopment and acquisition activities, payments of principal and
interest on our existing debt, tenant improvements and leasing costs) from operating cash flow. Consequently, we may rely on
third party sources to fund our capital needs. We may not be able to obtain the necessary capital on favorable terms, in the time
period we desire, or at all. Additional debt we incur may increase our leverage, expose us to the risk of default and impose operating
restrictions on us, and any additional equity we raise could be dilutive to existing shareholders. Our access to third party sources
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of capital depends, in part, on general market conditions, the market’s view of the quality of our assets, operating platform and
growth potential, our current debt levels, and our current and expected future earnings, cash flow and distributions to our
shareholders. If we cannot obtain capital from third-party sources, we may be unable to acquire or redevelop properties when
strategic opportunities exist, satisfy our principal and interest obligations or make cash distributions to our shareholders necessary
to maintain our qualification as a REIT.
We may be unable to sell a property at the time we desire and on favorable terms or at all, which could limit our ability to access
capital through dispositions and could adversely affect our cash flow, financial condition and results of operations.
Real estate investments generally cannot be sold quickly. Our ability to dispose of properties on advantageous terms depends on
factors beyond our control, including (i) competition from other sellers, (ii) increases in market capitalization rates and (iii) the
availability of attractive financing for potential buyers of our properties, and we cannot predict the market conditions affecting
real estate investments that will exist at any particular time in the future. As a result of the uncertainty of market conditions, we
cannot provide any assurance that we will be able to sell properties at a profit, or at all. In addition, and subject to certain safe
harbor provisions, the Code generally imposes a 100% tax on gain recognized by REITs upon the disposition of assets if the assets
are held primarily for sale in the ordinary course of business, rather than for investment, which may cause us to forego or defer
sales of properties that otherwise would be attractive from a pre-tax perspective. Accordingly, our ability to access capital through
dispositions may be limited, which could limit our ability to fund future capital needs.
We may be unable to complete acquisitions and even if acquisitions are completed, our operating results at acquired properties
may not meet our financial expectations.
We continue to evaluate the market of available properties and expect to continue to acquire properties when we believe strategic
opportunities exist. Our ability to acquire properties on favorable terms and successfully operate or develop them is subject to the
following risks:
• we may be unable to acquire a desired property because of competition from other real estate investors with substantial
capital, including other REITs, real estate operating companies and institutional investment funds;
•
even if we are able to acquire a desired property, competition from other potential investors may significantly increase
the purchase price;
• we may incur significant costs and divert management attention in connection with the evaluation and negotiation of
potential acquisitions, including ones that are subsequently not completed;
• we may be unable to finance acquisitions on favorable terms and in the time period we desire, or at all;
• we may be unable to quickly and efficiently integrate newly acquired properties, particularly the acquisition of portfolios
of properties, into our existing operations;
• we may acquire properties that are not initially accretive to our results and we may not successfully manage and lease
those properties to meet our expectations; and
• we may acquire properties that are subject to liabilities without any recourse, or with only limited recourse to former
owners, with respect to unknown liabilities for clean-up of undisclosed environmental contamination, claims by tenants
or other persons to former owners of the properties and claims for indemnification by general partners, directors, officers
and others indemnified by the former owners of the properties.
If we are unable to acquire properties on favorable terms, obtain financing in a timely manner and on favorable terms, or operate
acquired properties to meet our financial expectations, our cash flow, financial condition and results of operations could be adversely
affected.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority.
As of December 31, 2017, we had no properties held in joint ventures. Any joint venture arrangements in which we may engage
in the future could be subject to various risks including, among others, (i) lack of exclusive control over the joint venture, which
may prevent us from taking actions that are in our best interest, (ii) future capital constraints of our partners, which may require
us to contribute more capital than we anticipated to cover the joint venture’s liabilities, (iii) actions by our partners that could
jeopardize our REIT status or the tax status of the joint venture, requiring us to pay taxes or subject the properties owned by the
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joint venture to liabilities greater than those contemplated by the terms of the joint venture agreements, and (iv) disputes between
us and our partners, which could result in litigation or arbitration that would increase our expenses and require our officers and/
or directors to focus a disproportionate amount of their time and effort on the joint venture. If any of the foregoing were to occur,
our cash flow, financial condition and results of operations could be adversely affected.
Development, redevelopment, expansions and pad development activities have inherent risks that could adversely impact our
cash flow, financial condition and results of operations.
As of December 31, 2017, we had two properties in active redevelopment, Reisterstown Road Plaza and Towson Circle. We have
invested a total of approximately $20,600 in these projects, which are at various stages of completion, and based on our current
plans and estimates, we anticipate that to complete these projects, it will require an additional $21,900 to $24,900, net of proceeds
from land sales, sales of air rights, reimbursement from third parties and contributions from a project partner, as applicable. We
anticipate engaging in additional redevelopment, expansions and pad development of commercial retail space and residential units
in the future. In addition to the risks associated with real estate investments in general as described elsewhere, the risks associated
with future development, redevelopment, expansions and pad development activities include the following:
•
•
•
•
•
•
•
•
expenditure of capital and time on projects that may never be completed;
failure or inability to obtain financing on favorable terms or at all;
inability to secure necessary zoning or regulatory approvals;
higher than estimated construction or operating costs, including labor and material costs;
inability to complete construction on schedule due to a number of factors, including (i) inclement weather, (ii) labor
disruptions, (iii) construction delays, (iv) delays or failure to receive zoning or other regulatory approvals, (v) acts of
terror or other acts of violence, or (vi) acts of God (such as fires, earthquakes, hurricanes or floods);
significant time lag between commencement and stabilization resulting in delayed returns and greater risks due to
fluctuations in the general economy, shifts in demographics and competition;
decrease in customer traffic during the redevelopment period causing a decrease in tenant sales;
inability to secure key anchor or other tenants for commercial retail projects or complete the lease-up of residential units
at anticipated absorption rates or at all; and
•
occupancy and rental rates at a newly completed project may not meet expectations.
If any of the above events were to occur, the development, redevelopment, expansion or pad development of the properties could
hinder our growth and have an adverse effect on our cash flow, financial condition and results of operations. In addition, new
development and significant redevelopment activities, regardless of whether they are ultimately successful, typically require
substantial time and attention from management.
We are subject to litigation that could negatively impact our cash flow, financial condition and results of operations.
We are a defendant from time to time in lawsuits and regulatory proceedings relating to our business. Due to the inherent uncertainties
of litigation and regulatory proceedings, we may not be able to accurately predict the ultimate outcome of any such litigation or
proceedings. A significant unfavorable outcome could negatively impact our cash flow, financial condition and results of operations.
If we are found to be in breach of a ground lease at one of our properties or are unable to renew a ground lease, we could be
materially and adversely affected.
We have eight properties in our portfolio that are either completely or partially on land that is owned by third parties and leased
to us pursuant to ground leases. Accordingly, we only own a long-term leasehold or similar interest in those properties. If we are
found to be in breach of a ground lease and that breach cannot be cured, we could lose our interest in the improvements and the
right to operate the property. In addition, unless we can purchase a fee interest in the underlying land or extend the terms of these
leases before or at their expiration, as to which no assurance can be given, we will lose our interest in the improvements and the
right to operate these properties. Assuming we exercise all available options to extend the terms of our ground leases, all of our
ground leases will expire between 2050 and 2115. However, in certain cases, our ability to exercise such options is subject to the
9
condition that we are not in default under the terms of the ground lease at the time we exercise such options, and we can provide
no assurances that we will be able to exercise our options at such time. If we were to lose the right to operate a property due to a
breach or non-renewal of the ground lease, we would be unable to derive income from such property, which could materially and
adversely affect us.
Uninsured losses or losses in excess of insurance coverage could materially and adversely affect our cash flow, financial
condition and results of operations.
Each tenant is responsible for insuring its goods and demised premises and, in most circumstances, is required to reimburse us for
its share of the cost of acquiring comprehensive insurance for the property, including casualty, liability, fire and extended coverage
customarily obtained for similar properties in amounts which have been determined as sufficient to cover reasonably foreseeable
losses. Tenants with net leases typically are required to pay all insurance costs associated with their space. However, material
losses may occur in excess of insurance proceeds with respect to any property and, specific to net leases, tenants may fail to obtain
adequate insurance. Additionally, losses of a catastrophic nature including loss due to wars, acts of terrorism, earthquakes, floods,
hurricanes, wind, other natural disasters, pollution or environmental matters may be considered uninsurable or not economically
insurable, or may be insured subject to limitations such as large deductibles or co-payments. In the instance of a loss that is uninsured
or that exceeds policy limits, a significant portion of the capital invested in the damaged property could be lost, as well as the
anticipated future revenue of the property, which could materially and adversely affect our financial condition and results of
operations. A variety of factors, including, among others, changes in building codes and ordinances and environmental
considerations, might also make it impractical or undesirable to use insurance proceeds to replace a property after it has been
damaged or destroyed. Furthermore, we may be unable to obtain adequate insurance coverage at reasonable costs in the future, as
the costs associated with property and casualty renewals may be higher than anticipated.
A number of our properties are located in areas which are susceptible to, and could be significantly affected by, natural disasters
that could cause significant damage. For example, many of our properties are located in coastal regions and would, therefore, be
affected by any future increases in sea levels or in the frequency or severity of hurricanes and tropical storms to the extent they
are located in impacted areas. In addition, some of our properties are located in California and other regions that are especially
susceptible to earthquakes.
The occurrence of terrorist acts could sharply increase the premiums paid for terrorism insurance coverage. Further, mortgage
lenders, in some cases, insist that specific coverage against terrorism be purchased by commercial property owners as a condition
for providing mortgage loans. It is uncertain whether such insurance policies will be available, or available at reasonable costs,
which could inhibit our ability to finance or refinance our properties. In such instances, we may be required to provide other
financial support, either through financial assurances or self-insurance, to cover potential losses. We cannot provide assurance that
we will have adequate coverage for such losses and, to the extent we are required to pay unexpectedly large amounts for insurance,
our cash flow, financial condition and results of operations could be materially and adversely affected.
We may incur significant costs complying with the ADA and similar laws, which could adversely affect our cash flow, financial
condition and results of operations.
Under the ADA, all public accommodations must meet federal requirements related to access and use by disabled persons. Although
we believe the properties in our portfolio substantially comply with the present requirements of the ADA, we have not conducted
an audit or investigation of all of our properties to determine our compliance, nor can we be assured that requirements will not
change. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our properties
and make alterations as appropriate in this respect. If one or more of the properties in our portfolio is not in compliance with the
ADA, we would be required to incur additional costs to bring the property into compliance and it could result in the imposition
of fines or an award of damages to private litigants. Additional federal, state and local laws may also require modifications to our
properties or restrict our ability to renovate our properties. We cannot predict the ultimate cost of compliance with the ADA or
other legislation. If we incur substantial costs to comply with the ADA and any other legislation, our cash flow, financial condition
and results of operations could be adversely affected.
We may become liable with respect to contaminated property or incur costs to comply with environmental laws, which could
negatively impact our cash flow, financial condition and results of operations.
Under various federal, state and local laws, ordinances and regulations, as a current or former owner or operator of real property,
we may be liable for costs and damages resulting from the presence or release of hazardous substances, waste or petroleum products
at, on, in, under or from such property, including costs for investigation, remediation, natural resource damages or third party
liability for personal injury or property damage. These laws often impose liability without regard to whether the owner or operator
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knew of, or was responsible for, the presence or release of such materials, and the liability may be joint and several. In addition,
the presence of contamination or the failure to remediate contamination at our properties may adversely affect our ability to sell,
redevelop, or lease such property or borrow funds using the property as collateral. Environmental laws may also create liens on
contaminated sites in favor of the government for damages and costs it incurs to address such contamination. Moreover, if
contamination is discovered on our properties, environmental laws may impose restrictions on the manner in which that property
may be used or how businesses may be operated on that property. Some of our properties have been or may be impacted by
contamination arising from current or prior uses of the property or adjacent properties for commercial or industrial purposes. Such
contamination may arise from spills of petroleum or hazardous substances or releases from tanks used to store such materials. We
may also be liable for the cost of remediating contamination at off-site disposal or treatment facilities when we arrange for disposal
or treatment of hazardous substances at such facilities. The environmental site assessments described in Item 1. “Business —
Environmental Matters” have a limited scope and may not reveal all potential environmental liabilities. Further, material
environmental conditions may have arisen after the review was completed or may arise in the future, and future laws, ordinances
or regulations may impose additional material environmental liability beyond what was known at the time the site assessment was
conducted.
In addition, our properties are subject to various federal, state and local environmental, health and safety laws, including laws
governing the management of waste and underground and aboveground storage tanks. Noncompliance with these environmental,
health and safety laws could subject us or our tenants to liability, which could affect a tenant’s ability to make rental payments to
us. Moreover, changes in laws could increase the potential cost of compliance with environmental, health and safety laws or
increase liability for noncompliance. This could result in significant unanticipated expenditures or could otherwise materially and
adversely affect our operations, or those of our tenants, which could in turn have a material adverse effect on us.
As the owner or operator of real property, we may also incur liability based on various building conditions. For example, buildings
and other structures on properties that we currently own or operate or those we acquire or operate in the future contain, may contain,
or may have contained, asbestos-containing material, or ACM. Environmental, health and safety laws require that ACM be properly
managed and maintained and fines or penalties may be imposed on owners, operators or employers for non-compliance with these
requirements. These requirements include special precautions, such as removal, abatement or air monitoring, if ACM would be
disturbed during maintenance, renovation or demolition of a building, potentially resulting in substantial costs. In addition, we
may be subject to liability for personal injury or property damage sustained as a result of exposure to ACM or releases of ACM
into the environment.
When excessive moisture accumulates in buildings or on building materials, mold growth may occur if it is not addressed over a
period of time. Some molds may produce airborne toxins or irritants. Indoor air quality issues can also stem from inadequate
ventilation, chemical contamination from indoor or outdoor sources, and other biological contaminants such as pollen, viruses and
bacteria. Indoor exposure to airborne toxins or irritants is alleged to cause a variety of adverse health effects and symptoms,
including allergic or other reactions. As a result, the presence of significant mold or other airborne contaminants at any of our
properties could require us to undertake a costly remediation program to contain or remove the mold or other airborne contaminants
or to increase ventilation. In addition, the presence of significant mold or other airborne contaminants could expose us to liability
from our tenants, employees of our tenants, or others if property damage or personal injury occurs.
To the extent we incur costs or liabilities as a result of environmental issues, our cash flow, financial condition and results of
operations could be materially and adversely affected.
We could experience a decline in the fair value of our assets, which could materially and adversely impact our results of
operations.
A decline in the fair value of our assets could require us to recognize an impairment charge on such assets under accounting
principles generally accepted in the United States (GAAP) if we were to determine that we do not have the ability and intent to
hold such assets for a period of time sufficient to allow for recovery to the asset’s carrying value. If such a determination were to
be made, we would recognize an impairment charge through earnings and write down the carrying value of such assets to a new
cost basis based on the fair value of such assets on the date they are considered to not be recoverable. For the years ended
December 31, 2017, 2016 and 2015, we recognized aggregate impairment charges related to investment properties of $67,003,
$20,376 and $19,937, respectively. We may be required to recognize additional asset impairment charges in the future.
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We face risks associated with security breaches through cyber attacks, cyber intrusions or otherwise, as well as other significant
disruptions of our information technology (IT) networks and related systems.
We face risks associated with security breaches, whether through (i) cyber attacks or cyber intrusions, (ii) malware or ransomware,
(iii) computer viruses, (iv) people with access or who gain access to our systems, and (v) other significant disruptions of our
IT networks and related systems. The risk of a security breach or disruption, particularly through cyber attack or cyber intrusion,
including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity and
sophistication of attempted attacks and intrusions from around the world have increased. Our IT networks and related systems are
essential to the operation of our business and our ability to perform day-to-day operations. Although we make efforts to maintain
the security and integrity of our IT networks and related systems, and we have implemented various measures to manage the risk
of a security breach or disruption, there can be no assurance that our security efforts and measures will be effective or that attempted
security breaches or disruptions would not be successful or damaging. A security breach or other significant disruption involving
our IT networks and related systems could significantly disrupt the proper functioning of our networks and systems and, as a result,
disrupt our operations, which could have a material adverse effect on our cash flow, financial condition and results of operations.
Our success depends on key personnel whose continued service is not guaranteed.
We depend on the efforts and expertise of our senior management team to manage our day-to-day operations and strategic business
direction. While we have retention agreements with the members of our executive management team that provide for certain
payments in the event of a change in control or termination without cause, we do not have employment agreements with the
members of our executive management team. Therefore, we cannot guarantee their continued service. The loss of their services
and our inability to find suitable replacements could have an adverse effect on our operations.
RISKS RELATED TO OUR DEBT FINANCING
We are generally subject to the risks associated with debt financing and our debt service obligations could adversely affect our
financial health and operating flexibility.
Required principal and interest payments on our indebtedness reduce funds available for general business purposes and distributions
to our shareholders. Our existing debt financing and debt service obligations also increase our vulnerability to general adverse
economic and industry conditions, including increases in interest rates. In addition, as our existing debt comes due, we may be
unable to refinance it on favorable terms, or at all, which could adversely affect our cash flow, financial condition and results of
operations.
Credit ratings may not reflect all the risks of an investment in our debt.
Our credit ratings are an assessment by rating agencies of our ability to pay our debts when due. Consequently, real or anticipated
changes in our credit ratings will generally affect the market value of our publicly-traded debt. Credit ratings may be revised or
withdrawn at any time by the rating agency at its sole discretion. We do not undertake any obligation to maintain the ratings or
advise our debt holders of any change in our ratings. There can be no assurance that we will be able to maintain our current credit
ratings. Adverse changes in our credit ratings could impact our ability to obtain additional debt and equity financing on favorable
terms, if at all, and could significantly reduce the market price of our publicly-traded debt.
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Our cash flow, financial condition and results of operations could be adversely affected by financial and other covenants and
provisions under the unsecured credit agreement governing our Unsecured Credit Facility or our other debt agreements.
Our Unsecured Credit Facility, which is comprised of our unsecured revolving line of credit and two unsecured term loans, is
governed by our unsecured credit agreement (the Unsecured Credit Agreement). Our other debt agreements include, but are not
limited to, the Indenture, as supplemented, governing our Notes Due 2025 (the Indenture), the note purchase agreements governing
our Notes Due 2021, 2024, 2026 and 2028 (the Note Purchase Agreements) and the credit agreement governing our Term Loan
Due 2023 (the Term Loan Agreement). The Unsecured Credit Agreement, the Indenture, the Note Purchase Agreements, the Term
Loan Agreement and any future debt agreements require, or may require, compliance with certain financial and operating covenants,
including, among others, the requirement to maintain maximum unencumbered, secured and consolidated leverage ratios, minimum
interest, fixed charge, debt service and unencumbered interest coverage ratios, a minimum ratio of assets to unsecured debt and a
minimum consolidated net worth. They also contain or may contain customary events of default, including defaults on any of our
recourse indebtedness in excess of $50,000. The provisions of these agreements could limit our ability to obtain additional funds
needed to address cash shortfalls or pursue growth opportunities or other accretive transactions.
In addition, our senior unsecured debt obligations, including our Unsecured Credit Facility, Notes Due 2021, 2024, 2025, 2026
and 2028 and Term Loan Due 2023, are pari passu in priority of payment. Therefore, a breach of these covenants or other events
of default would allow the lenders to require us to accelerate payment of amounts outstanding under one or all of these agreements.
If payment is accelerated, our liquid assets may not be sufficient to repay such debt in full and, as a result, such an event could
have a material adverse effect on our cash flow, financial condition and results of operations.
Given the restrictions in our debt covenants, we may be limited in our operating and financial flexibility and in our ability to
respond to changes in our business or pursue strategic opportunities in the future.
Increases in interest rates would cause our borrowing costs to rise and may limit our ability to refinance debt.
Although a significant amount of our outstanding debt has fixed interest rates, we also borrow funds at variable interest rates.
Increases in interest rates would increase our interest expense on any outstanding unhedged variable rate debt and would affect
the terms under which we refinance our existing debt as it matures, which would adversely affect our cash flow, financial condition
and results of operations.
We may choose to retire debt prior to its stated maturity date and incur debt prepayment costs as a result, some of which could
be significant.
At times, management has chosen to retire debt prior to its stated maturity date, and in doing so, we have incurred prepayment or
defeasance premiums in accordance with the relevant loan agreements. If we choose to retire debt prior to its stated maturity date
in the future, we may incur significant debt prepayment costs or defeasance premiums, which could have an adverse effect on our
cash flow and results of operations.
Defaults on secured indebtedness may result in foreclosure.
In the event that we default on mortgages in the future, either as a result of ceasing to make debt service payments or failing to
meet applicable covenants, the lenders may accelerate the related debt obligations and foreclose and/or take control of the properties
that secure their loans. In the event of a default under any of our recourse indebtedness, we may also remain liable for any deficiency
between the value of the property securing such loan and the principal and accrued interest on the loan.
Further, for tax purposes, the foreclosure of a mortgage may result in the recognition of taxable income related to the extinguished
debt without us having received any accompanying cash proceeds. As a result, since we have elected to be taxed as a REIT, we
may be required to identify and utilize sources for distributions to our shareholders related to such taxable income in order to avoid
incurring corporate tax or to meet the REIT distribution requirements imposed by the Code.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE
Our board of directors may change significant corporate policies without shareholder approval.
Our investment, financing and distribution policies are determined by our board of directors. These policies may be amended or
revised at any time at the discretion of the board of directors without a vote of our shareholders. As a result, the ability of our
shareholders to control our policies and practices is extremely limited. We could make investments and engage in business activities
that are different from, and possibly riskier than, the investments and businesses described in this report. In addition, our board of
13
directors may change our policies with respect to conflicts of interest provided that such changes are consistent with applicable
legal and regulatory requirements, including the listing standards of the New York Stock Exchange (NYSE). A change in these
policies could have an adverse effect on our cash flow, financial condition and results of operations.
We could increase the number of authorized shares of stock and issue stock without shareholder approval.
Subject to applicable legal and regulatory requirements, our charter authorizes our board of directors, without shareholder approval,
to increase the aggregate number of authorized shares of stock or the number of authorized shares of stock of any class or series,
to issue authorized but unissued shares of our common stock or preferred stock, classify or reclassify any unissued shares of our
common stock or preferred stock and to set the preferences, rights and other terms of such classified or unclassified shares. As a
result, we may issue series or classes of common stock or preferred stock with preferences, dividends, powers and rights, voting
or otherwise, that are senior to, or otherwise conflict with, the rights of holders of our common stock. We have also established
an at-the-market equity program under which we may sell shares of our Class A common stock having an aggregate offering price
of up to $250,000 from time to time. In addition, our board of directors could establish a series of preferred stock that could,
depending on the terms of such series, delay, defer or prevent a transaction or a change of control that might involve a premium
price for our common stock or that our shareholders may believe is in their best interests.
Certain provisions of our charter may limit the ability of a third party to acquire control of our company.
Our charter provides that no person may beneficially own more than 9.8% in value or number of shares, whichever is more
restrictive, of our outstanding common stock or 9.8% in value of the aggregate outstanding shares of our capital stock. While these
charter provisions help ensure we maintain our REIT status, these ownership limitations may prevent an acquisition of control of
our company by a third party without our board of directors’ approval, even if our shareholders believe the change of control is
in their best interests.
Certain provisions of Maryland law could inhibit changes of control, which could lower the value of our Class A common stock.
Certain provisions of the Maryland General Corporation Law, or MGCL, may have the effect of inhibiting or deterring a third
party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide
our common stockholders with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
•
•
“business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an
“interested shareholder” (defined generally as any person who beneficially owns 10% or more of the voting power of our
shares or an affiliate or associate of ours who, at any time within the two-year period prior to the date in question, was
the beneficial owner of 10% or more of our then outstanding voting shares) or an affiliate of an interested shareholder
for five years after the most recent date on which the shareholder becomes an interested shareholder, and thereafter, may
impose special shareholder voting requirements unless certain minimum price conditions are satisfied; and
“control share” provisions that provide that “control shares” of our company (defined as shares which, when aggregated
with other shares controlled by the shareholder, entitle the shareholder to exercise one of three increasing ranges of voting
power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of
ownership or control of outstanding “control shares”) have no voting rights except to the extent approved by our
shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all
interested shares.
As permitted by the MGCL, our board of directors has adopted a resolution exempting any business combinations between us and
any other person or entity from the business combination provisions of the MGCL. Our bylaws provide that such resolution or
any other resolution of our board of directors exempting any business combination from the business combination provisions of
the MGCL may only be revoked, altered or amended, and our board of directors may only adopt a resolution that is inconsistent
with any such prior resolution (including any amendment to that bylaw provision), which we refer to as an opt-in to the business
combination provisions, with the approval of stockholders entitled to cast a majority of all votes cast by the holders of the issued
and outstanding shares of our common stock. In addition, as permitted by the MGCL, our bylaws contain a provision exempting
from the control share acquisition provisions of the MGCL any acquisition by any person of shares of our stock. This bylaw
provision may be amended, which we refer to as an opt-in to the control share acquisition provisions, only with the affirmative
vote of a majority of the votes cast on such matter by holders of the issued and outstanding shares of our common stock.
Title 3, Subtitle 8 of the MGCL permits our board of directors, without shareholder approval and regardless of what is currently
provided in our charter or bylaws, to implement certain takeover defenses, including adopting a classified board. Such takeover
14
defenses may have the effect of inhibiting a third party from making an acquisition proposal for us or of delaying, deferring or
preventing a change in control of us under the circumstances that otherwise could provide our common shareholders with the
opportunity to realize a premium over the then-prevailing market price.
In addition, the provisions of our charter on removal of directors and the advance notice provisions of our bylaws, among others,
could delay, defer or prevent a transaction or a change in control of our company that might involve a premium price for holders
of our common stock or that our shareholders may believe to be in their best interests. Likewise, if our company’s board of directors
were to opt-in to the provisions of Title 3, Subtitle 8 of the MGCL, or if our board of directors were to opt-in to the business
combination provisions or the control share acquisition provisions of the MGCL, with shareholder approval, these provisions could
have similar anti-takeover effects.
Our rights and the rights of our shareholders to take action against our directors and officers are limited, which could limit
shareholder recourse in the event of actions that our shareholders do not believe are in their best interests.
Maryland law provides that a director or officer has no liability in that capacity if he or she satisfies his or her duties to us and our
shareholders. As permitted by the MGCL, our charter limits the liability of our directors and officers to us and our shareholders
for monetary damages, except for liability resulting from the following:
• actual receipt of an improper benefit or profit in money, property or services; or
• a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to
the cause of action adjudicated.
In addition, our charter and bylaws and indemnification agreements that we have entered into with our directors and certain of our
officers require us to indemnify our directors and officers, among others, for actions taken by them in those capacities to the
maximum extent permitted by Maryland law. As a result, we and our shareholders may have more limited rights against our
directors and officers than might otherwise exist. Accordingly, in the event that actions taken in good faith by any of our directors
or officers impede the performance of our company, the ability of our shareholders to recover damages from such director or officer
will be limited. In addition, we will be obligated to advance the defense costs incurred by our directors and officers who have
indemnification agreements, and may, at the discretion of our board of directors, advance the defense costs incurred by our
employees and other agents in connection with legal proceedings.
Our charter contains provisions that make removal of our directors difficult, which could make it difficult for our shareholders
to effect changes to our management.
Our charter provides that a director may only be removed for cause upon the affirmative vote of holders of a majority of the votes
entitled to be cast in the election of directors. Vacancies may be filled only by a majority vote of the remaining directors in office,
even if less than a quorum. These requirements make it more difficult to change our management by removing and replacing
directors and may prevent a change of control that is in the best interests of our shareholders.
RISKS RELATED TO OUR REIT STATUS
Failure to qualify as a REIT would cause us to be taxed as a regular corporation and, even if we qualify as a REIT, we may
face other tax liabilities which could substantially reduce funds available for distribution to our shareholders and materially
and adversely affect our cash flow, financial condition and results of operations.
We believe that we have been organized, owned and operated in conformity with the requirements for qualification and taxation
as a REIT under the Code beginning with our taxable year ended December 31, 2003, and that our intended manner of ownership
and operation will enable us to continue to meet the requirements for qualification and taxation as a REIT for U.S. federal income
tax purposes. However, we cannot assure you that we have qualified or will qualify as such.
Qualification as a REIT involves the application of highly technical and complex provisions of the Code as to which there are only
limited judicial and administrative interpretations and involves the determination of facts and circumstances not entirely within
our control. For example, to qualify as a REIT, we generally are required to annually distribute to our shareholders at least 90%
of our REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. To the
extent that we satisfy this distribution requirement, but distribute less than 100% of our taxable income, we will be subject to U.S.
federal corporate income tax on our undistributed taxable income.
15
If we fail to qualify as a REIT in any taxable year, we will face serious tax consequences that will substantially reduce the funds
available for distributions to our shareholders because of the following:
• we would not be allowed a deduction for dividends paid to shareholders in computing our taxable income and would be
subject to U.S. federal income tax at the generally applicable corporate rate;
• we could be subject to increased state and local taxes; and
•
unless we are entitled to relief under certain U.S. federal income tax laws, we could not re-elect REIT status until the
fifth calendar year after the year in which we failed to qualify as a REIT.
In addition, if we fail to qualify as a REIT, it could result in default under certain of our indebtedness agreements. As a result of
all of these factors, our failure to qualify as a REIT could adversely affect our cash flow, financial condition and results of operations.
We may be subject to adverse legislative or regulatory tax changes that could negatively impact our cash flow, financial condition
and results of operations.
At any time, the U.S. federal income tax laws governing REITs or the administrative interpretation of those laws (or other laws
affecting our business) may be amended. We cannot predict if or when any new or amended U.S. federal income tax law, regulation
or administrative interpretation (or any repeal thereof) will become effective, and any such law, regulation, interpretation or repeal
may take effect retroactively. Any such changes could adversely affect our cash flow, financial condition and results of operations.
We may be required to borrow funds or sell assets to satisfy our REIT distribution requirements.
Our cash flows may be insufficient to fund distributions required to maintain our qualification as a REIT as a result of differences
in timing between the actual receipt of income and the recognition of income for U.S. federal income tax purposes, or the effect
of non-deductible expenses, such as capital expenditures, payments of compensation for which Section 162(m) of the Code denies
a deduction, the creation of reserves or required amortization payments. If we do not have other funds available in these situations,
we may need to borrow funds on a short-term basis or sell assets, even if the then-prevailing market conditions are not favorable
for these borrowings or sales, in order to satisfy our REIT distribution requirements. Such actions could adversely affect our cash
flow and results of operations.
Dividends payable by REITs generally do not qualify for reduced tax rates.
Certain qualified dividends paid by corporations to individuals, trusts and estates that are U.S. shareholders are taxed at capital
gain rates, which are lower than ordinary income rates. Dividends of current and accumulated earnings and profits payable by
REITs, however, are generally taxed at ordinary income rates as opposed to the capital gain rates (provided that for taxable years
2018 to 2025, non-corporate taxpayers generally may deduct up to 20% of their ordinary REIT dividends). Dividends payable by
REITs in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholders’ basis in the
shares to the extent thereof and thereafter as taxable gain. The more favorable rates applicable to regular corporate dividends could
cause investors who are individuals, trusts and estates to perceive investments in REITs, including us, to be relatively less attractive
than investments in the stock of non-REIT corporations that pay dividends. In addition, non-REIT corporations may begin to pay
dividends or increase dividends as a result of the lower corporate income tax rate that will go into effect in 2018. As a result, the
trading price of our Class A common stock may be negatively impacted.
Complying with REIT requirements may cause us to forego otherwise attractive opportunities or liquidate otherwise attractive
investments.
To qualify as a REIT, we must continually satisfy tests concerning, among other things, (i) the sources of our income, (ii) the nature
and diversification of our assets, (iii) the amounts we distribute to our shareholders, (iv) the number of or aggregate value of
dispositions completed annually and (v) the ownership of our capital stock. In order to meet these tests, we may be required to
forego investments we might otherwise make and refrain from engaging in certain activities. Thus, compliance with the REIT
requirements may hinder our performance.
In addition, if we fail to comply with certain asset ownership tests at the end of any calendar quarter, we must correct the failure
within 30 days after the end of the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT
qualification. As a result, we may be required to liquidate otherwise attractive investments.
16
If a transaction intended to qualify as an Internal Revenue Code Section 1031 tax-deferred exchange (1031 Exchange) is later
determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or
repealed, we may be unable to dispose of properties on a tax-deferred basis.
From time to time, we may dispose of properties in transactions that are intended to qualify as 1031 Exchanges. It is possible that
the qualification of a transaction as a 1031 Exchange could be successfully challenged and determined to be currently taxable. In
such case, our taxable income and earnings and profits would increase, which could increase the ordinary dividend income to our
stockholders. In some circumstances, we may be required to pay additional dividends or, in lieu of that, corporate income tax,
possibly including interest and penalties. As a result, we may be required to borrow funds in order to pay additional dividends or
taxes, and the payment of such taxes could cause us to have less cash available to distribute to our stockholders. In addition, if a
1031 Exchange was later determined to be taxable, we may be required to amend our tax returns for the applicable year in question,
including any information reports we sent our stockholders. Moreover, it is possible that legislation could be enacted that could
modify or repeal the laws with respect to 1031 Exchanges, which could make it more difficult or impossible for us to dispose of
properties on a tax-deferred basis.
Shareholders may be restricted from acquiring or transferring certain amounts of our stock.
In order to maintain our REIT qualification, among other requirements, no more than 50% in value of our outstanding stock may
be owned, directly or indirectly, by five or fewer individuals, as defined in the Code to include certain kinds of entities, during the
last half of any taxable year, other than the first year for which we made a REIT election. To assist us in qualifying as a REIT, our
charter contains an aggregate stock ownership limit of 9.8% and a common stock ownership limit of 9.8%. Generally, shareholders
must include stock of affiliates for purposes of determining whether they own stock in excess of any of these ownership limits.
If anyone attempts to transfer or own shares of our stock in a way that would violate the aggregate stock ownership limit or the
common stock ownership limit, unless such ownership limits have been waived by our board of directors, or in a way that would
prevent us from continuing to qualify as a REIT, those shares instead will be transferred to a trust for the benefit of a charitable
beneficiary and will either be redeemed by us or sold to a person whose ownership of the shares will not violate the aggregate
stock ownership limit or the common stock ownership limit. Purported transferees generally bear any decline in the market price
of such stock held in such trust but do not benefit from any increase. If this transfer to a trust fails to prevent such a violation or
our disqualification as a REIT, then the initial intended transfer or ownership will be null and void from the outset.
The ability of our board of directors to revoke our REIT qualification without shareholder approval may cause adverse
consequences to our shareholders.
Our charter provides that our board of directors may revoke or otherwise terminate our REIT election, without the approval of our
shareholders, if it determines that it is no longer in our best interest to continue to qualify as a REIT. If we cease to be a REIT, we
will not be allowed a deduction for dividends paid to shareholders in computing our taxable income and we will be subject to U.S.
federal income tax at the generally applicable corporate rate and state and local taxes, which may have adverse consequences on
our total return to our shareholders.
Prospective investors are urged to consult with their tax advisors regarding the effects of recently enacted tax legislation and
other legislative, regulatory and administrative developments.
On December 22, 2017, H.R. 1, informally titled the “Tax Cuts and Jobs Act” (TCJA), was signed into law. The TCJA makes
major changes to the Code, including a number of provisions of the Code that affect the taxation of REITs and their shareholders.
Among the changes made by the TCJA are (i) permanently reducing the generally applicable corporate tax rate, (ii) generally
reducing the tax rate applicable to individuals and other non-corporate taxpayers for tax years beginning after December 31, 2017
and before January 1, 2026, (iii) eliminating or modifying certain previously allowed deductions (including substantially limiting
interest deductibility), and (iv) for taxable years beginning after December 31, 2017 and before January 1, 2026, providing for
preferential rates of taxation through a deduction of up to 20% (subject to certain limitations) on most ordinary REIT dividends
and certain trade or business income of non-corporate taxpayers. The TCJA also imposes new limitations on the deduction of net
operating losses, which may result in us having to make additional taxable distributions to our shareholders in order to comply
with REIT distribution requirements or avoid taxes on retained income and gains. The effect of the significant changes made by
the TCJA is highly uncertain, and administrative guidance will be required in order to fully evaluate the effect of many provisions.
The effect of any technical corrections or other amendments with respect to the TCJA could have an adverse effect on us or our
shareholders. Investors should consult their tax advisors regarding the implications of the TCJA on their investment in our Class
A common stock or fixed rate debt securities.
17
GENERAL INVESTMENT RISKS
The market prices and trading volume of our debt and equity securities may be volatile.
The market prices of our debt and equity securities depend on various factors that may be unrelated to our operating performance
or prospects. We cannot assure you that the market prices of our debt and equity securities, including our Class A common stock,
will not fluctuate or decline significantly in the future.
A number of factors could negatively affect, or result in fluctuations in, the prices or trading volume of our debt and equity securities,
including:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated changes in our operating results and changes in expectations of future financial performance;
our operating performance and the performance of other similar companies;
our strategic decisions, such as acquisitions, dispositions, spin-offs, joint ventures, strategic investments or changes in
business strategy;
adverse market reaction to any indebtedness we incur in the future;
equity issuances or buybacks by us or the perception that such issuances or buybacks may occur;
increases in market interest rates or decreases in our distributions to shareholders that lead purchasers of our shares to
demand a higher yield;
changes in market valuations of similar companies;
changes in real estate valuations;
additions or departures of key management personnel;
changes in the real estate industry, including increased competition due to shopping center supply growth, and in the retail
industry, including growth in e-commerce, catalog companies and direct consumer sales;
publication of research reports about us or our industry by securities analysts;
speculation in the press or investment community;
the passage of legislation or other regulatory developments that adversely affect us, our tax status, or our industry;
changes in accounting principles;
our failure to satisfy the listing requirements of the NYSE;
our failure to comply with the requirements of the Sarbanes Oxley Act;
our failure to qualify as a REIT; and
general market conditions, including factors unrelated to our performance.
In the past, securities class action litigation has often been instituted against companies following periods of volatility in the price
of their common stock. This type of litigation could result in substantial costs and divert management’s attention and resources,
which could have a material adverse effect on our cash flow, financial condition and results of operations.
Increases in market interest rates may result in a decrease in the value of our publicly-traded debt and equity securities.
One of the factors that may influence the prices of our publicly-traded debt and equity securities is the interest rate on our publicly-
traded debt and the dividend yield on our common stock relative to market interest rates. If market interest rates, which are currently
at low levels relative to historical rates, rise, our borrowing costs could rise and result in less funds being available for distribution.
Therefore, we may not be able to, or we may choose not to, provide a higher distribution rate on our common stock. In addition,
18
fluctuations in interest rates could adversely affect the market value of our properties. These factors could result in a decline in
the market prices of our publicly-traded debt and equity securities.
Future offerings of debt securities, which would be senior to our common stock, would dilute the interests of our existing
shareholders and may be senior to our existing common stock, may adversely affect the market price of our common stock.
We have $700,000 of unsecured notes and have established an at-the-market (ATM) equity program under which we may sell
shares of our Class A common stock. In the future, we may attempt to increase our capital resources by making additional offerings
of debt or equity securities, including senior or subordinated notes and classes of preferred or common stock. Holders of debt
securities or shares of preferred stock will generally be entitled to receive interest payments or distributions, both current and in
connection with any liquidation or sale, prior to the holders of our common stock. Furthermore, offerings of common stock or
other equity securities may dilute the holdings of our existing shareholders. We are not required to offer any such equity securities
to existing shareholders on a preemptive basis, and future offerings of debt or equity securities, or perceptions that such offerings
may occur, may reduce the market price of our common stock or the distributions that we pay with respect to our common stock.
Because we may generally issue any such debt or equity securities in the future without obtaining the consent of our shareholders,
our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their proportionate
ownership.
Our ability to pay dividends is limited by the requirements of Maryland law.
Our ability to pay dividends on our common stock is limited by the laws of the State of Maryland. Under applicable Maryland
law, a Maryland corporation generally may not make a distribution if, after giving effect to the distribution, the corporation would
not be able to pay its debts as they become due in the usual course of business, or the corporation’s total assets would be less than
the sum of its total liabilities plus, unless the corporation’s charter provides otherwise, the amount that would be needed, if the
corporation were dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose
preferential rights are superior to those receiving the distribution. Accordingly, we generally may not make a distribution on our
common stock if, after giving effect to the distribution, we would not be able to pay our debts as they become due in the usual
course of business or our total assets would be less than the sum of our total liabilities plus, unless the terms of such class or series
provide otherwise, the amount that would be needed to satisfy the preferential rights upon dissolution of the holders of shares of
any class or series of preferred stock then outstanding, if any, with preferences senior to those of our common stock.
Changes in accounting standards may adversely impact our financial results.
The Financial Accounting Standards Board (FASB) recently issued new guidance on a variety of topics, including, among others,
lease accounting, that may impact how we account for certain transactions. Specifically, the new lease accounting guidance will
require the recognition of a lease liability and a right-of-use asset for operating leases where we are the lessee, such as ground
leases and office leases. We are continuing to assess the impact of adoption of this new standard at this time and, as such, are
unable to predict the full impact this new standard, or other new accounting standards that we have not yet adopted, could have
on the presentation of our consolidated financial statements, results of operations and financial ratios required by our debt covenants.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
19
ITEM 2. PROPERTIES
The following table sets forth summary information regarding our operating portfolio as of December 31, 2017. Dollars (other
than per square foot information) and square feet of GLA are presented in thousands. This information is grouped into divisions
based on the manner in which we have structured our asset management, property management and leasing operations. For additional
property details on our operating portfolio, see “Real Estate and Accumulated Depreciation (Schedule III)” herein.
Number of
Properties
ABR
% of Total
Retail
ABR (a)
ABR per
Occupied
Sq. Ft.
% of Total
Retail
GLA (a)
Occupancy
(b)
GLA
49
$
151,494
42.5% $
18.22
8,841
43.6%
94.1%
Division
Eastern Division
Connecticut, Florida, Georgia, Indiana, Maryland,
Massachusetts, Michigan, Missouri, New Jersey,
New York, North Carolina, Pennsylvania, South
Carolina, Tennessee, Virginia
Western Division
Arizona, California, Illinois, Oklahoma, Texas,
Washington
Total retail operating portfolio
Office
Total operating portfolio (c)
113
$
359,631
$
63
112
1
204,875
57.5%
19.11
11,424
56.4%
93.9%
356,369
3,262
100.0%
18.72
15.31
18.68
20,265
895
21,160
100.0%
93.9%
23.8%
91.0%
(a) Percentages are only provided for our retail operating portfolio.
(b) Calculated as the percentage of economically occupied GLA as of December 31, 2017. Including leases signed but not commenced, our
retail operating portfolio and our consolidated operating portfolio were 94.9% and 92.8% leased, respectively, as of December 31, 2017.
(c) Excludes one single-user retail operating property classified as held for sale as of December 31, 2017, as well as two properties that are in
active redevelopment and one property where we have begun activities in anticipation of future redevelopment.
The following table sets forth information regarding the 20 largest tenants in our retail operating portfolio based on ABR as of
December 31, 2017. Dollars (other than per square foot information) and square feet of GLA are presented in thousands.
Tenant
Primary DBA
Best Buy Co., Inc.
Best Buy, Pacific Sales
The TJX Companies, Inc.
HomeGoods, Marshalls, T.J. Maxx
Bed Bath & Beyond Inc.
Bed Bath & Beyond, Buy Buy
Baby, Cost Plus World Market
Regal Entertainment Group
Edwards Cinema
Ross Stores, Inc.
PetSmart, Inc.
AB Acquisition LLC
Michaels Stores, Inc.
Ascena Retail Group Inc.
BJ’s Wholesale Club, Inc.
Gap Inc.
Ahold U.S.A. Inc.
The Home Depot, Inc.
Barnes & Noble, Inc.
Lowe’s Companies, Inc.
Office Depot, Inc.
Pier 1 Imports, Inc.
The Kroger Co.
Party City Holdings Inc.
Mattress Firm Holding Corp.
Total Top Retail Tenants
Ross Dress for Less
Safeway, Jewel-Osco, Tom Thumb
Michaels, Aaron Brothers Art &
Frame
Dress Barn, Lane Bryant, Justice,
Catherine’s, Ann Taylor, Maurices,
LOFT
Old Navy, Banana Republic, The
Gap, Gap Factory Store, Athleta
Stop & Shop
Office Depot, OfficeMax
Kroger, Harris Teeter, QFC
Mattress Firm, Sleepy’s
Number
of Stores
ABR
% of
Total ABR
ABR per
Occupied
Sq. Ft.
Occupied
GLA
% of
Occupied
GLA
$
10,063
2.8% $
15
25
19
2
20
19
8
18
41
2
23
3
3
9
4
12
18
7
17
24
7,396
7,055
6,911
6,758
6,105
6,103
5,222
4,791
4,609
4,474
4,296
4,162
4,115
3,944
3,693
3,668
3,638
3,508
3,452
1.3%
22.08
2.1%
2.0%
1.9%
1.9%
1.7%
1.7%
1.5%
1.3%
1.3%
1.2%
1.2%
1.2%
1.1%
1.0%
1.0%
1.0%
1.0%
1.0%
16.63
10.32
13.70
31.56
11.57
16.11
13.12
12.83
18.81
16.33
23.48
11.86
18.79
6.47
13.68
20.38
10.42
14.15
29.01
14.53
605
717
515
219
584
379
465
407
217
245
274
183
351
219
610
270
180
349
248
119
3.2%
3.8%
2.7%
1.2%
3.1%
2.0%
2.4%
2.1%
1.1%
1.3%
1.4%
1.0%
1.8%
1.2%
3.2%
1.4%
0.9%
1.8%
1.3%
0.6%
7,156
37.5%
289
$ 103,963
29.2% $
20
The following table sets forth a summary, as of December 31, 2017, of lease expirations scheduled to occur during 2018 and each
of the nine calendar years from 2019 to 2027 and thereafter, assuming no exercise of renewal options or early termination rights
for all leases in our retail operating portfolio. The following table is based on leases commenced as of December 31, 2017. Dollars
(other than per square foot information) and square feet of GLA are presented in thousands.
Lease Expiration Year
Lease
Count
ABR
% of Total
ABR
ABR per
Occupied
Sq. Ft.
GLA
% of
Occupied
GLA
2018 (a)
2019
2020
2021
2022
2023
2024
2025
2026
2027
Thereafter
Month-to-month
Total
332
417
322
276
308
207
152
100
79
82
68
15
2,358
$
$
32,663
58,336
35,459
42,212
48,719
35,951
22,554
19,688
15,479
15,110
28,964
1,234
356,369
9.1% $
16.4%
9.9%
11.8%
13.7%
10.1%
6.3%
5.6%
4.3%
4.2%
8.2%
0.4%
100.0% $
22.81
20.51
18.59
19.45
16.17
16.68
17.61
17.13
21.50
15.29
21.66
28.05
18.72
1,432
2,844
1,907
2,170
3,012
2,155
1,281
1,149
720
988
1,337
44
19,039
7.6%
15.0%
10.0%
11.3%
15.7%
11.3%
6.7%
6.0%
3.8%
5.2%
7.1%
0.3%
100.0%
(a) Excludes month-to-month leases.
We continue to focus on leasing the vacant space at our one remaining office property and have leased 413,000 square feet of the
available 895,000 square feet as of December 31, 2017. The property is under contract for sale, which is expected to close during
the first quarter of 2018, subject to satisfaction of customary closing conditions.
ITEM 3. LEGAL PROCEEDINGS
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the
resolution of such matters may not be predicted with certainty, we believe, based on currently available information, that the final
outcome of such matters will not have a material effect on our consolidated financial statements.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
21
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
Market Information
The following table sets forth, for the quarterly periods indicated, the high and low sales prices of our Class A common stock,
which trades on the NYSE under the trading symbol RPAI, for the years ended December 31, 2017 and 2016:
2017
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
2016
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
Sales Price
High
Low
$
$
$
$
$
$
$
$
13.64
13.78
14.70
15.81
16.97
17.78
17.00
16.09
$
$
$
$
$
$
$
$
12.05
11.94
11.61
13.88
14.42
16.29
15.55
14.02
The closing share price for our Class A common stock on February 9, 2018, as reported on the NYSE, was $11.34.
The following table summarizes distributions per share of our Class A common stock:
Declaration Date
Record Date
Payment Date
Dividend per Share
2017
2016
10/26/2017
7/25/2017
4/25/2017
2/13/2017
10/25/2016
7/28/2016
4/26/2016
2/11/2016
10/27/2015
12/27/2017
9/26/2017
6/26/2017
3/27/2017
12/22/2016
9/26/2016
6/27/2016
3/28/2016
12/23/2015
1/10/2018
10/10/2017
7/10/2017
4/10/2017
1/10/2017
10/7/2016
7/8/2016
4/8/2016
1/8/2016
$
$
$
$
$
$
$
$
$
0.165625 (a)
0.165625
0.165625
0.165625
0.165625
0.165625
0.165625
0.165625
0.165625
(a) A portion of the dividend, $0.131898, is considered a taxable distribution to shareholders in 2017 with the remaining $0.033727
considered a taxable distribution to shareholders in 2018.
We have determined that the dividends paid on our Class A common stock qualify for the following tax treatment:
Ordinary dividends
Non-dividend distributions
Capital gain distributions
Total distribution per common share
2017
0.760339
—
0.034059
0.794398
$
$
2016
0.449528
0.212972
—
0.662500
$
$
As of February 9, 2018, there were approximately 13,600 record holders of our Class A common stock. The number of holders
does not include individuals or entities who beneficially own shares but whose shares of record are held by a broker or clearing
agency.
22
We intend to continue to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually
distributes to its shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction
and excluding net capital gains. The Code imposes tax on any undistributed REIT taxable income.
To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we
intend to make regular quarterly distributions of all, or substantially all, of our REIT taxable income to shareholders. Our future
distributions will be at the sole discretion of our board of directors. When determining the amount of future distributions, we expect
to consider, among other factors, (i) the amount of cash generated from our operating activities, (ii) our expectations of future cash
flow, (iii) our determination of near-term cash needs for debt repayments and potential future share repurchases, (iv) the market
of available acquisitions of new properties and redevelopment, expansions and pad development opportunities, (v) the timing of
significant re-leasing activities and the establishment of additional cash reserves for anticipated tenant allowances and general
property capital improvements, (vi) our ability to continue to access additional sources of capital and (vii) the amount required to
be distributed to maintain our status as a REIT, which is a requirement of our unsecured credit agreement, and to reduce any income
and excise taxes that we otherwise would be required to pay. Under certain circumstances, we may be required to make distributions
in excess of cash available for distribution in order to meet the REIT distribution requirements.
If our operations do not generate sufficient cash flow to allow us to satisfy the REIT distribution requirements, we may be required
to fund distributions from working capital or by borrowing funds, issuing equity or selling assets. Our actual results of operations
will be affected by a number of factors, including the revenues we receive from tenants at our properties, our operating and corporate
expenses, interest expense, the ability of our tenants to meet their obligations and unanticipated expenditures. For more information
regarding risk factors that could materially adversely affect our actual results of operations, please see Item 1A. “Risk Factors.”
Sales of Unregistered Equity Securities
There were no unregistered sales of equity securities during the quarter ended December 31, 2017.
Issuer Purchases of Equity Securities
The following table summarizes our common stock repurchases during the quarter ended December 31, 2017, including, where
applicable, shares of common stock surrendered to the Company by employees to satisfy their tax withholding obligations in
connection with the vesting of restricted shares, and amounts outstanding under our common stock repurchase program:
Period
October 1, 2017 to October 31, 2017
November 1, 2017 to November 30, 2017 (b)
December 1, 2017 to December 31, 2017
Total
Total number
of shares of
Class A common
stock purchased
Average price
paid per share
of Class A
common stock
— $
7,857
$
— $
7,857
$
—
12.90
—
12.90
Total number of
shares purchased
as part of publicly
announced plans
or programs
Maximum number
(or approximate dollar
value) of shares that
may yet be purchased
under the plans
or programs (a)
— $
7,854
$
— $
7,854
$
115,570
14,057
264,057
264,057
(a) As disclosed on the Forms 8-K dated December 15, 2015 and December 14, 2017, represents the amount outstanding under our $500,000
common stock repurchase program, which has no scheduled expiration date. The size of the program was increased from $250,000 to
$500,000 on December 14, 2017.
(b) Includes 968 shares repurchased in November 2017 at an average price per share of $13.02 for a total of $12,629, which settled in December
2017.
23
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the accompanying consolidated financial statements and
related notes appearing elsewhere in this annual report. Cash flows in the table below reflect the early adoption of Accounting
Standards Update (ASU) 2016-15, Statement of Cash Flows, which clarifies that debt prepayment costs are to be reflected as a
financing outflow, and ASU 2016-18, Statement of Cash Flows, which requires amounts generally described as restricted cash and
restricted cash equivalents to be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-
period total amounts shown on the statement of cash flows. The adoption of these pronouncements resulted in increases of $2,382,
$837, $9,147 and $6,669 in cash flows provided by operating activities, (decreases)/increases of $(5,093), $(22,665), $17,821,
and $(20,989) in cash flows provided by investing activities and increases of $3,863, $837, $8,697 and $9,021 in cash flows used
in financing activities for the years ended December 31, 2016, 2015, 2014 and 2013, respectively.
24
RETAIL PROPERTIES OF AMERICA, INC.
As of and for the years ended December 31, 2017, 2016, 2015, 2014 and 2013
(Amounts in thousands, except per share amounts)
Net investment properties
Total assets
Total debt
Total shareholders’ equity
Total revenues
Expenses:
Depreciation and amortization
Other
Total expenses
Operating income
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Equity in loss of unconsolidated joint ventures, net
Gain on sale of joint venture interest
Gain on change in control of investment properties
Interest expense
Other non-operating income, net
(Loss) income from continuing operations
Income from discontinued operations, net
Gain on sales of investment properties, net
Net income
Net income attributable to noncontrolling interest
Net income attributable to the Company
Preferred stock dividends
Net income attributable to common shareholders
Earnings (loss) per common share – basic and diluted:
Continuing operations
Discontinued operations
Net income per common share attributable to
common shareholders
Distributions declared – preferred
Distributions declared per preferred share
Excess of redemption value over carrying value of
preferred stock redemption
Distributions declared – common
Distributions declared per common share
Cash flows provided by operating activities
Cash flows provided by investing activities
Cash flows used in financing activities
Weighted average number of common shares outstanding – basic
Weighted average number of common shares outstanding – diluted
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2014
4,314,905
4,787,989
2,318,735
2,187,881
600,614
215,966
282,003
497,969
102,645
—
4,258
(2,088)
—
24,158
(133,835)
5,459
597
507
42,196
43,300
—
43,300
(9,450)
33,850
0.14
—
0.14
9,450
1.75
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2013
4,474,044
4,858,518
2,280,587
2,307,340
551,508
222,710
251,277
473,987
77,521
—
—
(1,246)
17,499
5,435
(146,805)
4,741
(42,855)
50,675
5,806
13,626
—
13,626
(9,450)
4,176
(0.20)
0.22
0.02
9,713
1.80
—
155,616
0.66
246,301
82,223
(431,744)
234,134
234,134
2017
3,569,937
3,918,264
1,746,086
1,885,700
538,139
203,866
275,038
478,904
59,235
—
—
—
—
—
$
$
$
$
$
2016
4,056,173
4,452,973
1,997,925
2,152,086
583,143
224,430
232,567
456,997
126,146
13,653
6,978
—
—
—
$
$
$
$
$
2015
4,254,647
4,621,251
2,166,238
2,155,337
603,960
214,706
248,184
462,890
141,070
—
—
—
—
—
(146,092)
(109,730)
(138,938)
63
37,110
—
129,707
166,817
—
166,817
(9,450)
157,367
0.66
—
0.66
9,450
1.75
$
$
$
$
$
1,700
3,832
—
121,792
125,624
(528)
125,096
(9,450)
115,646
0.49
—
0.49
9,450
1.75
373
(86,484)
—
337,975
251,491
—
251,491
(13,867)
237,624
1.03
—
1.03
9,161
1.70
4,706
151,612
0.66
247,516
608,302
(851,832)
230,747
230,927
$
$
$
$
$
$
$
$
$
$
$
25
— $
— $
— $
$
$
$
$
$
157,168
0.66
266,130
12,444
(283,453)
236,651
236,951
$
$
$
$
$
157,173
0.66
266,650
2,623
(352,806)
236,380
236,382
$
$
$
$
$
156,742
0.66
263,161
95,721
(286,509)
236,184
236,187
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements in “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Risk Factors,”
“Business” and elsewhere in this Annual Report on Form 10-K may constitute “forward-looking statements” within the meaning
of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set
forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act). Forward-looking statements involve numerous risks and uncertainties and you
should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods
which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events
described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of
forward-looking terminology such as “believes,” “expects,” “may,” “should,” “intends,” “plans,” “estimates,” “continue” or
“anticipates” and variations of such words or similar expressions or the negative of such words. You can also identify forward-
looking statements by discussions of strategies, plans or intentions. Risks, uncertainties and changes in the following factors,
among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-
looking statements:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
economic, business and financial conditions, and changes in our industry and changes in the real estate markets in particular;
economic and other developments in markets where we have a high concentration of properties;
our business strategy;
our projected operating results;
rental rates and/or vacancy rates;
frequency and magnitude of defaults on, early terminations of or non-renewal of leases by tenants;
bankruptcy or insolvency of a major tenant or a significant number of smaller tenants;
interest rates or operating costs;
real estate and zoning laws and changes in real property tax rates;
real estate valuations;
our leverage;
our ability to generate sufficient cash flows to service our outstanding indebtedness and make distributions to our
shareholders;
our ability to obtain necessary outside financing;
the availability, terms and deployment of capital;
general volatility of the capital and credit markets and the market price of our Class A common stock;
risks generally associated with real estate acquisitions and dispositions, including our ability to identify and pursue
acquisition and disposition opportunities;
risks generally associated with redevelopment, including the impact of construction delays and cost overruns, our ability
to lease redeveloped space and our ability to identify and pursue redevelopment opportunities;
composition of members of our senior management team;
our ability to attract and retain qualified personnel;
our ability to continue to qualify as a REIT;
26
•
•
•
•
•
governmental regulations, tax laws and rates and similar matters;
our compliance with laws, rules and regulations;
environmental uncertainties and exposure to natural disasters;
insurance coverage; and
the likelihood or actual occurrence of terrorist attacks in the U.S.
For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A.
“Risk Factors.” Readers should not place undue reliance on any forward-looking statements, which are based only on information
currently available to us (or to third parties making the forward-looking statements). We undertake no obligation to publicly release
any revisions to such forward-looking statements to reflect events or circumstances after the date of this Annual Report on Form
10-K, except as required by applicable law.
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related
notes included in this report.
Executive Summary
Retail Properties of America, Inc. is a REIT that owns and operates high quality, strategically located shopping centers in the
United States. As of December 31, 2017, we owned 112 retail operating properties representing 20,265,000 square feet of GLA.
Our retail operating portfolio includes (i) neighborhood and community centers, (ii) power centers, and (iii) lifestyle centers and
multi-tenant retail-focused mixed-use properties, as well as single-user retail properties.
The following table summarizes our operating portfolio as of December 31, 2017:
Property Type
Number of
Properties
GLA
(in thousands)
Occupancy
Percent Leased
Including Leases
Signed (a)
Operating portfolio:
Multi-tenant retail
Neighborhood and community centers
Power centers
Lifestyle centers and mixed-use properties
Total multi-tenant retail
Single-user retail
Total retail operating portfolio
Office
Total operating portfolio (b)
58
34
15
107
5
112
1
113
8,418
7,670
3,797
19,885
380
20,265
895
21,160
93.0%
95.3%
92.8%
93.8%
100.0%
93.9%
23.8%
91.0%
93.7%
96.2%
94.4%
94.8%
100.0%
94.9%
46.1%
92.8%
(a) Includes leases signed but not commenced.
(b) Excludes one single-user retail operating property classified as held for sale as of December 31, 2017.
In addition to our operating portfolio, as of December 31, 2017, we owned two properties that were in active redevelopment and
one property where we have begun activities in anticipation of future redevelopment.
Subject to favorable market conditions, among other factors, we expect to effectively complete our portfolio transformation in
early 2018, the core objective of which was to become a prominent owner of multi-tenant retail properties primarily located in the
following markets: Dallas, Washington, D.C./Baltimore, New York, Chicago, Seattle, Atlanta, Houston, San Antonio, Phoenix and
Austin.
2017 Company Highlights
Acquisitions
During the year ended December 31, 2017, we acquired three multi-tenant retail operating properties, five additional phases,
including the development rights for additional residential units, at an existing wholly-owned multi-tenant retail operating property,
27
one outparcel at an existing wholly-owned multi-tenant retail operating property and the fee interest in an existing wholly-owned
multi-tenant retail operating property for a total purchase price of $202,915.
The following table summarizes our 2017 acquisitions:
Date
Property Name
January 13, 2017
Main Street Promenade
January 25, 2017
Boulevard at the Capital Centre –
Fee Interest
MSA
Chicago
Property Type
Multi-tenant retail
Square
Footage
Acquisition
Price
181,600
$
88,000
Washington, D.C.
Fee interest (a)
February 24, 2017
One Loudoun Downtown – Phase II
Washington, D.C.
April 5, 2017
May 16, 2017
July 6, 2017
One Loudoun Downtown – Phase III
Washington, D.C.
One Loudoun Downtown – Phase IV
Washington, D.C.
Development rights (b)
New Hyde Park Shopping Center
New York
August 8, 2017
One Loudoun Downtown – Phase V
Washington, D.C.
August 8, 2017
One Loudoun Downtown – Phase VI
Washington, D.C.
December 11, 2017
Plaza del Lago (c)
December 19, 2017
Southlake Town Square – Outparcel
Chicago
Dallas
Additional phase of
multi-tenant retail (b)
Additional phase of
multi-tenant retail (b)
Multi-tenant retail
Additional phase of
multi-tenant retail (b)
Additional phase of
multi-tenant retail (b)
Multi-tenant retail
Multi-tenant retail
outparcel (d)
—
15,900
9,800
—
32,300
17,700
74,100
100,200
12,200
2,000
4,128
2,193
3,500
22,075
5,167
20,523
48,300
7,029
443,800
$
202,915
(a) The wholly-owned multi-tenant retail operating property located in Largo, Maryland was previously subject to an approximately 70 acre
long-term ground lease with a third party. We completed a transaction whereby we received the fee interest in approximately 50 acres of
the underlying land in exchange for which (i) we paid $1,939 and (ii) the term of the ground lease with respect to the remaining approximately
20 acres was shortened to nine months. We derecognized building and improvements of $11,347 related to the remaining ground lease,
recognized the fair value of land received of $15,200 and recorded a gain of $2,524, which was recognized during the three months ended
December 31, 2017 upon the expiration of the ground lease on approximately 20 acres. The total number of properties in our portfolio was
not affected by this transaction.
(b) We acquired the remaining five phases under contract, including the development rights for an additional 123 residential units for a total
of 408 units, at our One Loudoun Downtown multi-tenant retail operating property. The total number of properties in our portfolio was not
affected by these transactions.
(c) Plaza del Lago also contains 8,800 square feet of residential space, comprised of 15 residential units, for a total of 109,000 square feet.
(d) We acquired a multi-tenant retail outparcel located at our Southlake Town Square multi-tenant retail operating property. The total number
of properties in our portfolio was not affected by this transaction.
In total for 2018, we expect to invest approximately $50,000 to $150,000 on strategic acquisitions.
Dispositions
During the year ended December 31, 2017, we continued to pursue targeted dispositions of select non-target and single-user
properties. Consideration from dispositions totaled $917,808 and included the sales of 41 multi-tenant retail operating properties
aggregating 5,546,600 square feet for total consideration of $870,221, a 131,900 square foot single-user parcel located at an existing
multi-tenant retail operating property for consideration of $17,519 and six single-user retail properties aggregating 132,200 square
feet for total consideration of $30,068.
28
The following table summarizes our 2017 dispositions:
Date
Property Name
January 27, 2017
Rite Aid Store (Eckerd), Culver Rd.–Rochester, NY
February 21, 2017
Shoppes at Park West
March 7, 2017
March 8, 2017
March 15, 2017
March 16, 2017
March 24, 2017
April 4, 2017
April 4, 2017
April 4, 2017
April 27, 2017
May 9, 2017
May 9, 2017
May 25, 2017
May 26, 2017
May 30, 2017
May 31, 2017
June 5, 2017
June 6, 2017
June 16, 2017
June 29, 2017
June 29, 2017
June 29, 2017
June 29, 2017
July 20, 2017
July 26, 2017
July 27, 2017
August 4, 2017
August 14, 2017
August 25, 2017
August 25, 2017
CVS Pharmacy – Sylacauga, AL
Rite Aid Store (Eckerd) – Kill Devil Hills, NC
Century III Plaza – Home Depot
Village Shoppes at Gainesville
Northwood Crossing
University Town Center
Edgemont Town Center
Phenix Crossing
Brown’s Lane
Rite Aid Store (Eckerd) – Greer, SC
Evans Town Centre
Red Bug Village
Wilton Square
Town Square Plaza
Cuyahoga Falls Market Center
Plaza Santa Fe II
Rite Aid Store (Eckerd) – Columbia, SC
Fox Creek Village
Cottage Plaza
Magnolia Square
Cinemark Seven Bridges
Low Country Village I & II
Boulevard Plaza
Irmo Station (a)
Hickory Ridge
Lakepointe Towne Center
The Columns
Holliday Towne Center
Northwoods Center (a)
September 14, 2017
The Orchard
September 21, 2017
Lake Mary Pointe
September 22, 2017
West Town Market
September 29, 2017
Dorman Centre I & II
October 6, 2017
October 10, 2017
October 24, 2017
October 27, 2017
Forks Town Center
Placentia Town Center
Five Forks
Saucon Valley Square
December 8, 2017
Corwest Plaza
December 14, 2017
23rd Street Plaza
December 15, 2017
Century III Plaza
December 20, 2017
Page Field Commons
December 21, 2017
Quakertown (a)
December 21, 2017
Bed Bath & Beyond Plaza – Miami, FL
December 22, 2017
High Ridge Crossing
December 28, 2017
Azalea Square I & Azalea Square III
Property Type
Single-user retail
Multi-tenant retail
Single-user retail
Single-user retail
Single-user parcel
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Square
Footage
Consideration
$
10,900
63,900
10,100
13,800
131,900
229,500
160,000
57,500
77,700
56,600
74,700
13,800
75,700
26,200
438,100
215,600
76,400
224,200
13,400
107,500
85,500
116,000
70,200
139,900
111,100
99,400
380,600
196,600
173,400
83,100
96,000
165,800
51,100
67,900
388,300
100,300
111,000
70,200
80,700
115,100
53,400
152,200
319,400
61,800
97,500
76,900
269,800
500
15,383
3,700
4,297
17,519
41,750
22,850
14,700
19,025
12,400
10,575
3,050
11,825
8,100
49,300
28,600
11,500
35,220
3,250
24,825
23,050
16,000
15,271
22,075
14,300
16,027
44,020
10,500
21,750
11,750
24,250
20,000
5,100
14,250
46,000
23,800
35,725
10,720
6,300
29,825
5,400
11,600
38,000
15,940
38,250
4,750
54,786
(a) Disposition proceeds related to this property are temporarily restricted related to a potential 1031 Exchange. As of December 31, 2017,
disposition proceeds totaling $54,087 are temporarily restricted and are included in “Other assets, net” in the accompanying consolidated
balance sheets.
5,810,700
$
917,808
29
During the year ended December 31, 2017, we also received net proceeds of $155 from other transactions, including condemnation
awards and receipt of the escrow related to the disposition of Maple Tree Place on August 12, 2016. The aggregate proceeds, net
of closing costs, from property dispositions and other transactions during the year ended December 31, 2017 totaled $896,456.
Subsequent to December 31, 2017, we sold one single-user retail operating property consisting of 74,200 square feet for
consideration of $6,900. During 2018, we expect targeted dispositions to be approximately $200,000.
Market Summary
The following table summarizes our operating portfolio by market as of December 31, 2017:
Number of
Properties
ABR (a)
% of Total
Multi-Tenant
Retail ABR
(a)
ABR per
Occupied
Sq. Ft.
% of Total
Multi-Tenant
Retail GLA
(a)
Occupancy
% Leased
Including
Signed
GLA (a)
Property Type/Market
Multi-Tenant Retail:
Top 25 MSAs (b)
Dallas
New York
Washington, D.C.
Chicago
Seattle
Atlanta
Houston
Baltimore
San Antonio
Phoenix
Los Angeles
Riverside
St. Louis
Charlotte
Tampa
Subtotal
Non-Top 25 MSAs (b)
19
9
8
8
8
9
9
4
3
3
1
1
1
1
1
85
22
$
83,144
35,246
33,043
28,261
20,762
19,052
15,430
13,616
12,296
10,042
5,542
4,594
4,106
3,350
2,374
290,858
24.0% $
10.2%
9.5%
8.1%
6.0%
5.5%
4.4%
3.9%
3.5%
2.9%
1.6%
1.3%
1.2%
1.0%
0.7%
83.8%
56,190
16.2%
22.23
28.23
26.86
22.81
15.33
13.30
14.18
16.85
17.23
17.33
26.23
15.71
9.61
11.61
19.48
19.68
14.47
18.60
24.52
18.72
15.31
3,938
1,292
1,385
1,358
1,478
1,513
1,140
865
722
631
255
292
453
319
126
15,767
4,118
19,885
380
20,265
895
19.8%
6.5%
7.0%
6.8%
7.4%
7.6%
5.7%
4.4%
3.6%
3.2%
1.3%
1.5%
2.3%
1.6%
0.6%
79.3%
20.7%
95.0%
96.6%
88.8%
91.3%
91.6%
94.7%
95.4%
93.5%
98.9%
91.7%
82.9%
100.0%
94.3%
90.6%
97.0%
93.7%
95.2%
97.3%
93.9%
92.1%
92.5%
96.7%
95.4%
93.5%
99.1%
93.6%
82.9%
100.0%
94.3%
96.6%
97.0%
94.8%
94.3%
94.7%
100.0%
93.8%
94.8%
100.0%
100.0%
93.9%
94.9%
23.8%
46.1%
Total Multi-Tenant Retail
107
347,048
100.0%
Single-User Retail
5
9,321
Total Retail
Office
112
356,369
1
3,262
Total Operating Portfolio (c)
113
$ 359,631
$
18.68
21,160
91.0%
92.8%
(a) Excludes $11,275 of multi-tenant retail ABR and 1,093 square feet of multi-tenant retail GLA attributable to our two active redevelopments
and one property where we have begun activities in anticipation of future redevelopment, which are located in the Washington, D.C. and
Baltimore MSAs. Including these amounts, 84.3% of our multi-tenant retail ABR and 80.4% of our multi-tenant retail GLA is located in
the top 25 MSAs.
(b) Top 25 MSAs and Non-Top 25 MSAs are determined by the United States Census Bureau and ranked based on the most recently available
population estimates.
(c) Excludes one single-user retail operating property classified as held for sale as of December 31, 2017.
30
Leasing Activity
The following table summarizes the leasing activity in our retail operating portfolio during the year ended December 31, 2017.
Leases with terms of less than 12 months have been excluded from the table.
Number of
Leases Signed
GLA Signed
(in thousands)
New
Contractual
Rent per Square
Foot (PSF) (a)
Prior
Contractual
Rent PSF (a)
% Change
over Prior
ABR (a)
Weighted
Average
Lease Term
Tenant
Allowances
PSF
Comparable Renewal Leases
Comparable New Leases
Non-Comparable New and
Renewal Leases (b)
Total
352
57
101
510
1,879
$
353
483
2,715
$
19.65
25.20
20.06
20.53
$
$
18.46
19.60
N/A
18.64
6.4%
28.6%
N/A
10.1%
4.8
9.0
7.3
5.9
$
$
1.53
53.89
35.01
14.31
(a) Total excludes the impact of Non-Comparable New and Renewal Leases.
(b) Includes (i) leases signed on units that were vacant for over 12 months, (ii) leases signed without fixed rental payments and (iii) leases
signed where the previous and the current lease do not have a consistent lease structure.
We anticipate our leasing efforts in 2018 will focus on (i) vacant anchor and small shop space, (ii) upcoming natural lease expirations,
(iii) space within our redevelopment projects and (iv) properties where we have begun expansion activities. As we lease vacant
space, we look to capitalize on the opportunity to mark rents to market, upgrade our tenancy and optimize the mix of operators
and unique retailers at our properties.
We continue to focus on leasing the vacant space at our one remaining office property and have leased 413,000 square feet of the
available 895,000 square feet as of December 31, 2017. The property is under contract for sale, which is expected to close during
the first quarter of 2018, subject to satisfaction of customary closing conditions.
Capital Markets
During the year ended December 31, 2017, we:
•
•
•
•
•
•
•
•
•
•
defeased the IW JV portfolio of mortgages payable, which had an outstanding principal balance of $379,435 and an
interest rate of 7.50%, and incurred a defeasance premium and associated fees totaling $60,198;
redeemed all 5,400 outstanding shares of our 7.00% Series A cumulative redeemable preferred stock for cash at a
redemption price of $25.00 per preferred share, plus $0.3840 per preferred share representing all accrued and unpaid
dividends;
repaid $100,000 of our unsecured term loan due 2018;
received funding in the amount of $200,000 on a seven-year unsecured term loan;
entered into two agreements to swap a total of $200,000 of London Interbank Offered Rate (LIBOR)-based variable rate
debt to a fixed interest rate of 1.26% through November 22, 2018;
entered into three agreements to swap a total of $250,000 of LIBOR-based variable rate debt to a fixed interest rate of
2.00% through January 5, 2021 upon the expiration of two of our previous swap agreements;
borrowed $130,000, net of repayments, on our unsecured revolving line of credit;
repaid $102,070 of mortgages payable and made scheduled principal payments of $4,652 related to amortizing loans;
repurchased 17,683 shares of our common stock at an average price per share of $12.82 for a total of $227,102; and
increased the size of our common stock repurchase program by $250,000. As a result, $264,057 remains available for
repurchases under our $500,000 common stock repurchase program.
31
Distributions
In total for 2017, we declared distributions totaling $1.6965 per share of preferred stock. We also declared quarterly distributions
totaling $0.6625 per share of common stock during 2017.
Results of Operations
Comparison of Results for the Years Ended December 31, 2017 to 2016
Revenues
Rental income
Tenant recovery income
Other property income
Total revenues
Expenses
Operating expenses
Real estate taxes
Depreciation and amortization
Provision for impairment of investment properties
General and administrative expenses
Total expenses
Operating income
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Other income, net
(Loss) income from continuing operations
Gain on sales of investment properties
Net income
Preferred stock dividends
Net income attributable to common shareholders
Year Ended December 31,
2016
2017
Change
$
$
414,804
115,944
7,391
538,139
84,556
82,755
203,866
67,003
40,724
478,904
59,235
—
—
(146,092)
373
(86,484)
337,975
251,491
(13,867)
237,624
$
$
455,658
118,569
8,916
583,143
85,895
81,774
224,430
20,376
44,522
456,997
126,146
13,653
6,978
(109,730)
63
37,110
129,707
166,817
(9,450)
157,367
$
$
(40,854)
(2,625)
(1,525)
(45,004)
(1,339)
981
(20,564)
46,627
(3,798)
21,907
(66,911)
(13,653)
(6,978)
(36,362)
310
(123,594)
208,268
84,674
(4,417)
80,257
Net income attributable to common shareholders increased $80,257 from $157,367 for the year ended December 31, 2016 to
$237,624 for the year ended December 31, 2017 primarily as a result of the following:
•
•
•
a $208,268 increase in gain on sales of investment properties related to the sales of 47 investment properties, representing
approximately 5,810,700 square feet of GLA, during the year ended December 31, 2017 compared to the sales of 46
investment properties and one single-user outparcel, representing approximately 3,013,900 square feet of GLA, during
the year ended December 31, 2016;
a $20,564 decrease in depreciation and amortization primarily due to the write-off of assets taken out of service at two
redevelopment properties during the year ended December 31, 2016, along with a decrease from the investment properties
sold or classified as held for sale as of December 31, 2017, partially offset by an increase from the acquisition of investment
properties during the year ended December 31, 2017; and
a $3,798 decrease in general and administrative expenses primarily consisting of a $1,822 decrease in executive and
employee bonus expense and a $1,233 decrease in amortization of stock awards primarily due to the reversal of $830 in
2017 of previously recognized compensation expense related to the forfeiture of 34 restricted shares and 89 performance
restricted stock units resulting from the resignation of our former Chief Financial Officer and Treasurer. In addition,
following the adoption of ASU 2017-01 on October 1, 2016, all costs associated with acquisitions have been capitalized,
which resulted in a reduction of general and administrative expenses of $913;
partially offset by
32
•
•
a $46,627 increase in provision for impairment of investment properties. Based on the results of our evaluations for
impairment (see Notes 14 and 15 to the accompanying consolidated financial statements), we recognized impairment
charges of $67,003 and $20,376 for the year ended December 31, 2017 and 2016, respectively;
a $40,854 decrease in rental income primarily consisting of a $41,665 decrease in base rent, which resulted from the
operating properties sold during 2016 and 2017 or classified as held for sale as of December 31, 2017, along with our
one remaining office property and our redevelopment properties, partially offset by an increase from the operating
properties acquired during 2016 and 2017 and growth from our same store portfolio;
•
a $36,362 increase in interest expense primarily consisting of:
•
•
•
•
a $62,867 increase in prepayment penalties and defeasance premiums and a $3,206 increase in capitalized loan fee
write-offs primarily related to the defeasance of the IW JV portfolio of mortgages payable during the year ended
December 31, 2017, which resulted in a defeasance premium and associated fees totaling $60,198 and the write-off
of $4,003 of capitalized loan fees;
a $7,209 increase in interest from our 4.08% senior unsecured notes due 2026 and our 4.24% senior unsecured notes
due 2028 (Notes Due 2026 and 2028), which were issued in September 2016 and December 2016, respectively;
a $5,977 increase in interest on our Term Loan Due 2023, which funded in January 2017; and
a $4,916 increase in interest on our Unsecured Credit Facility primarily due to higher average balances on our
unsecured revolving line of credit and higher LIBOR interest rates;
partially offset by
•
a $44,654 decrease in interest on mortgages payable due to a reduction in mortgage debt;
•
•
•
a $13,653 gain on extinguishment of debt recognized during the year ended December 31, 2016 associated with the
disposition of The Gateway through a lender-directed sale in full satisfaction of our mortgage obligation. No such gain
was recorded during the year ended December 31, 2017;
a $6,978 gain on extinguishment of other liabilities recognized during the year ended December 31, 2016 related to the
acquisition of the fee interest in Ashland & Roosevelt, one of our existing investment properties that was previously
subject to a ground lease with a third party. The amount recognized represents the reversal of the straight-line ground rent
liability associated with the ground lease. No such gain was recorded during the year ended December 31, 2017; and
a $4,417 increase in preferred stock dividends primarily due to the original underwriting discount and offering costs from
2012 being recorded as a dividend to the preferred shareholders in conjunction with the redemption of our 7.00% Series
A cumulative redeemable preferred stock on December 20, 2017.
Net operating income (NOI)
We define NOI as all revenues other than (i) straight-line rental income, (ii) amortization of lease inducements, (iii) amortization
of acquired above and below market lease intangibles and (iv) lease termination fee income, less real estate taxes and all operating
expenses other than straight-line ground rent expense (non-cash) and amortization of acquired ground lease intangibles (non-cash).
NOI consists of same store NOI (Same Store NOI) and NOI from other investment properties (NOI from Other Investment
Properties). We believe that NOI, Same Store NOI and NOI from Other Investment Properties, which are supplemental non-GAAP
financial measures, provide an additional and useful operating perspective not immediately apparent from “Operating income” or
“Net income attributable to common shareholders” in accordance with accounting principles generally accepted in the United
States (GAAP). We use these measures to evaluate our performance on a property-by-property basis because they allow management
to evaluate the impact that factors such as lease structure, lease rates and tenant base have on our operating results. NOI, Same
Store NOI and NOI from Other Investment Properties do not represent alternatives to “Net income” or “Net income attributable
to common shareholders” in accordance with GAAP as indicators of our financial performance. Comparison of our presentation
of NOI, Same Store NOI and NOI from Other Investment Properties to similarly titled measures for other REITs may not necessarily
be meaningful due to possible differences in definition and application by such REITs. For reference and as an aid in understanding
our computation of NOI, a reconciliation of net income attributable to common shareholders as computed in accordance with
GAAP to Same Store NOI has been presented for each comparable period presented.
33
Same store portfolio – 2017 and 2016
For the year ended December 31, 2017, our same store portfolio consisted of 102 retail operating properties acquired or placed in
service and stabilized prior to January 1, 2016. The number of properties in our same store portfolio decreased to 102 as of
December 31, 2017 from 140 as of December 31, 2016 as a result of the following:
•
•
the removal of 45 same store investment properties sold during the year ended December 31, 2017; and
the removal of one same store investment property classified as held for sale as of December 31, 2017;
partially offset by
•
the addition of eight same store investment properties acquired prior to January 1, 2016.
The sales of CVS Pharmacy – Sylacauga on March 7, 2017, the Home Depot parcel at Century III Plaza on March 15, 2017 and
Century III Plaza on December 15, 2017 did not impact the number of same store properties as they were classified as held for
sale as of December 31, 2016.
The properties and financial results reported in “Other investment properties” primarily include the following:
•
•
•
•
•
•
properties acquired after December 31, 2015;
our one remaining office property;
three properties where we have begun redevelopment and/or activities in anticipation of future redevelopment;
properties that were sold or held for sale in 2016 and 2017;
the net income from our wholly-owned captive insurance company; and
the historical ground rent expense related to an existing same store investment property that was subject to a ground lease
with a third party prior to our acquisition of the fee interest on April 29, 2016.
The following tables present a reconciliation of net income attributable to common shareholders to Same Store NOI and details
of the components of Same Store NOI for the years ended December 31, 2017 and 2016:
Net income attributable to common shareholders
Adjustments to reconcile to Same Store NOI:
Preferred stock dividends
Gain on sales of investment properties
Depreciation and amortization
Provision for impairment of investment properties
General and administrative expenses
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Straight-line rental income, net
Amortization of acquired above and below market lease intangibles, net
Amortization of lease inducements
Lease termination fees
Straight-line ground rent expense
Amortization of acquired ground lease intangibles
Other income, net
NOI
NOI from Other Investment Properties
Same Store NOI
$
34
Year Ended December 31,
2016
2017
Change
$
237,624
$
157,367
$
80,257
13,867
(337,975)
203,866
67,003
40,724
—
—
146,092
(4,646)
(3,313)
1,065
(2,021)
2,710
(560)
(373)
364,063
(77,145)
286,918
$
9,450
(129,707)
224,430
20,376
44,522
(13,653)
(6,978)
109,730
(4,601)
(2,991)
1,033
(3,339)
3,253
(560)
(63)
408,269
(127,002)
281,267
$
4,417
(208,268)
(20,564)
46,627
(3,798)
13,653
6,978
36,362
(45)
(322)
32
1,318
(543)
—
(310)
(44,206)
49,857
5,651
Same Store NOI:
Base rent
Percentage and specialty rent
Tenant recovery income
Other property operating income
Property operating expenses
Bad debt expense
Real estate taxes
Year Ended December 31,
2016
2017
Change
$
$
313,253
3,307
91,669
2,883
411,112
57,933
1,012
65,249
124,194
$
308,383
3,509
88,536
2,770
403,198
59,067
1,161
61,703
121,931
4,870
(202)
3,133
113
7,914
(1,134)
(149)
3,546
2,263
Same Store NOI
$
286,918
$
281,267
$
5,651
Same Store NOI increased $5,651, or 2.0%, primarily due to the following:
•
•
base rent increased $4,870 primarily due to an increase of $2,429 from contractual rent changes, $2,074 from re-leasing
spreads and $600 from lower rent abatements; and
property operating expenses and real estate taxes, net of tenant recovery income, decreased $721 primarily due to decreases
in certain non-recoverable property operating expenses and a positive impact from the common area maintenance and
real estate tax reconciliation process, partially offset by lower net real estate tax refunds in 2017.
Comparison of Results for the Years Ended December 31, 2016 to 2015
Revenues
Rental income
Tenant recovery income
Other property income
Total revenues
Expenses
Operating expenses
Real estate taxes
Depreciation and amortization
Provision for impairment of investment properties
General and administrative expenses
Total expenses
Operating income
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Other income, net
Income from continuing operations
Gain on sales of investment properties
Net income
Net income attributable to noncontrolling interest
Net income attributable to the Company
Preferred stock dividends
Net income attributable to common shareholders
Year Ended December 31,
2015
2016
Change
$
$
455,658
118,569
8,916
583,143
85,895
81,774
224,430
20,376
44,522
456,997
126,146
13,653
6,978
(109,730)
63
37,110
129,707
166,817
—
166,817
(9,450)
157,367
$
$
472,344
119,536
12,080
603,960
94,780
82,810
214,706
19,937
50,657
462,890
141,070
—
—
(138,938)
1,700
3,832
121,792
125,624
(528)
125,096
(9,450)
115,646
$
$
(16,686)
(967)
(3,164)
(20,817)
(8,885)
(1,036)
9,724
439
(6,135)
(5,893)
(14,924)
13,653
6,978
29,208
(1,637)
33,278
7,915
41,193
528
41,721
—
41,721
35
Net income attributable to common shareholders increased $41,721 from $115,646 for the year ended December 31, 2015 to
$157,367 for the year ended December 31, 2016 primarily as a result of the following:
•
a $29,208 decrease in interest expense primarily consisting of:
•
•
•
•
•
a $21,387 decrease in interest on mortgages payable due to a reduction in mortgage debt; and
a $12,582 decrease in prepayment penalties and defeasance premiums;
partially offset by
a $2,184 increase in interest on our Unsecured Credit Facility primarily due to higher average balances on our
unsecured revolving line of credit and higher LIBOR interest rates;
a $1,944 increase in interest due to a full year of interest expense from our 4.00% senior unsecured notes due 2025
(Notes Due 2025), which were issued in March 2015; and
a $1,020 increase in interest from our 4.08% senior unsecured notes due 2026 (Notes Due 2026), which were issued
in September 2016;
•
•
•
•
•
•
•
•
a $13,653 gain on extinguishment of debt recognized during the year ended December 31, 2016 associated with the
disposition of The Gateway through a lender-directed sale in full satisfaction of our mortgage obligation. No such gain
was recorded during the year ended December 31, 2015;
an $8,954 decrease in operating expenses and real estate taxes, net of tenant recovery income, primarily as a result of the
operating properties sold during 2015 and 2016 or classified as held for sale as of December 31, 2016 and the impact
from our same store portfolio, partially offset by an increase from our one remaining office property;
a $7,915 increase in gain on sales of investment properties related to the sales of 46 investment properties and one single-
user outparcel, representing approximately 3,013,900 square feet of GLA, during the year ended December 31, 2016
compared to the sales of 26 investment properties, representing approximately 3,917,200 square feet of GLA, during the
year ended December 31, 2015;
a $6,978 gain on extinguishment of other liabilities recognized during the year ended December 31, 2016 related to the
acquisition of the fee interest in Ashland & Roosevelt, one of our existing investment properties that was previously
subject to a ground lease with a third party. The amount recognized represents the reversal of the straight-line ground rent
liability associated with the ground lease. No such gain was recorded during the year ended December 31, 2015; and
a $6,135 decrease in general and administrative expenses primarily consisting of executive and realignment separation
charges of $4,730 incurred during the year ended December 31, 2015, which were not present in 2016, and a $1,521
decrease in executive and employee bonus expense;
partially offset by
a $16,686 decrease in rental income primarily consisting of a $16,324 decrease in base rent resulting from the operating
properties sold during 2015 and 2016 or classified as held for sale as of December 31, 2016, along with our redevelopment
properties and our one remaining office property, partially offset by an increase from the operating properties acquired
during 2015 and 2016 and growth from our same store portfolio;
a $9,724 increase in depreciation and amortization primarily attributable to the write-off of assets taken out of service at
two redevelopment properties during the year ended December 31, 2016; and
a $3,164 decrease in other property income primarily as a result of the operating properties sold during 2015 and 2016
or classified as held for sale as of December 31, 2016, along with our same store portfolio and our redevelopment properties,
partially offset by an increase from the operating properties acquired during 2015 and 2016.
Same store portfolio – 2016 and 2015
For the year ended December 31, 2016, our same store portfolio consisted of 140 retail operating properties acquired or placed in
service and stabilized prior to January 1, 2015.
36
The following tables present a reconciliation of net income attributable to common shareholders to Same Store NOI and details
of the components of Same Store NOI for the years ended December 31, 2016 and 2015:
Net income attributable to common shareholders
Adjustments to reconcile to Same Store NOI:
Preferred stock dividends
Net income attributable to noncontrolling interest
Gain on sales of investment properties
Depreciation and amortization
Provision for impairment of investment properties
General and administrative expenses
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Straight-line rental income, net
Amortization of acquired above and below market lease intangibles, net
Amortization of lease inducements
Lease termination fees
Straight-line ground rent expense
Amortization of acquired ground lease intangibles
Other income, net
NOI
NOI from Other Investment Properties
Same Store NOI
Same Store NOI:
Base rent
Percentage and specialty rent
Tenant recovery income
Other property operating income
Property operating expenses
Bad debt expense
Real estate taxes
Year Ended December 31,
2015
2016
Change
$
157,367
$
115,646
$
41,721
9,450
—
(129,707)
224,430
20,376
44,522
(13,653)
(6,978)
109,730
(4,601)
(2,991)
1,033
(3,339)
3,253
(560)
(63)
408,269
(81,483)
326,786
$
9,450
528
(121,792)
214,706
19,937
50,657
—
—
138,938
(3,498)
(3,621)
847
(3,757)
3,722
(560)
(1,700)
419,503
(103,832)
315,671
Year Ended December 31,
2015
2016
$
355,077
3,626
96,208
3,405
458,316
64,355
31
67,144
131,530
347,806
3,095
94,354
3,527
448,782
65,722
1,179
66,210
133,111
—
(528)
(7,915)
9,724
439
(6,135)
(13,653)
(6,978)
(29,208)
(1,103)
630
186
418
(469)
—
1,637
(11,234)
22,349
11,115
Change
7,271
531
1,854
(122)
9,534
(1,367)
(1,148)
934
(1,581)
$
$
$
$
Same Store NOI
$
326,786
$
315,671
$
11,115
Same store NOI increased $11,115, or 3.5%, primarily due to the following:
•
•
base rent increased $7,271 primarily due to an increase of $2,983 from contractual rent changes, $2,574 from occupancy
growth and $2,353 from re-leasing spreads, partially offset by a decrease of $718 from higher rent abatements;
property operating expenses and real estate taxes, net of tenant recovery income, decreased $2,287 primarily as a result
of decreases in certain non-recoverable property operating expenses combined with lower net recoverable property
operating expenses and net real estate taxes resulting from lower than anticipated expenses and the receipt of real estate
tax refunds; and
•
bad debt expense decreased $1,148.
37
Funds From Operations Attributable to Common Shareholders
The National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a financial
measure known as funds from operations (FFO). As defined by NAREIT, FFO means net income (loss) computed in accordance
with GAAP, excluding gains (or losses) from sales of depreciable real estate, plus depreciation and amortization and impairment
charges on depreciable real estate. We have adopted the NAREIT definition in our computation of FFO attributable to common
shareholders. Management believes that, subject to the following limitations, FFO attributable to common shareholders provides
a basis for comparing our performance and operations to those of other REITs.
We define Operating FFO attributable to common shareholders as FFO attributable to common shareholders excluding the impact
of discrete non-operating transactions and other events which we do not consider representative of the comparable operating results
of our real estate operating portfolio, which is our core business platform. Specific examples of discrete non-operating transactions
and other events include, but are not limited to, the impact on earnings from gains or losses associated with the early extinguishment
of debt or other liabilities, impairment charges to write down the carrying value of assets other than depreciable real estate, litigation
involving the Company, including actual or anticipated settlement and associated legal costs, the impact on earnings from executive
separation and the excess of redemption value over carrying value of preferred stock redemption, which are not otherwise adjusted
in our calculation of FFO attributable to common shareholders.
We believe that FFO attributable to common shareholders and Operating FFO attributable to common shareholders, which are
supplemental non-GAAP financial measures, provide additional and useful means to assess the operating performance of REITs.
FFO attributable to common shareholders and Operating FFO attributable to common shareholders do not represent alternatives
to (i) “Net income” or “Net income attributable to common shareholders” as indicators of our financial performance, or (ii) “Cash
flows from operating activities” in accordance with GAAP as measures of our capacity to fund cash needs, including the payment
of dividends. Comparison of our presentation of Operating FFO attributable to common shareholders to similarly titled measures
for other REITs may not necessarily be meaningful due to possible differences in definition and application by such REITs.
The following table presents a reconciliation of net income attributable to common shareholders to FFO attributable to common
shareholders and Operating FFO attributable to common shareholders:
Net income attributable to common shareholders
Depreciation and amortization of depreciable real estate
Provision for impairment of investment properties
Gain on sales of depreciable investment properties, net of noncontrolling interest
FFO attributable to common shareholders
FFO attributable to common shareholders per common share outstanding – diluted
FFO attributable to common shareholders
Impact on earnings from the early extinguishment of debt, net
Provision for hedge ineffectiveness
Provision for impairment of non-depreciable investment property
Gain on extinguishment of other liabilities
Impact on earnings from executive separation, net (a)
Excess of redemption value over carrying value of preferred stock redemption (b)
Other (c)
Operating FFO attributable to common shareholders
Operating FFO attributable to common shareholders
per common share outstanding – diluted
Year Ended December 31,
2016
2015
2017
237,624
202,110
67,003
(337,975)
168,762
0.73
168,762
72,654
9
—
—
(1,086)
4,706
441
245,486
1.06
$
$
$
$
$
$
157,367
223,018
17,369
(129,707)
268,047
1.13
268,047
(7,028)
(21)
3,007
(6,978)
—
—
132
257,159
1.09
$
$
$
$
$
$
115,646
213,602
19,937
(121,264)
227,921
0.96
227,921
18,864
(25)
—
—
4,730
—
(224)
251,266
1.06
$
$
$
$
$
$
(a) Reflected as a reduction to “General and administrative expenses” in the accompanying consolidated statements of operations and other
comprehensive income.
(b) Included in “Preferred stock dividends” in the accompanying consolidated statements of operations and other comprehensive income.
(c) Primarily consists of the impact on earnings from litigation involving the Company, including actual or anticipated settlement and associated
legal costs as well as easement proceeds, which are included in “Other income, net” in the accompanying consolidated statements of
operations and other comprehensive income.
38
Liquidity and Capital Resources
We anticipate that cash flows from the below-listed sources will provide adequate capital for the next 12 months and beyond for
all scheduled principal and interest payments on our outstanding indebtedness, including maturing debt, current and anticipated
tenant allowances or other capital obligations, the shareholder distributions required to maintain our REIT status and compliance
with the financial covenants of our unsecured debt agreements.
Our primary expected sources and uses of liquidity are as follows:
SOURCES
USES
Operating cash flow
Cash and cash equivalents
Available borrowings under our unsecured revolving
line of credit
Proceeds from capital markets transactions
Proceeds from asset dispositions
Tenant allowances and leasing costs
Improvements made to individual properties, certain of which are not
recoverable through common area maintenance charges to tenants
Acquisitions
Debt repayments
Distribution payments
Redevelopment, renovation or expansion activities
New development
Repurchases of our common stock
We have made substantial progress over the last several years in strengthening our balance sheet, as demonstrated by our reduced
leverage, increased liquidity and higher unencumbered asset ratio. We have funded debt maturities primarily through asset
dispositions and capital markets transactions, including the public offering of our common stock and private and public offerings
of senior unsecured notes. As of December 31, 2017, we had $104,166 of debt scheduled to mature through the end of 2018,
comprised of $100,000 of our unsecured term loan due 2018 and $4,166 of principal amortization due through the end of 2018,
which we plan on satisfying through a combination of proceeds from asset dispositions, capital markets transactions and our
unsecured revolving line of credit.
The table below summarizes our consolidated indebtedness as of December 31, 2017:
Debt
Aggregate
Principal
Amount
Weighted
Average
Interest Rate
Fixed rate mortgages payable (a)
$
287,238
4.99%
Unsecured notes payable:
Senior notes – 4.12% due 2021
Senior notes – 4.58% due 2024
Senior notes – 4.00% due 2025
Senior notes – 4.08% due 2026
Senior notes – 4.24% due 2028
Total unsecured notes payable (a)
Unsecured credit facility:
Term loan due 2021 – fixed rate (b)
Term loan due 2018 – variable rate
Revolving line of credit – variable rate
Total unsecured credit facility (a)
Term Loan Due 2023 – fixed rate (a) (d)
100,000
150,000
250,000
100,000
100,000
700,000
250,000
100,000
216,000
566,000
200,000
Maturity Date
Various
June 30, 2021
June 30, 2024
March 15, 2025
September 30, 2026
December 28, 2028
January 5, 2021
May 11, 2018 (c)
January 5, 2020 (c)
4.12%
4.58%
4.00%
4.08%
4.24%
4.19%
3.30%
2.93%
2.92%
3.09%
2.96%
November 22, 2023
Weighted
Average Years
to Maturity
5.2 years
3.5 years
6.5 years
7.2 years
8.8 years
11.0 years
7.3 years
3.0 years
0.4 years
2.0 years
2.2 years
5.9 years
5.1 years
Total consolidated indebtedness
$
1,753,238
3.83%
(a) Fixed rate mortgages payable excludes mortgage premium of $1,024, discount of $(579) and capitalized loan fees of $(615), net of
accumulated amortization, as of December 31, 2017. Unsecured notes payable excludes discount of $(853) and capitalized loan fees of
$(3,399), net of accumulated amortization, as of December 31, 2017. Term loans exclude capitalized loan fees of $(2,730), net of accumulated
amortization, as of December 31, 2017. Capitalized loan fees related to the revolving line of credit are included in “Other assets, net” in
the accompanying consolidated balance sheets.
39
(b) Reflects $250,000 of LIBOR-based variable rate debt that has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage
grid ranging from 1.30% to 2.20% through January 5, 2021. The applicable credit spread was 1.30% as of December 31, 2017.
(c) We have two one-year extension options on the term loan due 2018 and two six-month extension options on the revolving line of credit,
which we may exercise as long as we are in compliance with the terms of the unsecured credit agreement and we pay an extension fee equal
to 0.15% for the term loan and 0.075% of the commitment amount being extended for the revolving line of credit.
(d) Reflects $200,000 of LIBOR-based variable rate debt that has been swapped to a fixed rate of 1.26% plus a credit spread based on a leverage
grid ranging from 1.70% to 2.55% through November 22, 2018. The applicable credit spread was 1.70% as of December 31, 2017.
Mortgages Payable
During the year ended December 31, 2017, we repaid or defeased mortgages payable in the total amount of $481,505, which had
a weighted average fixed interest rate of 7.10%, and made scheduled principal payments of $4,652 related to amortizing loans.
Included within the total repayments and defeasances for the year ended December 31, 2017 is the defeasance of a portfolio of
mortgages payable with a principal balance of $379,435 as of December 31, 2016 and an interest rate of 7.50% that was cross-
collateralized by 45 properties and scheduled to mature in 2019 (known as the IW JV portfolio of mortgages payable). We incurred
a defeasance premium and associated fees totaling $60,198 in connection with this transaction, which are included within “Interest
expense” in the accompanying consolidated statements of operations and other comprehensive income. As a result, the 45 properties
that secured the mortgages payable as of December 31, 2016 are no longer encumbered by mortgages.
Unsecured Notes Payable
Notes Due 2026 and 2028
On September 30, 2016, we issued $100,000 of 4.08% senior unsecured notes due 2026 in a private placement transaction pursuant
to a note purchase agreement we entered into with certain institutional investors on September 30, 2016. Pursuant to the same note
purchase agreement, on December 28, 2016, we also issued $100,000 of 4.24% senior unsecured notes due 2028 (Notes Due 2026
and 2028). The proceeds were used to pay down our unsecured revolving line of credit, early repay certain longer-dated mortgages
payable and for general corporate purposes.
The note purchase agreement governing the Notes Due 2026 and 2028 contains customary representations, warranties and
covenants, and events of default. Pursuant to the terms of the note purchase agreement, we are subject to various financial covenants,
including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii)
a minimum interest coverage ratio; (iii) an unencumbered interest coverage ratio (as set forth in our unsecured credit facility and
the note purchase agreement governing the Notes Due 2021 and 2024); and (iv) a fixed charge coverage ratio (as set forth in our
unsecured credit facility).
Notes Due 2025
On March 12, 2015, we completed a public offering of $250,000 in aggregate principal amount of the Notes Due 2025. The Notes
Due 2025 were priced at 99.526% of the principal amount to yield 4.058% to maturity. The proceeds were used to repay a portion
of our unsecured revolving line of credit.
The indenture, as supplemented, governing the Notes Due 2025 (the Indenture) contains customary covenants and events of default.
Pursuant to the terms of the Indenture, we are subject to various financial covenants, including the requirement to maintain the
following: (i) maximum secured and total leverage ratios; (ii) a debt service coverage ratio; and (iii) maintenance of an unencumbered
assets to unsecured debt ratio.
Notes Due 2021 and 2024
On June 30, 2014, we completed a private placement of $250,000 of unsecured notes, consisting of $100,000 of 4.12% senior
unsecured notes due 2021 and $150,000 of 4.58% senior unsecured notes due 2024 (Notes Due 2021 and 2024). The proceeds
were used to repay a portion of our unsecured revolving line of credit.
The note purchase agreement governing the Notes Due 2021 and 2024 contains customary representations, warranties and
covenants, and events of default. Pursuant to the terms of the note purchase agreement, we are subject to various financial covenants,
some of which are based upon the financial covenants in effect in our unsecured credit facility, including the requirement to maintain
the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum interest coverage and
unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth.
40
As of December 31, 2017, management believes we were in compliance with the financial covenants under the Indenture and the
note purchase agreements.
Unsecured Term Loans and Revolving Line of Credit
Unsecured Credit Facility
On January 6, 2016, we entered into our fourth amended and restated unsecured credit agreement (Unsecured Credit Agreement)
with a syndicate of financial institutions led by KeyBank National Association serving as administrative agent and Wells Fargo
Bank, National Association serving as syndication agent to provide for an unsecured credit facility aggregating $1,200,000
(Unsecured Credit Facility). The Unsecured Credit Facility consists of a $750,000 unsecured revolving line of credit, a $250,000
unsecured term loan and a second unsecured term loan that had an outstanding balance of $200,000 at inception, of which we
repaid $100,000 during the year ended December 31, 2017, and is priced on a leverage grid at a rate of LIBOR plus a credit spread.
We received investment grade credit ratings from Moody’s and Standard & Poor’s in 2014. In accordance with the Unsecured
Credit Agreement, we may elect to convert to an investment grade pricing grid. As of December 31, 2017, making such an election
would have resulted in a higher interest rate and, as such, we have not made the election to convert to an investment grade pricing
grid.
The following table summarizes the key terms of the Unsecured Credit Facility:
Unsecured Credit Facility
$250,000 unsecured term loan
$100,000 unsecured term loan
Maturity
Date
1/5/2021
Extension
Option
Extension
Fee
Credit
Spread
Unused Fee
Credit
Spread
Facility Fee
Leverage-Based Pricing
Ratings-Based Pricing
N/A
N/A
1.30% - 2.20%
5/11/2018
2 one year
0.15%
1.45% - 2.20%
N/A
N/A
0.90% - 1.75%
1.05% - 2.05%
N/A
N/A
$750,000 unsecured revolving line of credit
1/5/2020
2 six month
0.075%
1.35% - 2.25% 0.15% - 0.25% 0.85% - 1.55% 0.125% - 0.30%
The Unsecured Credit Facility has a $400,000 accordion option that allows us, at our election, to increase the total credit facility
subject to (i) customary fees and conditions including, but not limited to, the absence of an event of default as defined in the
Unsecured Credit Agreement and (ii) our ability to obtain additional lender commitments.
The Unsecured Credit Agreement contains customary representations, warranties and covenants, and events of default. Pursuant
to the terms of the Unsecured Credit Agreement, we are subject to various financial covenants, including the requirement to
maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; and (ii) minimum fixed charge and
unencumbered interest coverage ratios. As of December 31, 2017, management believes we were in compliance with the financial
covenants and default provisions under the Unsecured Credit Agreement.
As of December 31, 2017, we had letters of credit outstanding totaling $9,645 that serve as collateral for certain capital improvements
and performance obligations on certain redevelopment projects, which will be satisfied upon completion of the projects, and
reduced the available borrowings on our unsecured revolving line of credit.
Term Loan Due 2023
On January 3, 2017, we received funding on a seven-year $200,000 unsecured term loan with a group of financial institutions,
which closed during the year ended December 31, 2016. The Term Loan Due 2023 is priced on a leverage grid at a rate of LIBOR
plus a credit spread. In accordance with the term loan agreement (Term Loan Agreement), we may elect to convert to an investment
grade pricing grid. As of December 31, 2017, making such an election would have resulted in a higher interest rate and, as such,
we have not made the election to convert to an investment grade pricing grid.
The following table summarizes the key terms of the Term Loan Due 2023:
Term Loan Due 2023
$200,000 unsecured term loan
Maturity Date
11/22/2023
Leverage-Based Pricing
Credit Spread
1.70% – 2.55%
Ratings-Based Pricing
Credit Spread
1.50% – 2.45%
The Term Loan Due 2023 has a $100,000 accordion option that allows us, at our election, to increase the total unsecured term loan
up to $300,000, subject to customary fees and conditions, including the absence of an event of default as defined in the Term Loan
Agreement.
41
The Term Loan Agreement contains customary representations, warranties and covenants, and events of default, including financial
covenants that require us to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; and
(ii) minimum fixed charge and unencumbered interest coverage ratios. As of December 31, 2017, management believes we were
in compliance with the financial covenants and default provisions under the Term Loan Agreement.
Debt Maturities
The following table shows the scheduled maturities and principal amortization of our indebtedness as of December 31, 2017 for
each of the next five years and thereafter and the weighted average interest rates by year, as well as the fair value of our indebtedness
as of December 31, 2017. The table does not reflect the impact of any 2018 debt activity.
2018
2019
2020
2021
2022
Thereafter
Total
Fair Value
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
4,166
25,257
3,923
$
4,166
$ 25,257
$
3,923
$ 22,820
$ 157,216
$ 73,856
$ 287,238
$
298,635
—
—
—
—
—
—
250,000
100,000
372,820
—
—
157,216
200,000
600,000
873,856
450,000
700,000
452,451
693,823
1,437,238
1,444,909
Variable rate debt:
Variable rate term loan and
revolving line of credit
100,000
—
216,000
—
—
—
316,000
316,326
Total debt (d)
$ 104,166
$ 25,257
$ 219,923
$ 372,820
$ 157,216
$ 873,856
$1,753,238
$ 1,761,235
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
5.07%
2.93%
3.01%
7.29%
—
7.29%
4.62%
2.92%
2.95%
3.62%
—
3.62%
4.97%
—
4.97%
3.92%
—
3.92%
4.02%
2.92%
3.83%
(a) Excludes mortgage premium of $1,024 and discount of $(579), net of accumulated amortization, as of December 31, 2017.
(b) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate through three interest rate swaps. The swaps effectively
convert one-month floating rate LIBOR to a fixed rate of 2.00% through January 5, 2021. In addition, $200,000 of LIBOR-based variable
rate debt has been swapped to a fixed rate through two interest rate swaps. The swaps effectively convert one-month floating rate LIBOR
to a fixed rate of 1.26% through November 22, 2018.
(c) Excludes discount of $(853), net of accumulated amortization, as of December 31, 2017.
(d) The weighted average years to maturity of consolidated indebtedness was 5.1 years as of December 31, 2017. Total debt excludes capitalized
loan fees of $(6,744), net of accumulated amortization, as of December 31, 2017, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2017.
We plan on addressing our debt maturities through a combination of proceeds from asset dispositions, capital markets transactions
and our unsecured revolving line of credit.
Distributions and Equity Transactions
Our distributions of current and accumulated earnings and profits for U.S. federal income tax purposes are taxable to shareholders,
generally, as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction
of the shareholders’ basis in the shares to the extent thereof (non-dividend distributions) and thereafter as taxable gain. We intend
to continue to qualify as a REIT for U.S. federal income tax purposes. The Code generally requires that a REIT annually distributes
to its shareholders at least 90% of its REIT taxable income, determined without regard to the dividends paid deduction and excluding
net capital gains. The Code imposes tax on any undistributed REIT taxable income.
To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we
intend to make regular quarterly distributions of all, or substantially all, of our taxable income to shareholders. Our future
distributions will be at the sole discretion of our board of directors. When determining the amount of future distributions, we expect
to consider, among other factors, (i) the amount of cash generated from our operating activities, (ii) our expectations of future cash
flow, (iii) our determination of near-term cash needs for debt repayments and potential future share repurchases, (iv) the market
of available acquisitions of new properties and redevelopment, expansions and pad development opportunities, (v) the timing of
42
significant re-leasing activities and the establishment of additional cash reserves for anticipated tenant allowances and general
property capital improvements, (vi) our ability to continue to access additional sources of capital, and (vii) the amount required
to be distributed to maintain our status as a REIT, which is a requirement of our Unsecured Credit Agreement, and to avoid or
minimize any income and excise taxes that we otherwise would be required to pay. Under certain circumstances, we may be
required to make distributions in excess of cash available for distribution in order to meet the REIT distribution requirements.
In December 2012, we issued 5,400 shares of our 7.00% Series A cumulative redeemable preferred stock at a price of $25.00 per
share. On December 20, 2017, we redeemed all 5,400 outstanding shares of our Series A preferred stock for cash at a redemption
price of $25.00 per share, plus $0.3840 per share representing all accrued and unpaid dividends up to, but excluding, the redemption
date. The $4,706 difference between the carrying value of $130,294 and the redemption amount of $135,000 represents the original
underwriting discount and offering costs from 2012 and was recorded as preferred stock dividends.
In December 2015, we entered into an at-the-market (ATM) equity program under which we may issue and sell shares of our Class
A common stock, having an aggregate offering price of up to $250,000, from time to time. Actual sales may depend on a variety
of factors, including, among others, market conditions and the trading price of our Class A common stock. Any net proceeds are
expected to be used for general corporate purposes, which may include the funding of acquisitions and redevelopment activities
and the repayment of debt, including our unsecured revolving line of credit. We did not sell any shares under our ATM equity
program during the years ended December 31, 2017, 2016 and 2015. As of December 31, 2017, we had Class A common shares
having an aggregate offering price of up to $250,000 remaining available for sale under our ATM equity program.
In December 2015, our board of directors authorized a common stock repurchase program under which we may repurchase, from
time to time, up to a maximum of $250,000 of shares of our Class A common stock. On December 14, 2017, our board of directors
authorized a $250,000 increase to our common stock repurchase program. The shares may be repurchased in the open market or
in privately negotiated transactions and are canceled upon repurchase. The timing and actual number of shares repurchased will
depend on a variety of factors, including price in absolute terms and in relation to the value of our assets, corporate and regulatory
requirements, market conditions and other corporate liquidity requirements and priorities. The common stock repurchase program
may be suspended or terminated at any time without prior notice. We did not repurchase any shares during the year ended December
31, 2015. During the year ended December 31, 2016, we repurchased 591 shares at an average price per share of $14.93 for a total
of $8,841. During the year ended December 31, 2017, we repurchased 17,683 shares at an average price per share of $12.82 for
a total of $227,102. As of December 31, 2017, $264,057 remained available for repurchases under our common stock repurchase
program.
Capital Expenditures and Redevelopment Activity
We anticipate that obligations related to capital improvements, including expansions and pad developments, at our retail operating
properties and our one remaining office property in 2018 can be met with cash flows from operations, asset dispositions and
working capital.
We began redevelopment activities at Reisterstown Road Plaza and Towson Circle in 2016. We have invested a total of approximately
$20,600 in these projects, which are at various stages of completion, and based on our current plans and estimates, we anticipate
that to complete these projects, it will require an additional $21,900 to $24,900, net of proceeds from land sales, sales of air rights,
reimbursement from third parties and contributions from a project partner, as applicable. In addition, we plan to begin the first
phase of the redevelopment at Boulevard at the Capital Centre in 2018. We anticipate funding the redevelopments with cash flows
from operations, asset dispositions, working capital, capital markets transactions and our unsecured revolving line of credit.
Dispositions
The following table highlights our property dispositions during 2017, 2016 and 2015 pursuant to our portfolio transformation
strategy of disposing of select non-target and single-user properties.
2017 Dispositions
2016 Dispositions
2015 Dispositions
Number of
Properties Sold (a)
47
46
26
Square
Footage
5,810,700
3,013,900
3,917,200
Consideration
917,808
$
540,362
$
516,444
$
Aggregate
Proceeds, Net (b)
896,301
$
448,216
$
505,524
$
Debt
Extinguished
$
$
$
27,353 (c)
94,353 (c) (d)
25,724 (c)
(a) 2017 dispositions include the dispositions of CVS Pharmacy – Sylacauga and Century III Plaza, including the Home Depot parcel, both of
which were classified as held for sale as of December 31, 2016. 2016 dispositions include the disposition of one development property,
43
which was not under active development. 2015 dispositions include the dispositions of two development properties, one of which had been
held in a consolidated joint venture.
(b) Represents total consideration net of transaction costs. 2017 dispositions include proceeds of $54,087, which are temporarily restricted
related to potential 1031 Exchanges.
(c) Excludes $214,505, $10,695 and $95,881 of mortgages payable repayments or defeasances completed prior to disposition of the respective
property for the years ended December 31, 2017, 2016 and 2015, respectively.
(d) Represents The Gateway’s outstanding mortgage payable prior to the lender-directed sale of the property. Immediately prior to the disposition,
the lender reduced our loan obligation to $75,000 which was assumed by the buyer in connection with the disposition. Along with the loan
reduction, the lender received the balance of the restricted escrows that they held and the rights to unpaid accounts receivable and forgave
accrued interest, resulting in a net gain on extinguishment of debt of $13,653.
In addition to the transactions presented in the preceding table, we received net proceeds of $155, $2,549 and $300 from other
transactions, including escrow funds related to a property disposition, condemnation awards and the sale of parcels at certain of
our properties, during the years ended December 31, 2017, 2016 and 2015, respectively.
Acquisitions
During the years ended December 31, 2017, 2016 and 2015, we executed on our investment strategy of acquiring high quality,
multi-tenant retail assets in certain markets. The following table highlights our acquisitions during these periods:
2017 Acquisitions (a)
2016 Acquisitions (b)
2015 Acquisitions (c)
Number of
Assets Acquired
10
9
11
Square
Footage
443,800
1,102,300
1,179,800
Acquisition
Price
Mortgage
Debt
$
$
$
202,915
408,308
463,136
$
$
$
—
15,971
—
(a) 2017 acquisitions include the purchase of the following: 1) the fee interest in our Boulevard at the Capital Centre multi-tenant retail operating
property that was previously subject to a ground lease with a third party, 2) the remaining five phases under contract, including the development
rights for additional residential units, at our One Loudoun Downtown multi-tenant retail operating property that was acquired in phases as
the seller completed construction on stand-alone buildings at the property and 3) a multi-tenant retail outparcel located at our Southlake
Town Square multi-tenant retail operating property. The total number of properties in our portfolio was not affected by these transactions.
(b) 2016 acquisitions include the purchase of the following: 1) the fee interest in our Ashland & Roosevelt multi-tenant retail operating property
that was previously subject to a ground lease with a third party and 2) the anchor space improvements at our Woodinville Plaza multi-tenant
retail operating property that was previously subject to a ground lease with us. The total number of properties in our portfolio was not
affected by these transactions.
(c) 2015 acquisitions include the purchase of the following: 1) a land parcel located at our Lake Worth Towne Crossing multi-tenant retail
operating property, 2) a single-user outparcel located at our Southlake Town Square multi-tenant retail operating property that was subject
to a ground lease with us prior to the transaction and 3) a single-user outparcel located at our Royal Oaks Village II multi-tenant retail
operating property. The total number of properties in our portfolio was not affected by these transactions.
Summary of Cash Flows
Net cash provided by operating activities
Net cash provided by investing activities
Net cash used in financing activities
Increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, at beginning of year
Cash, cash equivalents and restricted cash, at end of year
Cash Flows from Operating Activities
Year Ended December 31,
2016
2017
Change
$
$
247,516
608,302
(851,832)
3,986
82,349
86,335
$
$
266,130
12,444
(283,453)
(4,879)
87,228
82,349
$
(18,614)
595,858
(568,379)
8,865
Cash flows from operating activities consist primarily of net income from property operations, adjusted for the following, among
others: (i) depreciation and amortization, (ii) provision for impairment of investment properties, (iii) gains on sales of investment
properties, and (iv) gains on extinguishment of debt and other liabilities. Net cash provided by operating activities in 2017 decreased
$18,614 primarily due to the following:
44
•
a $44,206 decrease in NOI, consisting of a decrease in NOI from properties that were sold or held for sale in 2016 and
2017 and other properties not included in our same store portfolio of $49,857, partially offset by an increase in Same
Store NOI of $5,651; and
•
a $6,341 increase in cash paid for leasing fees and inducements;
partially offset by
•
•
•
a $28,097 decrease in cash paid for interest, excluding debt prepayment fees;
a $707 decrease in cash bonuses paid; and
ordinary course fluctuations in working capital accounts.
Cash Flows from Investing Activities
Cash flows from investing activities consist primarily of proceeds from the sales of investment properties, net of cash paid to
purchase investment properties and fund capital expenditures, tenant improvements and developments in progress. Net cash flows
from investing activities in 2017 increased $595,858 primarily due to the following:
•
•
•
•
a $450,390 increase in proceeds from the sales of investment properties; and
a $180,681 decrease in cash paid to purchase investment properties;
partially offset by
a $21,982 increase in capital expenditures and tenant improvements; and
a $12,287 increase in investment in developments in progress.
In 2018, we expect to generate cash flows from investing activities from targeted dispositions, which are expected to be used to
(i) fund redevelopment, expansion and pad development activities, capital expenditures and tenant improvements, (ii) repay debt,
and (iii) complete targeted acquisitions.
Cash Flows from Financing Activities
Cash flows used in financing activities primarily consist of proceeds from our unsecured revolving line of credit and the issuance
of debt instruments, partially offset by distribution payments, repayments of our unsecured revolving line of credit and other debt
instruments, principal payments on mortgages payable, debt prepayment costs, the purchase of U.S. Treasury securities in
connection with defeasance of mortgages payable, repurchases of our common stock and the redemption of our preferred stock.
Net cash flows used in financing activities in 2017 increased $568,379 primarily due to the following:
•
•
•
•
•
•
•
a $426,973 increase in the purchase of U.S. Treasury securities in connection with defeasance of mortgages payable due
to the defeasance of the remaining mortgages payable in the IW JV portfolio during the year ended December 31, 2017;
a $218,261 increase in repurchases of our common shares through our share repurchase program;
the $135,000 redemption of all 5,400 outstanding shares of our 7.00% Series A cumulative redeemable preferred stock
during the year ended December 31, 2017;
the repayment of $100,000 on our unsecured term loan due 2018 during the year ended December 31, 2017; and
a $200,000 decrease in proceeds from the issuance of unsecured notes related to a $200,000 private placement transaction
during the year ended December 31, 2016;
partially offset by
$200,000 of proceeds from the Term Loan Due 2023, which funded in January 2017;
a $159,311 decrease in principal payments on mortgages payable;
45
•
•
a $144,000 increase in net proceeds from our unsecured revolving line of credit; and
an $8,746 decrease in the payment of loan fees and deposits.
In 2018, we plan to continue to address our debt maturities through a combination of proceeds from asset dispositions, capital
markets transactions and our unsecured revolving line of credit.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
Contractual Obligations
The following table presents our obligations and commitments to make future payments under our debt obligations and lease
agreements as of December 31, 2017 and excludes the following:
•
•
•
•
the impact of any 2018 debt activity;
recorded debt premiums, discounts and capitalized loan fees, which are not obligations;
obligations related to development, redevelopment, expansions and pad site developments, as payments are only due
upon satisfactory performance under the contracts; and
letters of credit totaling $9,645 that serve as collateral for certain capital improvements and performance obligations on
certain redevelopment projects, which will be satisfied upon completion of the projects.
Long-term debt (a):
Fixed rate
Variable rate
Interest (e)
Operating lease obligations (f)
Less than
1 year (b)
1-3
years
3-5
years (c)
More than
5 years (d)
Total
Payment due by period
$
$
4,166
100,000
65,543
6,717
176,426
$
$
29,180
216,000
120,097
14,304
379,581
$
$
530,036
—
82,434
14,706
627,176
$
$
873,856
—
86,956
348,246
1,309,058
$
$
1,437,238
316,000
355,030
383,973
2,492,241
(a) Fixed and variable rate amounts for each year include scheduled principal amortization payments. Interest payments related to variable rate
debt were calculated using interest rates as of December 31, 2017.
(b) We plan on addressing our 2018 term loan maturity and scheduled principal payments on our mortgages payable through a combination of
proceeds from asset dispositions, capital markets transactions and our unsecured revolving line of credit.
(c) Included in fixed rate debt is $250,000 of LIBOR-based variable rate debt that has been swapped to a fixed rate through three interest rate
swaps through January 2021.
(d) Included in fixed rate debt is $200,000 of LIBOR-based variable rate debt that has been swapped to a fixed rate through two interest rate
swaps through November 2018.
(e) Represents expected interest payments on our consolidated debt obligations as of December 31, 2017, including any capitalized interest.
(f) We lease land under non-cancellable leases at certain of our properties expiring in various years from 2035 to 2087, not inclusive of any
available option period. In addition, unless we can purchase a fee interest in the underlying land or extend the terms of these leases before
or at their expiration, we will lose our interest in the improvements and the right to operate these properties. We lease office space under
non-cancellable leases expiring in various years from 2018 to 2023.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These
estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods.
For example, significant estimates and assumptions have been made with respect to useful lives of assets; capitalization of
development costs; fair value measurements; provision for impairment, including estimates of holding periods, capitalization rates
and discount rates (where applicable); provision for income taxes; recoverable amounts of receivables; deferred taxes and initial
46
valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions.
Actual results could differ from these estimates.
Summary of Significant Accounting Policies
Critical Accounting Policies and Estimates
The following disclosure pertains to accounting policies and estimates we believe are most “critical” to the portrayal of our financial
condition and results of operations and require our most difficult, subjective or complex judgments. These judgments often result
from the need to make estimates about the effect of matters that are inherently uncertain. GAAP requires information in financial
statements about accounting principles, methods used and disclosures pertaining to significant estimates. This discussion addresses
our judgment pertaining to known trends, events or uncertainties which were taken into consideration upon the application of those
policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions
and assumptions.
Acquisition of Investment Property
We elected to early adopt ASU 2017-01, Business Combinations, on a prospective basis as of October 1, 2016. This guidance
clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not
considered a business and, thus, is accounted for as an asset acquisition as opposed to a business combination. Refer to the “Recently
Adopted Accounting Pronouncements – Prior to 2018” section within Item 7. “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Under this guidance, all of the acquisitions completed subsequent to October 1, 2016 met
this screen and, thus, have been accounted for as asset acquisitions. We allocate the purchase price of each acquired investment
property that is accounted for as an asset acquisition based upon the relative fair value of the individual assets acquired and liabilities
assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired
above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market and (vi) the
value of customer relationships. Asset acquisitions do not give rise to goodwill and the related transaction costs are capitalized
and included with the allocated purchase price.
We allocate the purchase price of each acquired investment property accounted for as a business combination based upon the
estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include (i) land, (ii)
building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease intangibles,
(v) any assumed financing that is determined to be above or below market, (vi) the value of customer relationships and (vii)
goodwill, if any. Transaction costs related to acquisitions accounted for as business combinations are expensed as incurred and
included within “General and administrative expenses” in the accompanying consolidated statements of operations and other
comprehensive income.
For tangible assets acquired, including land, building and other improvements, we consider available comparable market and
industry information in estimating the acquisition date fair value. We allocate a portion of the purchase price to the estimated
acquired in-place lease value intangibles based on estimated lease execution costs for similar leases as well as lost rental payments
during an assumed lease-up period. We also evaluate each acquired lease as compared to current market rates. If an acquired lease
is determined to be above or below market, we allocate a portion of the purchase price to such above or below market leases based
upon the present value of the difference between the contractual lease payments and estimated market rent payments over the
remaining lease term. Renewal periods are included within the lease term in the calculation of above and below market lease
intangibles if, based upon factors known at the acquisition date, market participants would consider it reasonably assured that the
lessee would exercise such options. Fair value estimates used in acquisition accounting, including the discount rate used, require
us to consider various factors, including, but not limited to, market knowledge, demographics, age and physical condition of the
property, geographic location, size and location of tenant spaces within the acquired investment property and tenant profile. For
acquisitions accounted for as business combinations, if, up to one year from the acquisition date, information regarding fair value
of the assets acquired and liabilities assumed is received and estimates are refined, appropriate adjustments are made to the purchase
price allocation on a prospective basis.
Impairment of Long-Lived Assets
Our investment properties, including developments in progress, are reviewed for potential impairment at the end of each reporting
period or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. At the end of each
reporting period, we separately determine whether impairment indicators exist for each property. Examples of situations considered
to be impairment indicators for both operating properties and developments in progress include, but are not limited to:
47
•
•
•
•
•
•
•
•
a substantial decline in or continued low occupancy rate or cash flow;
expected significant declines in occupancy in the near future;
continued difficulty in leasing space;
a significant concentration of financially troubled tenants;
a change in anticipated holding period;
a cost accumulation or delay in project completion date significantly above and beyond the original development or
redevelopment estimate;
a significant decrease in market price not in line with general market trends; and
any other quantitative or qualitative events or factors deemed significant by our management or board of directors.
If the presence of one or more impairment indicators as described above is identified at the end of a reporting period or at any
point throughout the year with respect to a property, the asset is tested for recoverability by comparing its carrying value to the
estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future
undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair
value of an impaired investment property, we make certain complex or subjective assumptions which include, but are not limited
to:
•
•
•
•
•
•
•
projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength,
competitive positioning and property location;
estimated holding period or various potential holding periods when considering probability-weighted scenarios;
projected capital expenditures and lease origination costs;
estimated interest and internal costs expected to be capitalized, dates of construction completion and grand opening dates
for developments in progress;
projected cash flows from the eventual disposition of an operating property or development in progress using a property-
specific capitalization rate;
comparable selling prices; and
a property-specific discount rate.
To determine whether any identified impairment is other-than-temporary, we consider whether we have the ability and intent to
hold the investment until the carrying value is fully recovered. To the extent impairment has occurred, we will record an impairment
charge calculated as the excess of the carrying value of the asset over its estimated fair value.
Cost Capitalization, Depreciation and Amortization Policies
Our policy is to review all expenses paid and capitalize any items which are deemed to be an upgrade or a tenant improvement,
including internal salaries and related benefits of personnel directly involved in the upgrade or improvement. These costs are
included in the investment properties financial statement caption as an addition to building and other improvements. We capitalized
$1,187, $1,152 and $0 of internal salaries and related benefits of personnel directly involved in capital upgrades and tenant
improvements during the years ended December 31, 2017, 2016 and 2015, respectively. In addition, we capitalized $368, $423
and $474 of internal leasing incentives, all of which were incremental to signed leases, during the years ended December 31, 2017,
2016 and 2015, respectively.
Depreciation expense is computed using the straight-line method. Building and other improvements are depreciated based upon
estimated useful lives of 30 years for building and associated improvements and 15 years for site improvements and most other
capital improvements. Tenant improvements, leasing fees and acquired in-place lease value intangibles are amortized on a straight-
line basis over the life of the related lease as a component of depreciation and amortization expense. Acquired above and below
market lease intangibles are amortized on a straight-line basis over the life of the related lease, inclusive of renewal periods if
48
market participants would consider it reasonably assured that the lessee would exercise such options, as an adjustment to rental
income when we are the lessor. For acquired leases in which we are the lessee, any value attributable to above and below market
lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to property operating
expenses.
Development and Redevelopment Projects
Active development and redevelopment projects are classified as developments in progress on the accompanying consolidated
balance sheets and include (i) land held for future development, (ii) ground-up developments and (iii) redevelopment properties
undergoing significant renovations and improvements. During the development or redevelopment period, we capitalize direct
project costs such as construction, insurance, architectural and legal, as well as certain indirect project costs such as interest, other
financing costs, real estate taxes and internal salaries and related benefits of personnel directly involved in the project. Capitalization
of project costs begins when the activities and related expenditures commence and cease when the project, or a portion of the
project, is substantially complete and ready for its intended use, at which time the project is placed in service and depreciation
commences. Additionally, we make estimates as to the probability of completion of development and redevelopment projects. If
we determine that completion of the development or redevelopment project is no longer probable, we expense any capitalized
costs that are not recoverable.
We capitalized $1,202 and $302 of indirect project costs, which includes $268 and $44 of internal salaries and related benefits of
personnel directly involved in the redevelopment projects and $485 and $69 of interest, related to redevelopment projects during
the years ended December 31, 2017 and 2016, respectively. No costs were capitalized during the year ended December 31, 2015.
A project’s, or portion of a project’s, classification changes from development to operating when it is substantially complete and
ready for its intended use, but no later than one year from the completion of major construction activity. Generally, rental property
is considered substantially complete and ready for its intended use upon completion of tenant improvements. A property is considered
stabilized upon reaching 90% occupancy, but no later than one year from the date it was classified as operating, and is included
in our same store portfolio when it is stabilized for the periods presented.
Investment Properties Held for Sale
In determining whether to classify an investment property as held for sale, we consider whether: (i) management has committed
to a plan to sell the investment property; (ii) the investment property is available for immediate sale in its present condition, subject
only to terms that are usual and customary; (iii) we have initiated a program to locate a buyer; (iv) we believe that the sale of the
investment property is probable; (v) we are actively marketing the investment property for sale at a price that is reasonable in
relation to its current value, and (vi) actions required for us to complete the plan indicate that it is unlikely that any significant
changes will be made.
If all of the above criteria are met, we classify the investment property as held for sale. When these criteria are met, we suspend
depreciation (including depreciation for building improvements and tenant improvements) and amortization of acquired in-place
lease value intangibles and any above or below market lease intangibles and we record the investment property held for sale at
the lower of cost or net realizable value. The assets and liabilities associated with those investment properties that are classified
as held for sale are presented separately on the consolidated balance sheets for the most recent reporting period.
Partially-Owned Entities
We consolidate partially-owned entities if they are variable interest entities (VIEs) in accordance with the Consolidation Topic of
the FASB Accounting Standards Codification (ASC) and we are considered the primary beneficiary, we have voting control, the
limited partners (or non-managing members) do not have substantive participatory rights, or other conditions exist that indicate
that we have control. Management uses its judgment when determining if we are the primary beneficiary of, or have a controlling
financial interest in, an entity in which we have a variable interest, to determine whether we have the power to direct the activities
that most significantly impact the entity’s economic performance and if we have significant economic exposure to the risk and
rewards of ownership. We assess our interests in VIEs on an ongoing basis to determine if the entity should be consolidated.
We did not have any VIEs as of December 31, 2017 and 2016. During the years ended December 31, 2017 and 2016, we acquired
one and three properties, respectively, through consolidated VIEs in connection with 1031 Exchanges. During the year ended
December 31, 2017, we loaned $87,452 to the VIEs to acquire Main Street Promenade. During the year ended December 31, 2016,
we loaned $65,419, $39,215 and $23,522 to the VIEs to acquire Oak Brook Promenade, Tacoma South and Eastside, respectively.
The 1031 Exchange for Main Street Promenade was completed during the year ended December 31, 2017 and the 1031 Exchanges
49
for Oak Brook Promenade, Tacoma South and Eastside were completed during the year ended December 31, 2016 and, accordingly,
no agreements remained outstanding related to 1031 Exchanges as of December 31, 2017 and 2016. At the completion of the 1031
Exchanges, the sole membership interests of the VIEs were assigned to us and the respective outstanding loans were extinguished,
resulting in the entities being wholly owned by us and no longer considered VIEs.
Revenue Recognition
We commence revenue recognition on our leases based on a number of factors. In most cases, revenue recognition under a lease
begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease
commencement date. The determination of who is the owner, for accounting purposes, of the tenant improvements determines the
nature of the leased asset and when revenue recognition under a lease begins. If we are the owner, for accounting purposes, of the
tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession
of the finished space, typically when the improvements are substantially complete. If we conclude that the lessee is the owner, for
accounting purposes, of the tenant improvements, then the leased asset is the unimproved space and any tenant improvement
allowances funded under the lease are accounted for as lease inducements which are amortized as a reduction to the revenue
recognized over the term of the lease. In these circumstances, we commence revenue recognition when the lessee takes possession
of the unimproved space for the lessee to construct their own improvements. We consider a number of factors to evaluate whether
we or the lessee are the owner of the tenant improvements for accounting purposes. These factors include:
• whether the lease stipulates how and on what a tenant improvement allowance may be spent;
• whether the tenant or landlord retains legal title to the improvements;
•
•
the uniqueness of the improvements;
the expected economic life of the tenant improvements relative to the length of the lease;
• who constructs or directs the construction of the improvements, and
• whether the tenant or landlord is obligated to fund cost overruns.
The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making
that determination, we consider all of the above factors. No one factor, however, necessarily establishes its determination.
Rental income, for only those leases that have fixed and measurable rent escalations, is recognized on a straight-line basis over
the term of each lease. The difference between such rental income earned and the cash rent due under the provisions of a lease is
recorded as deferred rent receivable and is included as a component of “Accounts and notes receivable” in the accompanying
consolidated balance sheets.
Reimbursements from tenants for recoverable real estate taxes and operating expenses are accrued as revenue in the period the
applicable expenditures are incurred. We make certain assumptions and judgments in estimating the reimbursements at the end of
each reporting period.
We record lease termination income in “Other property income” upon: (i) execution of a termination letter agreement; (ii) when
all of the conditions of such agreement have been fulfilled; (iii) the tenant is no longer occupying the property and (iv) collectibility
is reasonably assured. Upon early lease termination, we may record losses related to recognized tenant specific intangibles and
other assets or adjust the remaining useful life of the assets if determined to be appropriate.
Our policy for percentage rental income is to defer recognition of contingent rental income until the specified target (i.e. breakpoint)
that triggers the contingent rental income is achieved.
Profits from sales of real estate are not recognized under the full accrual method unless: (i) a sale is consummated; (ii) the buyer’s
initial and continuing investments are adequate to demonstrate a commitment to pay for the property; (iii) our receivable, if
applicable, is not subject to future subordination; (iv) we have transferred to the buyer the usual risks and rewards of ownership,
and (v) we do not have substantial continuing involvement with the property.
50
Accounts and Notes Receivable and Allowance for Doubtful Accounts
Accounts and notes receivable balances outstanding include base rents, tenant reimbursements and deferred rent receivables. An
allowance for the uncollectible portion of accounts receivable is determined on a tenant-specific basis through an analysis of
balances outstanding, historical bad debt levels, tenant creditworthiness and current economic trends. Additionally, estimates of
the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy are considered in assessing
the collectibility of the related receivables. As these factors change, the allowance is subject to revision and may impact our results
of operations. Management’s estimate of the collectibility of accounts and notes receivable is based on the best information available
to management at the time of evaluation.
Income Taxes
We have elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, we generally will not be subject
to U.S. federal income tax on the taxable income we currently distribute to our shareholders.
We record a benefit, based on the GAAP measurement criteria, for uncertain income tax positions if the result of a tax position
meets a “more likely than not” recognition threshold.
Impact of Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements – Prior to 2018
We elected to early adopt ASU 2017-01, Business Combinations, on a prospective basis as of October 1, 2016. This new guidance
clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not
considered a business and, thus, is accounted for as an asset acquisition as opposed to a business combination. The screen requires
that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable
asset or a group of similar identifiable assets, the set is not considered a business. Under this new guidance, all of the acquisitions
completed subsequent to October 1, 2016 met the screen and, thus, were accounted for as asset acquisitions. Consistent with
existing guidance, transaction costs associated with asset acquisitions are capitalized while transaction costs associated with
business combinations are expensed as incurred. The adoption of this pronouncement resulted in our acquisition of investment
properties subsequent to October 1, 2016 qualifying as asset acquisitions and, as such, the related transaction costs of $725 incurred
during the three months ended December 31, 2016 were capitalized. All of the acquisitions completed during 2017 were considered
asset acquisitions and, as such, transaction costs were capitalized upon closing.
We elected to early adopt ASU 2017-09, Compensation – Stock Compensation, on a prospective basis as of June 30, 2017. This
new pronouncement amends/clarifies guidance about which changes to the terms or conditions of a share-based payment award
require an entity to apply modification accounting. Under the new guidance, an entity should account for the effects of a modification
unless all of the following are the same in the modified award as the original award immediately before the original award is
modified: 1) the fair value; 2) the vesting conditions; and 3) the classification of the modified award as an equity instrument or a
liability instrument. The existing disclosure requirements apply regardless of whether an entity is required to apply modification
accounting. The adoption of this pronouncement did not have any effect on our consolidated financial statements.
We elected to early adopt ASU 2016-15, Statement of Cash Flows, on a retrospective basis as of December 31, 2017. This new
guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash flows. Of
the eight types of cash flows discussed in the new standard, only one impacted us. The classification of debt prepayment costs as
a financing outflow impacted our consolidated statements of cash flows as these costs had previously been reflected as operating
outflows. The adoption resulted in the reclassification of $3,863 and $837 of debt prepayment costs from operating outflows to
financing outflows for the years ended December 31, 2016 and 2015, respectively.
We elected to early adopt ASU 2016-18, Statement of Cash Flows, on a retrospective basis as of December 31, 2017. This new
guidance requires amounts that are generally described as restricted cash and restricted cash equivalents to be included with cash
and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash
flows. As a result of the adoption, we now include amounts generally described as restricted cash within the beginning-of-period,
change and end-of-period total amounts on the statement of cash flows rather than within an activity on the statement of cash
flows. This resulted in a decrease of $1,481 in net cash provided by operating activities for the year ended December 31, 2016 and
decreases of $5,093 and $22,665 in net cash provided by investing activities for the years ended December 31, 2016 and 2015,
respectively.
51
Recently Adopted Accounting Pronouncements – 2018
In May 2014 with subsequent updates issued in August 2015 and March, April, May and December 2016, the FASB issued ASU
2014-09, Revenue from Contracts with Customers. This new guidance is effective January 1, 2018 and will replace existing revenue
recognition standards. The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The majority of our revenue follows the existing leasing guidance and will not be impacted by the
adoption of this standard, however, the sale of investment property will be required to follow the new guidance upon adoption.
This pronouncement allows either a full or a modified retrospective method of adoption. Expanded quantitative and qualitative
disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. The adoption of this
pronouncement on January 1, 2018 will not have a material effect on our consolidated financial statements as the majority of our
revenue falls outside the scope of this guidance. We will adopt this guidance on a modified retrospective basis and apply it to the
sales of investment properties beginning January 1, 2018.
In February 2017, the FASB issued ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets.
This new guidance is required to be adopted concurrently with the amendments in ASU 2014-09, Revenue from Contracts with
Customers. The new pronouncement, which adds guidance for partial sales of nonfinancial assets and clarifies the scope of Subtopic
610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, applies to the derecognition of all nonfinancial assets
(including real estate) for which the counterparty is not a customer. The pronouncement requires either a retrospective or a modified
retrospective method of adoption. The adoption of this pronouncement on January 1, 2018 on a modified retrospective basis will
not have a material effect on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall. This new guidance is effective January 1, 2018
and will require companies to disclose the fair value of financial assets and financial liabilities measured at amortized cost in
accordance with the exit price notion, which is consistent with our existing practices, and will no longer require disclosure of the
methods and significant assumptions used, including any changes, to estimate fair value. In addition, companies will be required
to disclose all financial assets and financial liabilities grouped by 1) measurement category and 2) form of financial instrument.
The adoption of this pronouncement on January 1, 2018 will not have a material effect on our consolidated financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging. This new guidance is effective January 1, 2019, with
early adoption permitted, and amends the designation and measurement guidance for qualifying hedging relationships and the
presentation of hedge results in an entity’s financial statements. We elected to early adopt this pronouncement as of January 1,
2018. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and entities will be
required to present the earnings effect of the hedging instrument in the same income statement line item in which they report the
earnings effect of the hedged item. In addition, entities may perform the initial quantitative assessment of hedge effectiveness at
any time after hedge designation, but no later than the first quarterly effectiveness testing date, and subsequent assessments of
hedge effectiveness may be performed qualitatively unless facts and circumstances change. Disclosure requirements will be
modified to include a tabular disclosure related to the effect of hedging instruments on the income statement and eliminate the
requirement to disclose the ineffective portion of the change in fair value of such instruments. The adoption of this pronouncement
on January 1, 2018 will not have a material effect on our consolidated financial statements and we will record a cumulative effect
adjustment to accumulated other comprehensive income and accumulated distributions in excess of earnings related to eliminating
the separate measurement of ineffectiveness. The amended presentation and disclosure guidance will be applied prospectively.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance is effective January 1, 2019, with early adoption
permitted, and will require lessees to recognize a liability to make lease payments and a right-of-use (ROU) asset, initially measured
at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees
will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease
assets. Upon adoption, we will recognize a lease liability and an ROU asset for operating leases where we are the lessee, such as
ground leases and office leases. We are in the process of evaluating the inputs required to calculate the amounts that will be recorded
on our balance sheet for each lease. For leases with a term of 12 months or less, we expect to make an accounting policy election
by class of underlying asset to not recognize lease liabilities and lease assets. Under this new pronouncement, lessor accounting
for lease components will be largely unchanged from existing GAAP. Only incremental direct leasing costs may be capitalized
under the new guidance, which is consistent with our existing policies. The pronouncement allows some optional practical
expedients. We expect to adopt this new guidance on January 1, 2019 and will continue to evaluate the impact of this guidance
until it becomes effective.
52
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This new guidance is effective January 1,
2020, with early adoption permitted beginning January 1, 2019, and replaces the current incurred loss impairment methodology
with a methodology that reflects expected credit losses. Financial assets that are measured at amortized cost will be required to be
presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis.
In addition, an entity must consider broader information in developing its expected credit loss estimate, including the use of
forecasted information. Generally, the pronouncement requires a modified retrospective method of adoption. We will continue to
evaluate the impact of this guidance until it becomes effective.
Inflation
Certain of our leases contain provisions designed to mitigate the adverse impact of inflation. Such provisions include clauses
enabling us to receive payment of additional rent calculated as a percentage of tenants’ gross sales above predetermined thresholds,
which generally increase as prices rise, and/or escalation clauses, which generally increase rental rates during the terms of the
leases. While most escalation clauses are fixed in nature, some may include increases based upon changes in the consumer price
index or similar inflation indices. In addition, many of our leases are for terms of less than 10 years, which permits us to seek to
increase rents to market rates upon renewal. Most of our leases require the tenant to pay an allocable share of operating expenses,
including common area maintenance costs, real estate taxes and insurance, thereby reducing our exposure to increases in costs
and operating expenses resulting from inflation.
Subsequent Events
Subsequent to December 31, 2017, we:
•
•
•
•
closed on the disposition of Crown Theater, a 74,200 square foot single-user retail operating property located in Hartford,
Connecticut, which was classified as held for sale as of December 31, 2017, for a sales price of $6,900 with an anticipated
gain on sale;
granted 99 restricted shares at a grant date fair value of $13.34 per share and 268 RSUs at a grant date fair value of $14.13
per RSU to our executives in conjunction with our long-term equity compensation plan. The restricted shares will vest
over three years and the RSUs granted are subject to a three-year performance period. Refer to Note 5 to the accompanying
consolidated financial statements for additional details regarding the terms of the RSUs;
issued 42 shares of common stock and 65 restricted shares with a one year vesting term for the RSUs with a performance
period that concluded on December 31, 2017. An additional 16 shares of common stock were also issued for dividends
that would have been paid on the common stock and restricted shares during the performance period; and
declared the cash dividend for the first quarter of 2018 of $0.165625 per share on our outstanding Class A common stock,
which will be paid on April 10, 2018 to Class A common shareholders of record at the close of business on March 27,
2018.
On February 6, 2018, our board of directors appointed Julie M. Swinehart as our Executive Vice President, Chief Financial Officer
and Treasurer. Ms. Swinehart has served as our Senior Vice President and Chief Accounting Officer since 2015 and as our principal
accounting officer since 2013. She has also held various accounting and financial reporting positions with us since 2008.
53
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may be exposed to interest rate changes primarily as a result of our long-term debt that is used to maintain liquidity and fund
our operations. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash
flows and to lower our overall borrowing costs. To achieve our objectives, we borrow primarily at fixed rates, and in some cases
variable rates with the ability to convert to fixed rates.
With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in
interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain
risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding or forecasted debt
obligations as well as our potential offsetting hedge positions. The risk management control systems involve the use of analytical
techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash
flows.
As of December 31, 2017, we had $450,000 of variable rate debt based on LIBOR that has been swapped to fixed rate debt through
interest rate swaps. Our interest rate swaps as of December 31, 2017 are summarized in the following table:
Fixed rate portion of Unsecured Credit Facility
Term Loan Due 2023
Notional
Amount
$
$
250,000
200,000
450,000
Termination Date
January 5, 2021
November 22, 2018
Fair Value of
Derivative Asset
860
$
226
1,086
$
A decrease of 1% in market interest rates would result in a hypothetical decrease in our derivative asset of approximately $8,853.
The combined carrying amount of our mortgages payable, unsecured notes payable, Term Loan Due 2023 and Unsecured Credit
Facility is approximately $15,149 lower than the fair value as of December 31, 2017.
We may use additional derivative financial instruments to hedge exposures to changes in interest rates. To the extent we do, we
are exposed to market and credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a
change in interest rates. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters
that limit the types and degree of market risk that may be undertaken. Credit risk is the failure of the counterparty to perform under
the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates
credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we generally
are not exposed to the credit risk of the counterparty. We minimize credit risk in derivative instruments by entering into transactions
with highly rated counterparties or with the same party providing the financing, with the right of offset.
54
Debt Maturities
Our interest rate risk is monitored using a variety of techniques. The following table shows the scheduled maturities and principal
amortization of our indebtedness as of December 31, 2017, for each of the next five years and thereafter and the weighted average
interest rates by year, as well as the fair value of our indebtedness as of December 31, 2017. The table does not reflect the impact
of any 2018 debt activity.
2018
2019
2020
2021
2022
Thereafter
Total
Fair Value
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
4,166
25,257
3,923
$
4,166
$ 25,257
$
3,923
$ 22,820
$ 157,216
$ 73,856
$ 287,238
$
298,635
—
—
—
—
—
—
250,000
100,000
372,820
—
—
157,216
200,000
600,000
873,856
450,000
700,000
452,451
693,823
1,437,238
1,444,909
Variable rate debt:
Variable rate term loan and
revolving line of credit
100,000
—
216,000
—
—
—
316,000
316,326
Total debt (d)
$ 104,166
$ 25,257
$ 219,923
$ 372,820
$ 157,216
$ 873,856
$1,753,238
$ 1,761,235
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
5.07%
2.93%
3.01%
7.29%
—
7.29%
4.62%
2.92%
2.95%
3.62%
—
3.62%
4.97%
—
4.97%
3.92%
—
3.92%
4.02%
2.92%
3.83%
(a) Excludes mortgage premium of $1,024 and discount of $(579), net of accumulated amortization, as of December 31, 2017.
(b) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate through three interest rate swaps. The swaps effectively
convert one-month floating rate LIBOR to a fixed rate of 2.00% through January 5, 2021. In addition, $200,000 of LIBOR-based variable
rate debt has been swapped to a fixed rate through two interest rate swaps. The swaps effectively convert one-month floating rate LIBOR
to a fixed rate of 1.26% through November 22, 2018.
(c) Excludes discount of $(853), net of accumulated amortization, as of December 31, 2017.
(d) The weighted average years to maturity of consolidated indebtedness was 5.1 years as of December 31, 2017. Total debt excludes capitalized
loan fees of $(6,744), net of accumulated amortization, as of December 31, 2017, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2017.
We had $316,000 of variable rate debt, excluding $450,000 of variable rate debt that has been swapped to fixed rate debt and debt
issuance costs, with interest rates varying based upon LIBOR, with a weighted average interest rate of 2.92% as of December 31,
2017. An increase in the variable interest rate on this debt constitutes a market risk. If interest rates increase by 1% based on debt
outstanding as of December 31, 2017, interest expense would increase by approximately $3,160 on an annualized basis.
The table incorporates only those interest rate exposures that existed as of December 31, 2017 and does not consider those interest
rate exposures or positions that could arise after that date. The information presented herein is merely an estimate and has limited
predictive value. As a result, the ultimate realized gain or loss with respect to interest rate fluctuations will depend on the interest
rate exposures that arise during future periods, our hedging strategies at that time and future changes in interest rates.
55
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index
RETAIL PROPERTIES OF AMERICA, INC.
Report of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Other Comprehensive Income for the Years Ended
December 31, 2017, 2016 and 2015
Consolidated Statements of Equity for the Years Ended December 31, 2017, 2016 and 2015
Consolidated Statements of Cash Flows for the Years Ended December 31, 2017, 2016 and 2015
Notes to Consolidated Financial Statements
Valuation and Qualifying Accounts (Schedule II)
Real Estate and Accumulated Depreciation (Schedule III)
Schedules not filed:
57
58
59
60
61
63
98
99
All schedules other than the two listed in the Index have been omitted as the required information is either not applicable or the
information is already presented in the accompanying consolidated financial statements or related notes thereto.
56
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Retail Properties of America, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Retail Properties of America, Inc. and subsidiaries (the
“Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations and other comprehensive income,
equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and the schedules
listed in the Index at Item 15 (collectively referred to as the “financial statements”). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its
operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting
principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in
Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 14, 2018 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 2 to the financial statements, the Company has changed its method of accounting for the statement of cash
flows in 2017, 2016, and 2015 due to the adoption of Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230)
Restricted Cash.
As discussed in Note 2 to the financial statements, the Company changed its method of accounting for acquisitions as of October
1, 2016 due to the adoption of Accounting Standards Update 2017-01, Business Combinations.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2018
We have served as the Company’s auditor since 2009.
57
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Balance Sheets
(in thousands, except par value amounts)
Assets
Investment properties:
Land
Building and other improvements
Developments in progress
Less accumulated depreciation
Net investment properties
Cash and cash equivalents
Accounts and notes receivable (net of allowances of $6,567 and $6,886, respectively)
Acquired lease intangible assets, net
Assets associated with investment properties held for sale
Other assets, net
Total assets
Liabilities and Equity
Liabilities:
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
Accounts payable and accrued expenses
Distributions payable
Acquired lease intangible liabilities, net
Liabilities associated with investment properties held for sale
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, 7.00% Series A cumulative
redeemable preferred stock, liquidation preference $135,000, 0 and 5,400 shares issued
and outstanding as of December 31, 2017 and 2016, respectively
Class A common stock, $0.001 par value, 475,000 shares authorized, 219,237 and 236,770
shares issued and outstanding as of December 31, 2017 and 2016, respectively
Additional paid-in capital
Accumulated distributions in excess of earnings
Accumulated other comprehensive income
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements
December 31,
2017
December 31,
2016
$
$
$
1,066,705
3,686,200
33,022
4,785,927
(1,215,990)
3,569,937
25,185
71,678
122,646
3,647
125,171
3,918,264
287,068
695,748
547,270
216,000
82,698
36,311
97,971
—
69,498
2,032,564
$
$
$
1,191,403
4,284,664
23,439
5,499,506
(1,443,333)
4,056,173
53,119
78,941
142,015
30,827
91,898
4,452,973
769,184
695,143
447,598
86,000
83,085
39,222
105,290
864
74,501
2,300,887
—
5
219
4,574,428
(2,690,021)
1,074
1,885,700
3,918,264
237
4,927,155
(2,776,033)
722
2,152,086
4,452,973
$
$
58
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Operations and Other Comprehensive Income
(in thousands, except per share amounts)
Revenues
Rental income
Tenant recovery income
Other property income
Total revenues
Expenses
Operating expenses
Real estate taxes
Depreciation and amortization
Provision for impairment of investment properties
General and administrative expenses
Total expenses
Operating income
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Other income, net
(Loss) income from continuing operations
Gain on sales of investment properties
Net income
Net income attributable to noncontrolling interest
Net income attributable to the Company
Preferred stock dividends
Net income attributable to common shareholders
Earnings per common share – basic and diluted
Net income per common share attributable to common shareholders
Net income
Other comprehensive income:
Net unrealized gain on derivative instruments (Note 10)
Comprehensive income
Comprehensive income attributable to noncontrolling interest
Comprehensive income attributable to the Company
Year Ended December 31,
2016
2015
2017
$
$
$
$
$
414,804
115,944
7,391
538,139
84,556
82,755
203,866
67,003
40,724
478,904
59,235
—
—
(146,092)
373
(86,484)
337,975
251,491
—
251,491
(13,867)
237,624
1.03
251,491
352
251,843
—
251,843
$
$
$
$
$
455,658
118,569
8,916
583,143
85,895
81,774
224,430
20,376
44,522
456,997
126,146
13,653
6,978
(109,730)
63
37,110
129,707
166,817
—
166,817
(9,450)
157,367
0.66
166,817
807
167,624
—
167,624
$
$
$
$
$
472,344
119,536
12,080
603,960
94,780
82,810
214,706
19,937
50,657
462,890
141,070
—
—
(138,938)
1,700
3,832
121,792
125,624
(528)
125,096
(9,450)
115,646
0.49
125,624
452
126,076
(528)
125,548
Weighted average number of common shares outstanding – basic
230,747
236,651
236,380
Weighted average number of common shares outstanding – diluted
230,927
236,951
236,382
See accompanying notes to consolidated financial statements
59
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Equity
(in thousands, except per share amounts)
Preferred Stock
Class A
Common Stock
Shares
Amount
Shares
Amount
Accumulated
Distributions
in Excess of
Earnings
Accumulated
Other
Comprehensive
(Loss) Income
Total
Shareholders’
Equity
Noncontrolling
Interest
Total
Equity
Balance as of January 1, 2015
Net income
Other comprehensive income
Distribution upon dissolution of consolidated
joint venture
Distributions declared to preferred shareholders
($1.75 per share)
Distributions declared to common shareholders
($0.6625 per share)
Issuance of common stock, net of offering costs
Issuance of restricted shares
Stock-based compensation expense, net of forfeitures
Shares withheld for employee taxes
Balance as of December 31, 2015
Cumulative effect of accounting change
Net income
Other comprehensive income
Distributions declared to preferred shareholders
($1.75 per share)
Distributions declared to common shareholders
($0.6625 per share)
Issuance of common stock, net of offering costs
Shares repurchased through share repurchase program
Issuance of restricted shares
Exercise of stock options
Stock-based compensation expense, net of forfeitures
Shares withheld for employee taxes
Balance as of December 31, 2016
Net income
Other comprehensive income
Redemption of preferred stock
Distributions declared to preferred shareholders
($1.6965 per share)
Distributions declared to common shareholders
($0.6625 per share)
Shares repurchased through share repurchase program
Issuance of restricted shares
Stock-based compensation expense, net of forfeitures
Shares withheld for employee taxes
Balance as of December 31, 2017
$
5,400
—
—
—
—
—
—
—
—
—
5,400
$
— $
—
—
—
—
—
—
—
—
—
—
5,400
$
— $
—
(5,400)
—
—
—
—
—
—
— $
5
—
—
—
—
—
—
—
—
—
5
—
—
—
—
—
—
—
—
—
—
—
5
—
—
(5)
—
—
—
—
—
—
—
$
236,602
—
—
—
—
—
—
801
(4)
(132)
237,267
$
— $
—
—
—
—
—
(591)
274
2
(10)
(172)
236,770
$
— $
—
—
—
—
(17,683)
285
(40)
(95)
219,237
$
Additional
Paid-in
Capital
$ 4,922,864
—
—
—
—
—
(216)
—
10,755
(2,008)
$ 4,931,395
17
—
—
—
—
(100)
(8,841)
—
23
7,209
(2,548)
$ 4,927,155
$
$
$
$
237
—
—
—
—
—
—
—
—
—
237
—
—
—
—
—
—
—
—
237
— $
—
—
— $
—
—
— $
—
(130,289)
—
—
(18)
—
—
—
219
—
—
(227,084)
—
6,059
(1,413)
$ 4,574,428
$
$
(2,734,688)
125,096
—
$
(537)
—
452
$
2,187,881
125,096
452
1,494
528
—
$
2,189,375
125,624
452
—
(9,450)
(157,173)
—
—
—
—
(2,776,215)
(17)
166,817
—
(9,450)
(157,168)
—
—
—
—
—
—
(2,776,033)
251,491
—
(4,706)
(9,161)
(151,612)
—
—
—
—
(2,690,021)
$
$
$
$
$
—
—
—
—
—
—
—
(85)
$
— $
—
807
—
—
—
—
—
—
—
—
722
$
— $
352
—
—
—
—
—
—
—
1,074
$
—
(2,022)
(9,450)
(157,173)
(216)
—
10,755
(2,008)
2,155,337
$
— $
166,817
807
(9,450)
(157,168)
(100)
(8,841)
—
23
7,209
(2,548)
2,152,086
251,491
352
(135,000)
(9,161)
(151,612)
(227,102)
—
6,059
(1,413)
1,885,700
$
$
$
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
(2,022)
(9,450)
(157,173)
(216)
—
10,755
(2,008)
2,155,337
—
166,817
807
(9,450)
(157,168)
(100)
(8,841)
—
23
7,209
(2,548)
2,152,086
251,491
352
(135,000)
(9,161)
(151,612)
(227,102)
—
6,059
(1,413)
1,885,700
See accompanying notes to consolidated financial statements
60
Table of Contents
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2016
2017
2015
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
251,491
$
166,817
$
125,624
Depreciation and amortization
Provision for impairment of investment properties
Gain on sales of investment properties
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Amortization of loan fees and debt premium and discount, net
Amortization of stock-based compensation
Premium paid in connection with defeasance of mortgages payable
Debt prepayment fees
Payment of leasing fees and inducements
Changes in accounts receivable, net
Changes in accounts payable and accrued expenses, net
Changes in other operating assets and liabilities, net
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of investment properties
Capital expenditures and tenant improvements
Proceeds from sales of investment properties
Investment in developments in progress
Other, net
Net cash provided by investing activities
Cash flows from financing activities:
Proceeds from mortgages payable
Principal payments on mortgages payable
Proceeds from unsecured notes payable
Proceeds from unsecured term loans
Repayments of unsecured term loans
Proceeds from unsecured revolving line of credit
Repayments of unsecured revolving line of credit
Payment of loan fees and deposits
Debt prepayment fees
Purchase of U.S. Treasury securities in connection with defeasance of mortgages payable
Redemption of preferred stock
Distributions paid
Shares repurchased through share repurchase program
Other, net
Net cash used in financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, at beginning of year
Cash, cash equivalents and restricted cash, at end of year
203,866
67,003
(337,975)
—
—
7,655
6,059
59,968
8,498
(15,981)
962
579
(1,770)
(2,839)
247,516
(200,755)
(73,750)
896,456
(13,649)
—
608,302
—
(106,722)
—
200,000
(100,000)
943,000
(813,000)
(10)
(8,498)
(439,403)
(135,000)
(163,684)
(227,102)
(1,413)
(851,832)
224,430
20,376
(129,707)
(13,653)
(6,978)
5,781
7,209
1,735
3,863
(9,640)
(1,918)
2,007
(3,257)
(935)
266,130
(381,436)
(51,768)
446,066
(1,362)
944
12,444
—
(266,033)
200,000
—
—
622,500
(636,500)
(8,756)
(3,863)
(12,430)
—
(166,693)
(8,841)
(2,837)
(283,453)
214,706
19,937
(121,792)
—
—
5,129
10,755
17,343
837
(8,184)
4,420
1,976
(469)
(3,632)
266,650
(454,085)
(45,649)
505,503
(2,371)
(775)
2,623
1,049
(441,490)
248,815
—
—
610,000
(510,000)
(2,243)
(837)
(87,435)
—
(166,513)
—
(4,152)
(352,806)
3,986
82,349
86,335
$
(4,879)
87,228
82,349
$
(83,533)
170,761
$
87,228
(continued)
61
Table of Contents
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2016
2017
2015
Supplemental cash flow disclosure, including non-cash activities:
Cash paid for interest, net of interest capitalized
Distributions payable
Accrued capital expenditures and tenant improvements
Accrued leasing fees and inducements
Accrued redevelopment costs
Amounts reclassified to developments in progress
Developments in progress placed in service
U.S. Treasury securities transferred in connection with defeasance of mortgages payable
Defeasance of mortgages payable
$
$
$
$
$
$
$
$
$
78,327
36,311
7,902
547
750
$
$
$
$
$
101,789
39,222
9,286
952
4,816
— $
17,261
$
$
$
$
$
$
115,249
39,297
6,079
—
—
—
— $
— $
2,288
439,403
379,435
$
$
12,430
10,695
$
$
87,435
70,092
Purchase of investment properties (after credits at closing):
Net investment properties
Accounts receivable, acquired lease intangibles and other assets
Accounts payable, acquired lease intangibles and other liabilities
Mortgages payable assumed, net
Gain on exchange of investment property
Proceeds from sales of investment properties:
Net investment properties
Accounts receivable, acquired lease intangibles and other assets
Accounts payable, acquired lease intangibles and other liabilities
Deferred gains
Mortgage debt forgiven or assumed
Gain on extinguishment of debt
Gain on sales of investment properties
$ (198,984) $ (375,022) $ (442,763)
(47,498)
36,176
—
—
$ (200,755) $ (381,436) $ (454,085)
(40,989)
19,259
15,316
—
(15,451)
11,156
—
2,524
$
$
556,129
17,678
(11,316)
(1,486)
—
—
335,451
896,456
$
$
393,680
13,484
(11,605)
1,500
(94,353)
13,653
129,707
446,066
$
$
379,419
8,638
(4,378)
32
—
—
121,792
505,503
See accompanying notes to consolidated financial statements
62
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(1) ORGANIZATION AND BASIS OF PRESENTATION
Retail Properties of America, Inc. (the Company) was formed on March 5, 2003 and its primary purpose is to own and operate
high quality, strategically located shopping centers in the United States.
The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended
(the Code). The Company believes it qualifies for taxation as a REIT and, as such, the Company generally will not be subject to
U.S. federal income tax on taxable income that is distributed to its shareholders. If the Company fails to qualify as a REIT in any
taxable year, the Company will be subject to U.S. federal income tax on its taxable income. Even if the Company qualifies for
taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and U.S.
federal income and excise taxes on its undistributed income. The Company has one wholly-owned subsidiary that has jointly
elected to be treated as a taxable REIT subsidiary (TRS) and is subject to U.S. federal, state and local income taxes at regular
corporate tax rates. The income tax expense incurred by the TRS did not have a material impact on the Company’s accompanying
consolidated financial statements.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States (GAAP)
requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have
been made with respect to useful lives of assets, capitalization of development costs, fair value measurements, provision for
impairment, including estimates of holding periods, capitalization rates and discount rates (where applicable), provision for income
taxes, recoverable amounts of receivables, deferred taxes and initial valuations and related amortization periods of deferred costs
and intangibles, particularly with respect to property acquisitions. Actual results could differ from these estimates.
All share amounts and dollar amounts in the consolidated financial statements and notes thereto are stated in thousands with the
exception of per share amounts and per square foot amounts. Square foot and per square foot amounts are unaudited.
The accompanying consolidated financial statements include the accounts of the Company, as well as all wholly-owned subsidiaries
and any consolidated variable interest entities (VIEs). All intercompany balances and transactions have been eliminated in
consolidation. Wholly-owned subsidiaries generally consist of limited liability companies, limited partnerships and statutory trusts.
The Company’s property ownership as of December 31, 2017 is summarized below:
Retail operating properties (a)
Office properties
Total operating properties
Redevelopment properties
Wholly-owned
112
1
113
2
(a) Excludes one wholly-owned operating property classified as held for sale and one property where the Company has
begun activities in anticipation of future redevelopment as of December 31, 2017.
Noncontrolling interest is the portion of equity in a consolidated subsidiary not attributable, directly or indirectly, to the Company.
In the consolidated statements of operations and other comprehensive income, revenues, expenses and net income or loss from
less-than-wholly-owned consolidated subsidiaries are reported at the consolidated amounts, including both the amounts attributable
to common shareholders and noncontrolling interests. Consolidated statements of equity are included in the annual financial
statements, including beginning balances, activity for the period and ending balances for total shareholders’ equity, noncontrolling
interests and total equity. Noncontrolling interests are adjusted for additional contributions from and distributions to noncontrolling
interest holders, as well as the noncontrolling interest holders’ share of the net income or loss of each respective entity, as applicable.
The Company evaluates the classification and presentation of noncontrolling interests associated with consolidated joint venture
investments, if any, on an ongoing basis as facts and circumstances necessitate.
On October 29, 2015, the Company dissolved its remaining less-than-wholly owned consolidated joint venture concurrent with
the sale of Green Valley Crossing to an affiliate of the joint venture partner. The Company was entitled to a preferred return on its
63
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
capital contributions to the entity. The noncontrolling interest holder was allocated $528 as its share of the gain on sale of the
development property and received a distribution of $2,022 upon dissolution of the joint venture. As of December 31, 2017, the
Company did not have any less-than-wholly-owned consolidated entities.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investment Properties: Investment properties are recorded at cost less accumulated depreciation. Ordinary repairs and maintenance
are expensed as incurred. Expenditures for significant improvements, including internal salaries and related benefits of personnel
directly involved in the improvements, are capitalized.
The Company elected to early adopt Accounting Standards Update (ASU) 2017-01, Business Combinations, on a prospective basis
as of October 1, 2016. This guidance clarifies the definition of a business and provides a screen to determine when an integrated
set of assets and activities is not considered a business and, thus, is accounted for as an asset acquisition as opposed to a business
combination. Refer to the “Recently Adopted Accounting Pronouncements – Prior to 2018” section within this Note 2 to the
consolidated financial statements. Under this guidance, all of the acquisitions completed subsequent to October 1, 2016 met this
screen and, thus, have been accounted for as asset acquisitions. The Company allocates the purchase price of each acquired
investment property that is accounted for as an asset acquisition based upon the relative fair value of the individual assets acquired
and liabilities assumed, which generally include (i) land, (ii) building and other improvements, (iii) in-place lease value intangibles,
(iv) acquired above and below market lease intangibles, (v) any assumed financing that is determined to be above or below market
and (vi) the value of customer relationships. Asset acquisitions do not give rise to goodwill and the related transaction costs are
capitalized and included with the allocated purchase price.
The Company allocates the purchase price of each acquired investment property accounted for as a business combination based
upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which generally include
(i) land, (ii) building and other improvements, (iii) in-place lease value intangibles, (iv) acquired above and below market lease
intangibles, (v) any assumed financing that is determined to be above or below market, (vi) the value of customer relationships
and (vii) goodwill, if any. Transaction costs related to acquisitions accounted for as business combinations are expensed as incurred
and included within “General and administrative expenses” in the accompanying consolidated statements of operations and other
comprehensive income.
For tangible assets acquired, including land, building and other improvements, the Company considers available comparable
market and industry information in estimating acquisition date fair value. The Company allocates a portion of the purchase price
to the estimated acquired in-place lease value intangibles based on estimated lease execution costs for similar leases as well as
lost rental payments during an assumed lease-up period. The Company also evaluates each acquired lease as compared to current
market rates. If an acquired lease is determined to be above or below market, the Company allocates a portion of the purchase
price to such above or below market leases based upon the present value of the difference between the contractual lease payments
and estimated market rent payments over the remaining lease term. Renewal periods are included within the lease term in the
calculation of above and below market lease values if, based upon factors known at the acquisition date, market participants would
consider it reasonably assured that the lessee would exercise such options. Fair value estimates used in acquisition accounting,
including the discount rate used, require the Company to consider various factors, including, but not limited to, market knowledge,
demographics, age and physical condition of the property, geographic location, size and location of tenant spaces within the acquired
investment property and tenant profile. For acquisitions accounted for as business combinations, if, up to one year from the
acquisition date, information regarding fair value of the assets acquired and liabilities assumed is received and estimates are refined,
appropriate adjustments are made to the purchase price allocation on a prospective basis.
The portion of the purchase price allocated to acquired in-place lease value intangibles is amortized on a straight-line basis over
the life of the related lease as a component of depreciation and amortization expense. The Company incurred amortization expense
pertaining to acquired in-place lease value intangibles of $25,284, $27,443 and $25,913 for the years ended December 31, 2017,
2016 and 2015, respectively.
With respect to acquired leases in which the Company is the lessor, the portion of the purchase price allocated to acquired above
and below market lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment to rental
income. Amortization pertaining to above market lease intangibles of $4,696, $4,406 and $4,807 for the years ended December 31,
2017, 2016 and 2015, respectively, was recorded as a reduction to rental income. Amortization pertaining to below market lease
64
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
intangibles of $8,009, $7,396 and $8,428 for the years ended December 31, 2017, 2016 and 2015, respectively, was recorded as
an increase to rental income.
With respect to acquired leases in which the Company is the lessee, the portion of the purchase price allocated to acquired above
and below market ground lease intangibles is amortized on a straight-line basis over the life of the related lease as an adjustment
to property operating expenses. Amortization pertaining to above market ground lease intangibles of $560, $560 and $560 for the
years ended December 31, 2017, 2016 and 2015, respectively, was recorded as a reduction to property operating expenses.
The following table presents the amortization during the next five years and thereafter related to the acquired lease intangible
assets and liabilities for properties owned as of December 31, 2017:
Amortization of:
Acquired above market lease intangibles (a)
Acquired in-place lease value intangibles (a)
Acquired lease intangible assets, net (b)
Acquired below market lease intangibles (a)
Acquired ground lease intangibles (c)
Acquired lease intangible liabilities, net (b)
2018
2019
2020
2021
2022
Thereafter
Total
$
$
$
$
4,071
18,918
22,989
(6,434)
(560)
(6,994)
$
$
$
$
2,702
12,860
15,562
(5,897)
(560)
(6,457)
$
$
$
$
2,052
10,626
12,678
(5,717)
(560)
(6,277)
$
$
$
$
1,545
9,615
11,160
(5,517)
(560)
(6,077)
$
$
$
$
1,276
8,456
9,732
(5,330)
(560)
(5,890)
$
$
$
$
4,589
45,936
50,525
(56,618)
(9,658)
(66,276)
$
$
$
$
16,235
106,411
122,646
(85,513)
(12,458)
(97,971)
(a) Represents the portion of the purchase price with respect to acquired leases in which the Company is the lessor. The amortization of acquired
above and below market lease intangibles is recorded as an adjustment to rental income and the amortization of acquired in-place lease
value intangibles is recorded to depreciation and amortization expense.
(b) Acquired lease intangible assets, net and acquired lease intangible liabilities, net are presented net of $263,400 and $53,002 of accumulated
amortization, respectively, as of December 31, 2017.
(c) Represents the portion of the purchase price with respect to acquired leases in which the Company is the lessee. The amortization is recorded
as an adjustment to property operating expenses.
Depreciation expense is computed using the straight-line method. Building and other improvements are depreciated based upon
estimated useful lives of 30 years for building and associated improvements and 15 years for site improvements and most other
capital improvements. Tenant improvements and leasing fees, including capitalized internal leasing incentives, all of which are
incremental to signed leases, are amortized on a straight-line basis over the life of the related lease as a component of depreciation
and amortization expense. The Company capitalized $368, $423 and $474 of internal leasing incentives, all of which were
incremental to signed leases, during the years ended December 31, 2017, 2016 and 2015, respectively.
Impairment of Long-Lived Assets: The Company’s investment properties, including developments in progress, are reviewed for
potential impairment at the end of each reporting period or whenever events or changes in circumstances indicate that the carrying
value may not be recoverable. At the end of each reporting period, the Company separately determines whether impairment
indicators exist for each property. Examples of situations considered to be impairment indicators for both operating properties and
developments in progress include, but are not limited to:
•
•
•
•
•
•
a substantial decline in or continued low occupancy rate or cash flow;
expected significant declines in occupancy in the near future;
continued difficulty in leasing space;
a significant concentration of financially troubled tenants;
a change in anticipated holding period;
a cost accumulation or delay in project completion date significantly above and beyond the original development or
redevelopment estimate;
•
a significant decrease in market price not in line with general market trends; and
65
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
•
any other quantitative or qualitative events or factors deemed significant by the Company’s management or board of
directors.
If the presence of one or more impairment indicators as described above is identified at the end of a reporting period or at any
point throughout the year with respect to a property, the asset is tested for recoverability by comparing its carrying value to the
estimated future undiscounted cash flows. An investment property is considered to be impaired when the estimated future
undiscounted cash flows are less than its current carrying value. When performing a test for recoverability or estimating the fair
value of an impaired investment property, the Company makes certain complex or subjective assumptions which include, but are
not limited to:
•
•
•
•
•
•
•
projected operating cash flows considering factors such as vacancy rates, rental rates, lease terms, tenant financial strength,
competitive positioning and property location;
estimated holding period or various potential holding periods when considering probability-weighted scenarios;
projected capital expenditures and lease origination costs;
estimated interest and internal costs expected to be capitalized, dates of construction completion and grand opening dates
for developments in progress;
projected cash flows from the eventual disposition of an operating property or development in progress using a property-
specific capitalization rate;
comparable selling prices; and
a property-specific discount rate.
To determine whether any identified impairment is other-than-temporary, the Company considers whether it has the ability and
intent to hold the investment until the carrying value is fully recovered. To the extent impairment has occurred, the Company will
record an impairment charge calculated as the excess of the carrying value of the asset over its estimated fair value.
Below is a summary of impairment charges recorded during the years ended December 31, 2017, 2016 and 2015:
Year Ended December 31,
2016
2017
2015
Impairment of consolidated properties (a)
$
67,003
$
20,376
$
19,937
(a) Included in “Provision for impairment of investment properties” in the accompanying consolidated statements of operations and other
comprehensive income.
The Company’s assessment of impairment as of December 31, 2017 was based on the most current information available to the
Company. If the operating conditions mentioned above deteriorate or if the Company’s expected holding period for assets change,
subsequent tests for impairment could result in additional impairment charges in the future. The Company can provide no assurance
that material impairment charges with respect to the Company’s investment properties will not occur in 2018 or future periods.
Based upon current market conditions, certain of the Company’s properties may have fair values less than their carrying amounts.
However, based on the Company’s plans with respect to those properties, the Company believes that their carrying amounts are
recoverable and therefore, under applicable GAAP guidance, no additional impairment charges were recorded. Accordingly, the
Company will continue to monitor circumstances and events in future periods to determine whether additional impairment charges
are warranted. Refer to Note 14 to the consolidated financial statements for further discussion.
Development and Redevelopment Projects: Active development and redevelopment projects are classified as developments in
progress on the accompanying consolidated balance sheets and include (i) land held for future development, (ii) ground-up
developments and (iii) redevelopment properties undergoing significant renovations and improvements. During the development
or redevelopment period, the Company capitalizes direct project costs such as construction, insurance, architectural and legal, as
well as certain indirect project costs such as interest, other financing costs, real estate taxes and internal salaries and related benefits
of personnel directly involved in the project. Capitalization of project costs begins when the activities and related expenditures
66
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
commence and cease when the project, or a portion of the project, is substantially complete and ready for its intended use, at which
time the project is placed in service and depreciation commences. Generally, rental property is considered substantially complete
and ready for its intended use upon completion of tenant improvements, but no later than one year from completion of major
construction activity. Additionally, the Company makes estimates as to the probability of completion of development and
redevelopment projects. If the Company determines that completion of the development or redevelopment project is no longer
probable, the Company expenses any capitalized costs that are not recoverable. The Company capitalized $1,202 and $302 of
indirect project costs related to development and redevelopment projects and $1,187 and $1,152 related to expansions, pad
developments and other significant improvements during the years ended December 31, 2017 and 2016, respectively. The Company
did not capitalize any indirect project costs during the year ended December 31, 2015.
Investment Properties Held for Sale: In determining whether to classify an investment property as held for sale, the Company
considers whether: (i) management has committed to a plan to sell the investment property; (ii) the investment property is available
for immediate sale in its present condition, subject only to terms that are usual and customary; (iii) the Company has initiated a
program to locate a buyer; (iv) the Company believes that the sale of the investment property is probable; (v) the Company is
actively marketing the investment property for sale at a price that is reasonable in relation to its current value, and (vi) actions
required for the Company to complete the plan indicate that it is unlikely that any significant changes will be made.
If all of the above criteria are met, the Company classifies the investment property as held for sale. When these criteria are met,
the Company suspends depreciation (including depreciation for tenant improvements and building improvements) and amortization
of acquired in-place lease value intangibles and any above or below market lease intangibles and the Company records the investment
property held for sale at the lower of cost or net realizable value. The assets and liabilities associated with those investment
properties that are classified as held for sale are presented separately on the consolidated balance sheets for the most recent reporting
period. One property was classified as held for sale as of December 31, 2017 and two properties qualified for held for sale accounting
treatment as of December 31, 2016.
Partially-Owned Entities: The Company consolidates partially-owned entities if they are VIEs in accordance with the
Consolidation Topic of the Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) and the
Company is considered the primary beneficiary, the Company has voting control, the limited partners (or non-managing members)
do not have substantive participatory rights, or other conditions exist that indicate that the Company has control. Management
uses its judgment when determining if the Company is the primary beneficiary of, or has a controlling financial interest in, an
entity in which it has a variable interest, to determine whether the Company has the power to direct the activities that most
significantly impact the entity’s economic performance and if it has significant economic exposure to the risk and rewards of
ownership. The Company assesses its interests in VIEs on an ongoing basis to determine if the entity should be consolidated.
Cash, Cash Equivalents and Restricted Cash: The Company considers all demand deposits, money market accounts and
investments in certificates of deposit and repurchase agreements purchased with a maturity of three months or less at the date of
purchase to be cash equivalents. The Company maintains its cash and cash equivalents at major financial institutions. The cash
and cash equivalents balance at one or more of these financial institutions exceeds the Federal Depository Insurance Corporation
(FDIC) insurance coverage. The Company periodically assesses the credit risk associated with these financial institutions and
believes that the risk of loss is minimal. Restricted cash consists of lenders’ escrows and funds restricted through lender or other
agreements, including funds held in escrow for future acquisitions and potential Internal Revenue Code Section 1031 tax-deferred
exchanges (1031 Exchanges), and are included as a component of “Other assets, net” in the accompanying consolidated balance
sheets.
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported on the Company’s consolidated
balance sheets to such amounts shown in the Company’s consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Total cash, cash equivalents and restricted cash
2017
December 31,
2016
$
$
25,185
61,150
86,335
$
$
53,119
29,230
82,349
$
$
2015
51,424
35,804
87,228
Derivative and Hedging Activities: Derivatives are recorded in the accompanying consolidated balance sheets at fair value within
“Other assets, net.” The Company uses interest rate derivatives to manage differences in the amount, timing and duration of the
67
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Company’s known or expected cash payments principally related to certain of its borrowings. The Company does not use derivatives
for trading or speculative purposes. On the date the Company enters into a derivative, it may designate the derivative as a hedge
against the variability of cash flows that are to be paid in connection with a recognized liability. Subsequent changes in the fair
value of a derivative that is designated and qualifies as a cash flow hedge that is determined to be highly effective are recorded in
“Accumulated other comprehensive income” and are reclassified to interest expense as interest payments are made on the
Company’s variable rate debt. As of December 31, 2017, the balance in accumulated other comprehensive income relating to
derivatives was $1,074. Any hedge ineffectiveness or changes in the fair value for any derivative not designated as a hedge is
reported in “Other income, net” in the accompanying consolidated statements of operations and other comprehensive income.
Conditional Asset Retirement Obligations: The Company evaluates the potential impact of conditional asset retirement obligations
on its consolidated financial statements. The term conditional asset retirement obligation refers to a legal obligation to perform an
asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be
within the control of the entity. Thus, the timing and/or method of settlement may be conditional on a future event. Based upon
the Company’s evaluation, no accrual of a liability for asset retirement obligations was warranted as of December 31, 2017 and
2016.
Revenue Recognition: The Company commences revenue recognition on its leases based on a number of factors. In most cases,
revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset.
Generally, this occurs on the lease commencement date. The determination of who is the owner, for accounting purposes, of the
tenant improvements determines the nature of the leased asset and when revenue recognition under a lease begins. If the Company
is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition
begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the
Company concludes that the lessee is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the
unimproved space and any tenant improvement allowances funded under the lease are accounted for as lease inducements which
are amortized as a reduction to the revenue recognized over the term of the lease. In these circumstances, the Company commences
revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct their own improvements.
The Company considers a number of factors to evaluate whether it or the lessee is the owner of the tenant improvements for
accounting purposes. These factors include:
• whether the lease stipulates how and on what a tenant improvement allowance may be spent;
• whether the tenant or the Company retains legal title to the improvements;
•
•
the uniqueness of the improvements;
the expected economic life of the tenant improvements relative to the length of the lease;
• who constructs or directs the construction of the improvements, and
• whether the tenant or the Company is obligated to fund cost overruns.
The determination of who owns the tenant improvements, for accounting purposes, is subject to significant judgment. In making
that determination, the Company considers all of the above factors. No one factor, however, necessarily establishes its determination.
Rental income, for only those leases that have fixed and measurable rent escalations, is recognized on a straight-line basis over
the term of each lease. The difference between such rental income earned and the cash rent due under the provisions of a lease is
recorded as deferred rent receivable and is included as a component of “Accounts and notes receivable” in the accompanying
consolidated balance sheets.
Reimbursements from tenants for recoverable real estate taxes and operating expenses are accrued as revenue in the period the
applicable expenditures are incurred. The Company makes certain assumptions and judgments in estimating the reimbursements
at the end of each reporting period.
The Company records lease termination income as “Other property income” when (i) a termination letter agreement is signed, (ii)
all of the conditions of such agreement have been fulfilled, (iii) the tenant is no longer occupying the property and (iv) collectibility
68
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
is reasonably assured. Upon early lease termination, the Company provides for losses related to recognized tenant specific
intangibles and other assets or adjusts the remaining useful life of the assets if determined to be appropriate. The Company recorded
lease termination income of $2,021, $3,339 and $3,757 for the years ended December 31, 2017, 2016 and 2015, respectively.
The Company recorded contingent percentage rental income and percentage rental income in lieu of base rent of $4,451, $4,082
and $4,693 for the years ended December 31, 2017, 2016 and 2015, respectively. The Company’s policy is to defer recognition
of contingent rental income until the specified target (i.e. breakpoint) that triggers the contingent rental income is achieved.
Profits from sales of real estate are not recognized under the full accrual method until the following criteria are met: (i) a sale is
consummated; (ii) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay for the property;
(iii) the Company’s receivable, if applicable, is not subject to future subordination; (iv) the Company has transferred to the buyer
the usual risks and rewards of ownership; and (v) the Company does not have substantial continuing involvement with the property.
The Company sold 47, 46 and 26 consolidated investment properties during the years ended December 31, 2017, 2016 and 2015,
respectively. Refer to Note 4 to the consolidated financial statements for further discussion.
Accounts and Notes Receivable and Allowance for Doubtful Accounts: Accounts and notes receivable balances outstanding
include base rents, tenant reimbursements and deferred rent receivables. An allowance for the uncollectible portion of accounts
and notes receivable is determined on a tenant-specific basis through an analysis of balances outstanding, historical bad debt levels,
tenant creditworthiness and current economic trends. Additionally, estimates of the expected recovery of pre-petition and post-
petition claims with respect to tenants in bankruptcy are considered in assessing the collectibility of the related receivables.
Management’s estimate of the collectibility of accounts and notes receivable is based on the best information available to
management at the time of evaluation.
Rental Expense: Rental expense associated with land and office space that the Company leases under non-cancellable operating
leases, for only those leases that have fixed and measurable rent escalations, is recorded on a straight-line basis over the term of
each lease. The difference between rental expense incurred on a straight-line basis and rental payments due under the provisions
of a lease agreement is recorded as a deferred liability and is included as a component of “Other liabilities” in the accompanying
consolidated balance sheets. See Note 6 to the consolidated financial statements for additional information pertaining to these
leases.
Loan Fees: Loan fees are generally amortized using the effective interest method (or other methods which approximate the
effective interest method) over the life of the related loan as a component of interest expense. Debt prepayment penalties and
certain fees associated with exchanges or modifications of debt are expensed as incurred as a component of interest expense.
The Company presents unamortized capitalized loan fees, excluding those related to its unsecured revolving line of credit, as direct
reductions of the carrying amounts of the related debt liabilities in the accompanying consolidated balance sheets. Unamortized
capitalized loan fees attributable to the Company’s unsecured revolving line of credit are recorded in “Other assets, net” in the
accompanying consolidated balance sheets.
Income Taxes: The Company has elected to be taxed as a REIT under Sections 856 through 860 of the Code. As a REIT, the
Company generally will not be subject to U.S. federal income tax on the taxable income the Company currently distributes to its
shareholders.
The Company records a benefit, based on the GAAP measurement criteria, for uncertain income tax positions if the result of a tax
position meets a “more likely than not” recognition threshold. Tax returns for the calendar years 2014 through 2017 remain subject
to examination by federal and various state tax jurisdictions.
Segment Reporting: The Company’s chief operating decision maker, which is comprised of its Chief Executive Officer and Chief
Operating Officer, assesses and measures the operating results of the Company’s portfolio of properties based on net operating
income and does not differentiate properties by geography, market, size or type. Each of the Company’s investment properties is
considered a separate operating segment, as each property earns revenue and incurs expenses, individual operating results are
reviewed and discrete financial information is available. However, the Company’s properties are aggregated into one reportable
segment as they have similar economic characteristics, the Company provides similar services to its tenants and the Company’s
chief operating decision maker evaluates the collective performance of its properties.
69
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Recently Adopted Accounting Pronouncements – Prior to 2018
The Company elected to early adopt ASU 2017-01, Business Combinations, on a prospective basis as of October 1, 2016. This
new guidance clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities
is not considered a business and, thus, is accounted for as an asset acquisition as opposed to a business combination. The screen
requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not considered a business. Under this new guidance, all of the
acquisitions completed subsequent to October 1, 2016 met the screen and, thus, were accounted for as asset acquisitions. Consistent
with existing guidance, transaction costs associated with asset acquisitions are capitalized while transaction costs associated with
business combinations are expensed as incurred. The adoption of this pronouncement resulted in the Company’s acquisition of
investment properties subsequent to October 1, 2016 qualifying as asset acquisitions and, as such, the related transaction costs of
$725 incurred during the three months ended December 31, 2016 were capitalized. All of the acquisitions completed during 2017
were considered asset acquisitions and, as such, transaction costs were capitalized upon closing.
The Company elected to early adopt ASU 2017-09, Compensation – Stock Compensation, on a prospective basis as of June 30,
2017. This new pronouncement amends/clarifies guidance about which changes to the terms or conditions of a share-based payment
award require an entity to apply modification accounting. Under the new guidance, an entity should account for the effects of a
modification unless all of the following are the same in the modified award as the original award immediately before the original
award is modified: 1) the fair value; 2) the vesting conditions; and 3) the classification of the modified award as an equity instrument
or a liability instrument. The existing disclosure requirements apply regardless of whether an entity is required to apply modification
accounting. The adoption of this pronouncement did not have any effect on the Company’s consolidated financial statements.
The Company elected to early adopt ASU 2016-15, Statement of Cash Flows, on a retrospective basis as of December 31, 2017.
This new guidance adds or clarifies guidance on the classification of certain cash receipts and payments in the statement of cash
flows. Of the eight types of cash flows discussed in the new standard, only one impacted the Company. The classification of debt
prepayment costs as a financing outflow impacted the Company’s consolidated statements of cash flows as these costs had previously
been reflected as operating outflows. The adoption resulted in the reclassification of $3,863 and $837 of debt prepayment costs
from operating outflows to financing outflows for the years ended December 31, 2016 and 2015, respectively.
The Company elected to early adopt ASU 2016-18, Statement of Cash Flows, on a retrospective basis as of December 31, 2017.
This new guidance requires amounts that are generally described as restricted cash and restricted cash equivalents to be included
with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement
of cash flows. As a result of the adoption, the Company now includes amounts generally described as restricted cash within the
beginning-of-period, change and end-of-period total amounts on the statement of cash flows rather than within an activity on the
statement of cash flows. This resulted in a decrease of $1,481 in net cash provided by operating activities for the year ended
December 31, 2016 and decreases of $5,093 and $22,665 in net cash provided by investing activities for the years ended December
31, 2016 and 2015, respectively.
Recently Adopted Accounting Pronouncements – 2018
In May 2014 with subsequent updates issued in August 2015 and March, April, May and December 2016, the FASB issued ASU
2014-09, Revenue from Contracts with Customers. This new guidance is effective January 1, 2018 and will replace existing revenue
recognition standards. The core principle of this standard is that an entity recognizes revenue to depict the transfer of promised
goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange
for those goods or services. The majority of the Company’s revenue follows the existing leasing guidance and will not be impacted
by the adoption of this standard, however, the sale of investment property will be required to follow the new guidance upon
adoption. This pronouncement allows either a full or a modified retrospective method of adoption. Expanded quantitative and
qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. The adoption
of this pronouncement on January 1, 2018 will not have a material effect on the Company’s consolidated financial statements as
the majority of its revenue falls outside of the scope of this guidance. The Company will adopt this guidance on a modified
retrospective basis and apply it to the sales of investment properties beginning January 1, 2018.
In February 2017, the FASB issued ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets.
This new guidance is required to be adopted concurrently with the amendments in ASU 2014-09, Revenue from Contracts with
Customers. The new pronouncement, which adds guidance for partial sales of nonfinancial assets and clarifies the scope of Subtopic
70
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
610-20, Gains and Losses from the Derecognition of Nonfinancial Assets, applies to the derecognition of all nonfinancial assets
(including real estate) for which the counterparty is not a customer. The pronouncement requires either a retrospective or a modified
retrospective method of adoption. The adoption of this pronouncement on January 1, 2018 on a modified retrospective basis will
not have a material effect on the Company’s consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall. This new guidance is effective January 1, 2018
and will require companies to disclose the fair value of financial assets and financial liabilities measured at amortized cost in
accordance with the exit price notion, which is consistent with the Company’s existing practices, and will no longer require
disclosure of the methods and significant assumptions used, including any changes, to estimate fair value. In addition, companies
will be required to disclose all financial assets and financial liabilities grouped by 1) measurement category and 2) form of financial
instrument. The adoption of this pronouncement on January 1, 2018 will not have a material effect on the Company’s consolidated
financial statements.
In August 2017, the FASB issued ASU 2017-12, Derivatives and Hedging. This new guidance is effective January 1, 2019, with
early adoption permitted, and amends the designation and measurement guidance for qualifying hedging relationships and the
presentation of hedge results in an entity’s financial statements. The Company elected to early adopt this pronouncement as of
January 1, 2018. The new guidance eliminates the requirement to separately measure and report hedge ineffectiveness and entities
will be required to present the earnings effect of the hedging instrument in the same income statement line item in which they
report the earnings effect of the hedged item. In addition, entities may perform the initial quantitative assessment of hedge
effectiveness at any time after hedge designation, but no later than the first quarterly effectiveness testing date, and subsequent
assessments of hedge effectiveness may be performed qualitatively unless facts and circumstances change. Disclosure requirements
will be modified to include a tabular disclosure related to the effect of hedging instruments on the income statement and eliminate
the requirement to disclose the ineffective portion of the change in fair value of such instruments. The adoption of this pronouncement
on January 1, 2018 will not have a material effect on the Company’s consolidated financial statements and the Company will
record a cumulative effect adjustment to accumulated other comprehensive income and accumulated distributions in excess of
earnings related to eliminating the separate measurement of ineffectiveness. The amended presentation and disclosure guidance
will be applied prospectively.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance is effective January 1, 2019, with early adoption
permitted, and will require lessees to recognize a liability to make lease payments and a right-of-use (ROU) asset, initially measured
at the present value of lease payments, for both operating and financing leases. For leases with a term of 12 months or less, lessees
will be permitted to make an accounting policy election by class of underlying asset to not recognize lease liabilities and lease
assets. Upon adoption, the Company will recognize a lease liability and an ROU asset for operating leases where it is the lessee,
such as ground leases and office leases. The Company is in the process of evaluating the inputs required to calculate the amounts
that will be recorded on its balance sheet for each lease. For leases with a term of 12 months or less, the Company expects to make
an accounting policy election by class of underlying asset to not recognize lease liabilities and lease assets. Under this new
pronouncement, lessor accounting for lease components will be largely unchanged from existing GAAP. Only incremental direct
leasing costs may be capitalized under the new guidance, which is consistent with the Company’s existing policies. The
pronouncement allows some optional practical expedients. The Company expects to adopt this new guidance on January 1, 2019
and will continue to evaluate the impact of this guidance until it becomes effective.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses. This new guidance is effective January 1,
2020, with early adoption permitted beginning January 1, 2019, and replaces the current incurred loss impairment methodology
with a methodology that reflects expected credit losses. Financial assets that are measured at amortized cost will be required to be
presented at the net amount expected to be collected with an allowance for credit losses deducted from the amortized cost basis.
In addition, an entity must consider broader information in developing its expected credit loss estimate, including the use of
forecasted information. Generally, the pronouncement requires a modified retrospective method of adoption. The Company will
continue to evaluate the impact of this guidance until it becomes effective.
71
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(3) ACQUISITIONS
The Company closed on the following acquisitions during the year ended December 31, 2017:
Date
Property Name
Metropolitan
Statistical Area (MSA)
Property Type
Square
Footage
Acquisition
Price
January 13, 2017
Main Street Promenade (a)
Chicago
Multi-tenant retail
181,600
$
88,000
January 25, 2017
Boulevard at the Capital Centre –
Fee Interest
Washington, D.C.
Fee interest (b)
Additional phase of
multi-tenant retail (c)
Additional phase of
multi-tenant retail (c)
February 24, 2017
One Loudoun Downtown – Phase II
Washington, D.C.
April 5, 2017
May 16, 2017
July 6, 2017
One Loudoun Downtown – Phase III
Washington, D.C.
One Loudoun Downtown – Phase IV
Washington, D.C.
Development rights (c)
New Hyde Park Shopping Center
New York
Multi-tenant retail
August 8, 2017
One Loudoun Downtown – Phase V
Washington, D.C.
August 8, 2017
One Loudoun Downtown – Phase VI
Washington, D.C.
December 11, 2017
Plaza del Lago (d)
December 19, 2017
Southlake Town Square – Outparcel
Chicago
Dallas
Additional phase of
multi-tenant retail (c)
Additional phase of
multi-tenant retail (c)
Multi-tenant retail
Multi-tenant retail
outparcel (e)
—
15,900
9,800
—
32,300
17,700
74,100
100,200
12,200
2,000
4,128
2,193
3,500
22,075
5,167
20,523
48,300
7,029
443,800
$
202,915 (f)
(a) This property was acquired through a consolidated VIE and was used to facilitate a 1031 Exchange.
(b) The wholly-owned multi-tenant retail operating property located in Largo, Maryland was previously subject to an approximately 70 acre
long-term ground lease with a third party. The Company completed a transaction whereby it received the fee interest in approximately 50
acres of the underlying land in exchange for which (i) the Company paid $1,939 and (ii) the term of the ground lease with respect to the
remaining approximately 20 acres was shortened to nine months. The Company derecognized building and improvements of $11,347 related
to the remaining ground lease, recognized the fair value of land received of $15,200 and recorded a gain of $2,524, which was recognized
during the three months ended December 31, 2017 upon the expiration of the ground lease on approximately 20 acres. The total number of
properties in the Company’s portfolio was not affected by this transaction.
(c) The Company acquired the remaining five phases under contract, including the development rights for an additional 123 residential units
for a total of 408 units, at its One Loudoun Downtown multi-tenant retail operating property. The total number of properties in the Company’s
portfolio was not affected by these transactions.
(d) Plaza del Lago also contains 8,800 square feet of residential space, comprised of 15 residential units, for a total of 109,000 square feet.
(e) The Company acquired a multi-tenant retail outparcel located at its Southlake Town Square multi-tenant retail operating property. The total
number of properties in the Company’s portfolio was not affected by this transaction.
(f) Acquisition price does not include capitalized closing costs and adjustments totaling $2,506.
The Company closed on the following acquisitions during the year ended December 31, 2016:
Date
Property Name
January 15, 2016
Shoppes at Hagerstown (a)
MSA
Hagerstown
January 15, 2016
Merrifield Town Center II (a)
Washington, D.C.
March 29, 2016
Oak Brook Promenade (b)
April 1, 2016
April 29, 2016
May 5, 2016
June 15, 2016
The Shoppes at Union Hill (c)
Ashland & Roosevelt – Fee Interest
Tacoma South (b)
Eastside (b)
August 30, 2016
Woodinville Plaza – Anchor Space
Improvements
Chicago
New York
Chicago
Seattle
Dallas
Seattle
November 22, 2016
One Loudoun Downtown – Phase I
Washington, D.C.
Property Type
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Ground lease interest (d)
Multi-tenant retail
Multi-tenant retail
Anchor space
improvements (e)
Multi-tenant retail
Square
Footage
Acquisition
Price
113,000
$
76,000
183,200
91,700
—
230,700
67,100
—
340,600
1,102,300
$
27,055
45,676
65,954
63,060
13,850
39,400
23,842
4,500
124,971
408,308
72
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(a) These properties were acquired as a two-property portfolio. Merrifield Town Center II also contains 62,000 square feet of storage space for
a total of 138,000 square feet.
(b) These properties were acquired through consolidated VIEs and were used to facilitate 1031 Exchanges.
(c) In conjunction with this acquisition, the Company assumed mortgage debt with a principal balance of $15,971 and an interest rate of 3.75%
that matures in 2031.
(d) The Company acquired the fee interest in an existing wholly-owned multi-tenant retail operating property located in Chicago, Illinois, which
was previously subject to a ground lease with a third party. In conjunction with this transaction, the Company reversed the straight-line
ground rent liability of $6,978, which is reflected as “Gain on extinguishment of other liabilities” in the accompanying consolidated statements
of operations and other comprehensive income.
(e) The Company acquired the anchor space improvements, which were previously subject to a ground lease with the Company, at its Woodinville
Plaza multi-tenant retail operating property.
During the year ended December 31, 2016, the Company also completed a non-monetary transaction in which it received the fee
interest in less than an acre of adjacent land and terminated the ground lease on certain undeveloped parcels at an existing wholly-
owned multi-tenant retail operating property located in Southlake, Texas in exchange for the fee interest in approximately 2.5 acres
of undeveloped parcels. As a result of this transaction, the Company’s fee interest in certain undeveloped parcels at the property
are no longer encumbered by the ground lease. The Company capitalized $113 of costs related to this transaction.
The Company closed on the following acquisitions during the year ended December 31, 2015:
Date
Property Name
January 8, 2015
Downtown Crown
January 23, 2015
Merrifield Town Center
January 23, 2015
Fort Evans Plaza II
February 19, 2015
Cedar Park Town Center
March 24, 2015
Lake Worth Towne Crossing – Parcel
May 4, 2015
June 10, 2015
July 31, 2015
Tysons Corner
Woodinville Plaza
Southlake Town Square – Outparcel
August 27, 2015
Coal Creek Marketplace
October 27, 2015
Royal Oaks Village II – Outparcel
November 13, 2015
Towson Square
MSA
Washington, D.C.
Washington, D.C.
Washington, D.C.
Austin
Dallas
Washington, D.C.
Seattle
Dallas
Seattle
Houston
Baltimore
Property Type
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Land (a)
Multi-tenant retail
Multi-tenant retail
Single-user outparcel (b)
Multi-tenant retail
Single-user outparcel (a)
Multi-tenant retail
Square
Footage
Acquisition
Price
258,000
$
162,785
84,900
228,900
179,300
—
37,700
170,800
13,800
55,900
12,300
138,200
56,500
65,000
39,057
400
31,556
35,250
8,440
17,600
6,841
39,707
1,179,800
$
463,136
(a) The Company acquired a parcel located at its Lake Worth Towne Crossing multi-tenant retail operating property and a single-user outparcel
located at its Royal Oaks Village II multi-tenant retail operating property.
(b) The Company acquired a single-user outparcel located at its Southlake Town Square multi-tenant retail operating property that was subject
to a ground lease with the Company (as lessor) prior to the transaction.
The following table summarizes the acquisition date values, before prorations, the Company recorded in conjunction with the
acquisitions completed during the years ended December 31, 2017, 2016 and 2015 discussed above:
Land
Building and other improvements, net
Acquired lease intangible assets (a)
Acquired lease intangible liabilities (b)
Other liabilities
Mortgages payable, net (c)
Net assets acquired
2017
2016
2015
$
$
50,876
148,108
15,608
(8,095)
(1,076)
—
205,421
$
$
106,947
268,075
41,002
(8,258)
—
(15,316)
392,450
$
$
161,114
281,649
45,474
(25,101)
—
—
463,136
(a) The weighted average amortization period for acquired lease intangible assets is seven years, nine years and 15 years for acquisitions
completed during the years ended December 31, 2017, 2016 and 2015, respectively.
73
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(b) The weighted average amortization period for acquired lease intangible liabilities is 13 years, 18 years and 21 years for acquisitions completed
during the years ended December 31, 2017, 2016 and 2015, respectively.
(c) Includes mortgage discount of $(655) for acquisitions completed during the year ended December 31, 2016.
The above acquisitions were funded using a combination of available cash on hand, proceeds from dispositions and proceeds from
the Company’s unsecured revolving line of credit. All of the acquisitions completed during 2017 were considered asset acquisitions
and, as such, transaction costs were capitalized upon closing. Transaction costs related to acquisitions that were accounted for as
business combinations totaling $913 and $1,591 for the years ended December 31, 2016 and 2015, respectively, were expensed
as incurred and are included in “General and administrative expenses” in the accompanying consolidated statements of operations
and other comprehensive income. In addition, total revenues of $87,161 and $97,893 and net income attributable to common
shareholders of $22,283 and $18,334 are included in the Company’s consolidated statements of operations and other comprehensive
income for the years ended December 31, 2016 and 2015, respectively, from the properties acquired during the years ended
December 31, 2016 and 2015 that were accounted for as business combinations.
Condensed Pro Forma Financial Information
Disclosure of pro forma financial information is required for acquisitions accounted for as business combinations, if such financial
information is available. Pro forma financial information is provided for acquisitions accounted for as business combinations
completed during the period, or after such period through the financial statement issuance date, as if these acquisitions had been
completed as of the beginning of the year prior to the acquisition date. Pro forma financial information is not required for asset
acquisitions.
The following unaudited condensed pro forma financial information is presented as if the acquisitions completed during the year
ended December 31, 2016 were completed as of January 1, 2015 and the acquisitions completed during the year ended December
31, 2015 were completed as of January 1, 2014. The following 2016 acquisitions have not been adjusted in the pro forma presentation
as they were accounted for as asset acquisitions: (i) the acquisition of Phase I of One Loudoun Downtown located in the Washington,
D.C. MSA, which was acquired on November 22, 2016 for $124,971, (ii) the acquisition of the anchor space improvements in the
Company’s Woodinville Plaza multi-tenant retail operating property located in the Seattle MSA, which was acquired on August
30, 2016 for $4,500 and (iii) the acquisition of the fee interest in the Company’s Ashland & Roosevelt multi-tenant retail operating
property located in the Chicago MSA, which was acquired on April 29, 2016 for $13,850. The 2015 acquisition of a parcel at the
Company’s Lake Worth Towne Crossing multi-tenant retail operating property located in the Dallas MSA, which was acquired on
March 24, 2015 for $400, has not been adjusted in the pro forma presentation as it was accounted for as an asset acquisition. The
results of operations associated with the 2015 acquisitions of Towson Square on November 13, 2015 and single-user outparcels
at Southlake Town Square on July 31, 2015 and Royal Oaks Village II on October 27, 2015 have not been adjusted in the pro
forma presentation due to a lack of historical financial information. Pro forma financial information is not presented for acquisitions
completed during 2017 as they have been accounted for as asset acquisitions. These pro forma results are for comparative purposes
only and are not necessarily indicative of what the Company’s actual results of operations would have been had the acquisitions
occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
The unaudited condensed pro forma financial information is as follows:
Total revenues
Net income
Net income attributable to common shareholders
Earnings per common share – basic and diluted
Net income per common share attributable to common shareholders
Weighted average number of common shares outstanding – basic
Variable Interest Entities
Year Ended December 31,
2015
2016
587,374
165,696
156,246
0.66
236,651
$
$
$
$
627,300
121,406
111,428
0.47
236,380
$
$
$
$
During the year ended December 31, 2017, the Company entered into an agreement with a qualified intermediary related to a 1031
Exchange. The Company loaned $87,452 to the VIEs to acquire Main Street Promenade. The 1031 Exchange was completed
during the year ended December 31, 2017 and, in accordance with applicable provisions of the Code, within 180 days after the
74
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
acquisition date of the property. At the completion of the 1031 Exchange, the sole membership interests of the VIEs were assigned
to the Company in satisfaction of the outstanding loan, resulting in the entities being wholly owned by the Company and no longer
considered VIEs.
During the year ended December 31, 2016, the Company entered into agreements with a qualified intermediary related to three
1031 Exchanges. The Company loaned $65,419, $39,215 and $23,522 to the VIEs to acquire Oak Brook Promenade, Tacoma
South and Eastside, respectively. Each 1031 Exchange was completed during the year ended December 31, 2016 and, accordingly,
no agreements remained outstanding related to 1031 Exchanges as of December 31, 2016. At the completion of the 1031 Exchanges,
the sole membership interests of the VIEs were assigned to the Company and the respective outstanding loans were extinguished,
resulting in the entities being wholly owned by the Company and no longer considered VIEs.
Prior to the completion of the 1031 Exchanges, the Company was deemed to be the primary beneficiary of the VIEs as it had the
ability to direct the activities of the VIEs that most significantly impacted their economic performance and had all of the risks and
rewards of ownership. Accordingly, the Company consolidated the VIEs. No value or income was attributed to the noncontrolling
interests. The assets of the VIEs consisted of the investment properties that were operated by the Company.
75
Rite Aid Store (Eckerd) – Columbia, SC
Single-user retail
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(4) DISPOSITIONS
The Company closed on the following dispositions during the year ended December 31, 2017:
Date
Property Name
Property Type
Square
Footage
Consideration
Aggregate
Proceeds, Net (a)
Gain
Single-user retail
10,900
$
500
$
332
$
Rite Aid Store (Eckerd)–Kill Devil Hills, NC Single-user retail
January 27, 2017
February 21, 2017
March 7, 2017
March 8, 2017
Rite Aid Store (Eckerd), Culver Rd. –
Rochester, NY
Shoppes at Park West
CVS Pharmacy – Sylacauga, AL
March 15, 2017
Century III Plaza – Home Depot
March 16, 2017
Village Shoppes at Gainesville
March 24, 2017
Northwood Crossing
April 4, 2017
April 4, 2017
April 4, 2017
University Town Center
Edgemont Town Center
Phenix Crossing
April 27, 2017
Brown’s Lane
May 9, 2017
May 9, 2017
May 25, 2017
May 26, 2017
May 30, 2017
May 31, 2017
June 5, 2017
June 6, 2017
June 16, 2017
June 29, 2017
June 29, 2017
June 29, 2017
June 29, 2017
July 20, 2017
July 26, 2017
July 27, 2017
Rite Aid Store (Eckerd) – Greer, SC
Evans Towne Centre
Red Bug Village
Wilton Square
Town Square Plaza
Cuyahoga Falls Market Center
Plaza Santa Fe II
Fox Creek Village
Cottage Plaza
Magnolia Square
Cinemark Seven Bridges
Low Country Village I & II
Boulevard Plaza
Irmo Station (b)
Hickory Ridge
August 4, 2017
Lakepointe Towne Center
August 14, 2017
The Columns
August 25, 2017
Holliday Towne Center
August 25, 2017
Northwoods Center (b)
September 14, 2017
The Orchard
September 21, 2017
Lake Mary Pointe
September 22, 2017 West Town Market
September 29, 2017 Dorman Centre I & II
October 6, 2017
Forks Town Center
October 10, 2017
Placentia Town Center
October 24, 2017
Five Forks
October 27, 2017
Saucon Valley Square
December 8, 2017
Corwest Plaza
December 14, 2017
23rd Street Plaza
December 15, 2017
December 20, 2017
Century III Plaza
Page Field Commons
December 21, 2017
Quakertown (b)
Multi-tenant retail
Single-user retail
Single-user parcel
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
63,900
10,100
13,800
131,900
229,500
160,000
57,500
77,700
56,600
74,700
13,800
75,700
26,200
438,100
215,600
76,400
224,200
13,400
107,500
85,500
116,000
70,200
139,900
111,100
99,400
380,600
196,600
173,400
83,100
96,000
51,100
67,900
388,300
100,300
111,000
70,200
80,700
115,100
53,400
152,200
319,400
61,800
97,500
76,900
Multi-tenant retail
165,800
15,383
3,700
4,297
17,519
41,750
22,850
14,700
19,025
12,400
10,575
3,050
11,825
8,100
49,300
28,600
11,500
35,220
3,250
24,825
23,050
16,000
15,271
22,075
14,300
16,027
44,020
10,500
21,750
11,750
24,250
20,000
5,100
14,250
46,000
23,800
35,725
10,720
6,300
29,825
5,400
11,600
38,000
15,940
38,250
4,750
15,261
3,348
4,134
17,344
41,380
22,723
14,590
18,857
12,296
10,318
2,961
11,419
7,767
48,503
26,459
11,101
33,506
3,163
24,415
22,685
15,692
14,948
21,639
13,913
15,596
43,701
10,179
21,313
11,413
23,246
19,663
4,838
13,804
45,011
23,072
35,149
10,280
6,019
29,325
5,124
11,490
37,228
15,550
37,205
4,601
—
7,569
1,651
1,857
4,487
14,107
10,007
9,128
8,995
5,699
3,408
830
5,226
2,184
19,630
3,412
1,300
16,946
1,046
12,470
8,039
4,866
3,973
10,286
846
7,236
18,535
—
5,073
2,633
10,889
5,022
534
8,074
13,430
11,802
15,798
3,862
—
10,205
299
—
12,868
7,103
16,808
—
December 21, 2017
Bed Bath & Beyond Plaza – Miami, FL
Multi-tenant retail
December 22, 2017
High Ridge Crossing
Multi-tenant retail
December 28, 2017
Azalea Square I & Azalea Square III (c)
Multi-tenant retail
76
269,800
5,810,700
$
54,786
917,808
$
53,740
896,301
25,832
$ 333,965
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(a) Aggregate proceeds are net of transaction costs and exclude $150 of condemnation proceeds, which did not result in any additional gain
recognition.
(b) As of December 31, 2017, the following disposition proceeds are temporarily restricted related to potential 1031 Exchanges and are included
in “Other assets, net” in the accompanying consolidated balance sheets:
Property Name
Irmo Station
Northwoods Center
Quakertown
Proceeds
Temporarily
Restricted
$
$
15,643
23,255
15,189
54,087
(c) The terms of the disposition of Azalea Square I and Azalea Square III were negotiated as a single transaction.
During the year ended December 31, 2017, the Company also (i) received proceeds of $5 and recognized a gain of $1,486 as a
result of the receipt of the escrow related to the disposition of Maple Tree Place on August 12, 2016 and (ii) recorded a gain of
$2,524 upon the expiration of the ground lease related to the exchange transaction completed at Boulevard at the Capital Centre
on January 25, 2017 (refer to Note 3 to the consolidated financial statements for further discussion of the transaction). The aggregate
proceeds, net of closing costs, from the property dispositions and other transactions during the year ended December 31, 2017
totaled $896,456, with aggregate gains of $337,975.
During the year ended December 31, 2017, the Company repaid or defeased $241,858 in mortgages payable prior to or in connection
with the 2017 dispositions.
As of December 31, 2017, the Company had entered into a contract to sell Crown Theater, a 74,200 square foot single-user retail
operating property located in Hartford, Connecticut. This property qualified for held for sale accounting treatment upon meeting
all applicable GAAP criteria during the quarter ended December 31, 2017, at which time depreciation and amortization were
ceased. In addition, the assets and liabilities associated with this property are separately classified as held for sale in the
accompanying consolidated balance sheet as of December 31, 2017. Century III Plaza, including the Home Depot parcel, and CVS
Pharmacy – Sylacauga, AL were classified as held for sale as of December 31, 2016 and were sold during the year ended
December 31, 2017.
Subsequent to December 31, 2017, the Company sold Crown Theater for consideration of $6,900.
The following table presents the assets and liabilities associated with the investment properties classified as held for sale:
Assets
Land, building and other improvements
Less accumulated depreciation
Net investment properties
Other assets
Assets associated with investment properties held for sale
Liabilities
Other liabilities
Liabilities associated with investment properties held for sale
December 31, 2017
December 31, 2016
$
$
$
$
2,791
(27)
2,764
883
3,647
—
—
$
$
$
$
45,395
(15,769)
29,626
1,201
30,827
864
864
77
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The Company closed on the following dispositions during the year ended December 31, 2016:
Date
Property Name
Property Type
Square
Footage
Consideration
Aggregate
Proceeds,
Net (a)
Multi-tenant retail
623,200
$
75,000
$
(6,975) $
February 1, 2016
The Gateway (b)
February 10, 2016
Stateline Station
March 30, 2016
Six Property Portfolio (c)
April 20, 2016
CVS Pharmacy – Oklahoma City, OK
June 2, 2016
June 15, 2016
June 23, 2016
July 8, 2016
July 21, 2016
July 27, 2016
July 29, 2016
Rite Aid Store (Eckerd) – Canandaigua,
NY & Tim Horton Donut Shop (d)
Academy Sports – Midland, TX
Four Rite Aid Portfolio (e)
Broadway Shopping Center
Mid-Hudson Center
Rite Aid Store (Eckerd), Main St. –
Buffalo, NY
Rite Aid Store (Eckerd) – Lancaster, NY
August 4, 2016
Alison’s Corner
August 5, 2016
Rite Aid Store (Eckerd), Lake Ave. –
Rochester, NY
August 12, 2016
Maple Tree Place
August 12, 2016
CVS Pharmacy – Burleson, TX
August 18, 2016
Mitchell Ranch Plaza
August 22, 2016
Rite Aid Store (Eckerd), E. Main St. –
Batavia, NY
September 9, 2016
Rite Aid Store (Eckerd) – Lockport, NY
September 9, 2016
Rite Aid Store (Eckerd), Ferry St. –
Buffalo, NY
November 9, 2016 Walgreens – Northwoods, MO
November 23, 2016
Ten Rite Aid Portfolio (f)
December 8, 2016
Vail Ranch Plaza
December 15, 2016
Pacheco Pass Phase I & II
December 16, 2016
South Billings Center
Multi-tenant retail
Single-user retail
Single-user retail
Single-user retail
Single-user retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Single-user retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Single-user retail
Single-user retail
Single-user retail
Single-user retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Development (g)
142,600
230,400
10,900
16,600
61,200
45,400
190,300
235,600
10,900
10,900
55,100
13,200
489,000
10,900
199,600
13,800
13,800
10,900
16,300
119,700
101,800
194,300
—
13,400
156,500
17,500
35,413
4,676
5,400
5,541
15,934
20,500
27,500
3,388
3,425
7,850
5,400
90,000
4,190
55,625
5,050
4,690
3,600
6,450
30,000
27,450
41,500
2,250
7,700
23,700
10,630
17,210
34,986
4,608
5,333
5,399
14,646
20,103
25,615
3,296
3,349
7,559
5,334
88,528
4,102
54,305
4,924
4,415
3,370
5,793
29,380
27,160
39,549
2,157
7,444
21,460
10,467
Gain
3,868
4,253
13,618
1,764
1,444
2,220
2,287
7,958
—
344
625
3,334
907
15,566
1,425
33,612
1,249
753
612
2,199
251
11,247
4,758
—
1,893
6,553
5,069
December 22, 2016
Rite Aid Store (Eckerd) – Colesville, MD
Single-user retail
December 29, 2016
Commons at Royal Palm
Multi-tenant retail
December 30, 2016
CVS Pharmacy (Eckerd)–Edmond, OK &
CVS Pharmacy (Eckerd)–Norman, OK (h)
Single-user retail
27,600
3,013,900
$
540,362
$
443,517
$
127,809
(a) Aggregate proceeds are net of transaction costs.
(b) The property was disposed of through a lender-directed sale in full satisfaction of the Company’s $94,353 mortgage obligation. Immediately
prior to the disposition, the lender reduced the Company’s loan obligation to $75,000 which was assumed by the buyer in connection with
the disposition. Along with the loan reduction, the lender received the balance of the restricted escrows that they held and the rights to
unpaid accounts receivable and forgave accrued interest, resulting in a net gain on extinguishment of debt of $13,653.
(c) Portfolio consists of the following properties: (i) Academy Sports – Houma, LA, (ii) Academy Sports – Port Arthur, TX, (iii) Academy
Sports – San Antonio, TX, (iv) CVS Pharmacy – Moore, OK, (v) CVS Pharmacy – Saginaw, TX and (vi) Rite Aid Store (Eckerd) – Olean,
NY.
(d) The terms of the disposition of Rite Aid Store (Eckerd) – Canandaigua, NY and Tim Horton Donut Shop – Canandaigua, NY were negotiated
as a single transaction.
(e) Portfolio consists of the following properties: (i) Rite Aid Store (Eckerd) – Cheektowaga, NY, (ii) Rite Aid Store (Eckerd), W. Main St. –
Batavia, NY, (iii) Rite Aid Store (Eckerd), Union Rd. – West Seneca, NY and (iv) Rite Aid Store (Eckerd) – Greece, NY.
(f) Portfolio consists of the following properties: (i) Rite Aid Store (Eckerd) – Chattanooga, TN, (ii) Rite Aid Store (Eckerd) – Yorkshire, NY,
(iii) Rite Aid Store (Eckerd), Sheridan Dr. – Amherst, NY, (iv) Rite Aid Store (Eckerd) – Grand Island, NY, (v) Rite Aid Store (Eckerd) –
North Chili, NY, (vi) Rite Aid Store (Eckerd) – Tonawanda, NY, (vii) Rite Aid Store (Eckerd) – Irondequoit, NY, (viii) Rite Aid Store
(Eckerd) – Hudson, NY, (ix) Rite Aid Store (Eckerd), Transit Rd. – Amherst, NY and (x) Rite Aid Store (Eckerd), Harlem Rd. – West Seneca,
NY.
78
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(g) South Billings Center was classified as a development property but was not under active development.
(h) The terms of the disposition of CVS Pharmacy (Eckerd) – Edmond, OK and CVS Pharmacy (Eckerd) – Norman, OK were negotiated as a
single transaction.
During the year ended December 31, 2016, the Company also disposed of a single-user outparcel for consideration of $2,639,
received net proceeds of $2,549 and recorded a gain of $1,898 from the transaction. The aggregate proceeds, net of closing costs,
from the property dispositions and this additional transaction totaled $446,066 with aggregate gains of $129,707.
During the year ended December 31, 2016, the Company defeased $10,695 in mortgages payable prior to the 2016 dispositions.
During the year ended December 31, 2015, the Company sold 26 properties aggregating 3,917,200 square feet for total consideration
of $516,444. The dispositions and a condemnation award resulted in aggregate proceeds, net of transaction costs, of $505,503 with
aggregate gains of $121,792. During the year ended December 31, 2015, the Company repaid or defeased $121,605 in mortgages
payable prior to or in connection with the 2015 dispositions.
(5) EQUITY COMPENSATION PLANS
The Company’s 2014 Long-Term Equity Compensation Plan, subject to certain conditions, authorizes the issuance of (i) incentive
and non-qualified stock options, (ii) restricted stock and restricted stock units, (iii) stock appreciation rights and other similar
awards as well as cash-based awards to the Company’s employees, non-employee directors, consultants and advisors in connection
with compensation and incentive arrangements that may be established by the Company’s board of directors or executive
management.
The following table summarizes the Company’s unvested restricted shares as of and for the years ended December 31, 2017, 2016
and 2015:
Balance as of January 1, 2015
Shares granted (a)
Shares vested
Shares forfeited
Balance as of December 31, 2015
Shares granted (a)
Shares vested
Shares forfeited (b)
Balance as of December 31, 2016
Shares granted (a)
Shares vested
Shares forfeited (b)
Balance as of December 31, 2017 (c)
Unvested
Restricted
Shares
396
801
(405)
(4)
788
274
(510)
(10)
542
285
(291)
(40)
496
Weighted Average
Grant Date Fair
Value per
Restricted Share
$
$
$
$
$
$
$
$
$
$
$
$
$
14.26
15.82
14.89
16.01
15.52
14.76
15.38
14.70
15.28
14.60
15.44
15.12
14.81
(a) Shares granted in 2015, 2016 and 2017 vest over periods ranging from 0.4 years to 3.4 years, 0.4 years to 3.9 years and one
year to three years, respectively, in accordance with the terms of applicable award agreements.
(b) Effective January 1, 2016, the Company made an accounting policy election to account for forfeitures when they occur.
(c) As of December 31, 2017, total unrecognized compensation expense related to unvested restricted shares was $2,152, which
is expected to be amortized over a weighted average term of 1.2 years.
In addition, during the years ended December 31, 2017, 2016 and 2015, performance restricted stock units (RSUs) were granted
to the Company’s executives. Following the three-year performance period, one-third of the RSUs that are earned will convert
into shares of common stock and two-thirds will convert into restricted shares with a one year vesting term. As long as the minimum
hurdle is achieved and the executive remains employed during the performance period, the RSUs will convert into shares of
common stock and restricted shares at a conversion rate of between 50% and 200% based upon the Company’s Total Shareholder
Return (TSR) as compared to that of the peer companies within the National Association of Real Estate Investment Trusts (NAREIT)
79
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Shopping Center Index (Peer Companies) for the respective performance period. If an executive terminates employment during
the performance period by reason of a qualified termination, as defined in the agreement, a prorated portion of his or her outstanding
RSUs will be eligible for conversion based upon the period in which the executive was employed during the performance period.
If an executive terminates for any reason other than a qualified termination during the performance period, he or she would forfeit
his or her outstanding RSUs. Following the performance period, additional shares of common stock will also be issued in an
amount equal to the accumulated value of the dividends that would have been paid during the performance period on the shares
of common stock and restricted shares issued at the end of the performance period divided by the then-current market price of the
Company’s common stock. The Company calculated the grant date fair values per unit using Monte Carlo simulations based on
the probabilities of satisfying the market performance hurdles over the remainder of the performance period.
The following table summarizes the Company’s unvested RSUs as of and for the years ended December 31, 2017, 2016 and 2015:
RSUs eligible for future conversion as of January 1, 2015
RSUs granted (a)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2015
RSUs granted (b)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2016
RSUs granted (c)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2017 (d) (e)
Unvested
RSUs
Weighted Average
Grant Date
Fair Value
per RSU
—
180
(6)
174
246
(29)
391
253
(89)
555
$
$
$
$
$
$
$
$
$
$
—
14.19
14.10
14.20
13.85
13.56
14.02
15.52
14.68
14.60
(a) Assumptions and inputs as of the grant dates included a weighted average risk-free interest rate of 0.80%, the Company’s historical
common stock performance relative to the peer companies within the NAREIT Shopping Center Index and the Company’s weighted
average common stock dividend yield of 4.26%.
(b) Assumptions and inputs as of the grant dates included a weighted average risk-free interest rate of 0.89%, the Company’s historical
common stock performance relative to the peer companies within the NAREIT Shopping Center Index and the Company’s weighted
average common stock dividend yield of 4.59%.
(c) Assumptions and inputs as of the grant date included a risk-free interest rate of 1.50%, the Company’s historical common stock
performance relative to the peer companies within the NAREIT Shopping Center Index and the Company’s common stock dividend
yield of 4.32%.
(d) As of December 31, 2017, total unrecognized compensation expense related to unvested RSUs was $4,099, which is expected to
be amortized over a weighted average term of 2.3 years.
(e) Subsequent to December 31, 2017, 141 RSUs converted into 42 shares of common stock and 65 restricted shares with a one year
vesting term after applying a conversion rate of 76% based upon the Company’s TSR relative to the TSRs of its Peer Companies,
for the performance period that concluded on December 31, 2017. An additional 16 shares of common stock were also issued for
dividends that would have been paid on the common stock and restricted shares during the performance period.
During the years ended December 31, 2017, 2016 and 2015, the Company recorded compensation expense of $6,059, $7,209 and
$10,755, respectively, related to the amortization of unvested restricted shares and RSUs. Included within the amortization of
stock-based compensation expense recorded during the year ended December 31, 2017 is the reversal of $830 of previously
recognized compensation expense related to the forfeiture of 34 restricted shares and 89 RSUs resulting from the 2017 resignation
of the Company’s former Chief Financial Officer and Treasurer. In addition, $30 of dividends previously paid on the forfeited
restricted shares were reclassified from distributions paid to compensation expense. Included within the amortization of stock-
based compensation expense recorded during the year ended December 31, 2015 is compensation expense of $2,159 related to
the accelerated vesting of 194 restricted shares in conjunction with the 2015 departures of the Company’s former Chief Financial
Officer and Treasurer and former Executive Vice President and President of Property Management. The total fair value of restricted
shares vested during the years ended December 31, 2017, 2016 and 2015 was $4,232, $7,596 and $6,188, respectively.
Prior to 2013, non-employee directors had been granted options to acquire shares under the Company’s Third Amended and
Restated Independent Director Stock Option and Incentive Plan. Options to purchase a total of 84 shares of common stock had
80
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
been granted under the plan. As of December 31, 2017, options to purchase 38 shares of common stock remained outstanding and
exercisable. The Company did not grant any options in 2017, 2016 or 2015 and no compensation expense related to stock options
was recorded during the years ended December 31, 2017, 2016 and 2015, respectively.
(6) LEASES
The majority of revenues from the Company’s properties consist of rents received under long-term operating leases. In addition
to base rent paid monthly in advance, some leases provide for the reimbursement of the tenant’s pro rata share of certain operating
expenses incurred by the landlord including real estate taxes, special assessments, insurance, utilities, common area maintenance,
management fees and certain capital repairs, subject to the terms of the respective lease. Certain other tenants are subject to net
leases which provide that the tenant is responsible for fixed base rent, as well as all costs and expenses associated with occupancy.
Under net leases, where all expenses are paid directly by the tenant rather than the landlord, such expenses are not included in the
accompanying consolidated statements of operations and other comprehensive income. Under leases where all expenses are paid
by the landlord, subject to reimbursement by the tenant, the expenses are included in “Operating expenses” or “Real estate taxes”
and reimbursements are included in “Tenant recovery income” in the accompanying consolidated statements of operations and
other comprehensive income.
In certain municipalities, the Company is required to remit sales taxes to governmental authorities based upon the rental income
received from properties in those regions. These taxes are reimbursed by the tenant to the Company depending upon the terms of
the applicable tenant lease. The presentation of the remittance and reimbursement of these taxes is on a gross basis with sales tax
expenses included in “Operating expenses” and sales tax reimbursements included in “Other property income” in the accompanying
consolidated statements of operations and other comprehensive income. Such taxes remitted to governmental authorities, which
are reimbursed by tenants, were $1,414, $1,986 and $2,071 for the years ended December 31, 2017, 2016 and 2015, respectively.
Minimum lease payments to be received under operating leases, excluding payments under master lease agreements, additional
percentage rent based on tenants’ sales volume and tenant reimbursements of certain operating expenses and assuming no exercise
of renewal options or early termination rights, are as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Minimum
Lease Payments
370,874
$
322,661
278,958
238,830
192,161
736,226
2,139,710
$
The remaining lease terms range from less than one year to more than 65 years.
Many of the leases at the Company’s retail properties contain provisions that condition a tenant’s obligation to remain open, the
amount of rent payable by the tenant or potentially the tenant’s obligation to remain in the lease, upon certain factors, including:
(i) the presence and continued operation of a certain anchor tenant or tenants, (ii) minimum occupancy levels at the applicable
property or (iii) tenant sales amounts. If such a provision is triggered by a failure of any of these or other applicable conditions, a
tenant could have the right to cease operations at the applicable property, have its rent reduced or terminate its lease early. The
Company does not expect that such provisions will have a material impact on its future operating results.
81
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The Company leases land under non-cancellable operating leases at certain of its properties expiring in various years from 2035
to 2087, exclusive of any available option periods. In addition, the Company leases office space for certain management offices
and its corporate offices, which were expanded during the year ended December 31, 2016 to include a regional office in Tysons
Corner, Virginia. The following table summarizes rent expense included in the accompanying consolidated statements of operations
and other comprehensive income, including straight-line rent expense.
Ground lease rent expense (a)
Office rent expense (b)
Year Ended December 31,
2016
2017
2015
$
$
9,188
1,311
$
$
10,464
1,317
$
$
11,461
1,246
(a) Included in “Operating expenses” in the accompanying consolidated statements of operations and other comprehensive income.
Includes straight-line ground rent expense of $2,710, $3,253 and $3,722 for the years ended December 31, 2017, 2016 and 2015,
respectively.
(b) Office rent expense related to property management operations is included in “Operating expenses” and office rent expense related
to corporate office operations is included in “General and administrative expenses” in the accompanying consolidated statements
of operations and other comprehensive income.
Minimum future rental obligations to be paid under the ground and office leases, including fixed rental increases, are as follows:
2018
2019
2020
2021
2022
Thereafter
Total
Minimum
Lease Obligations
6,717
$
7,084
7,220
7,338
7,368
348,246
383,973
$
(7) MORTGAGES PAYABLE
The following table summarizes the Company’s mortgages payable:
Fixed rate mortgages payable (a)
$
287,238
4.99%
5.2
$
773,395
6.31%
4.2
December 31, 2017
December 31, 2016
Aggregate
Principal
Balance
Weighted
Average
Interest Rate
Weighted
Average Years
to Maturity
Aggregate
Principal
Balance
Weighted
Average
Interest Rate
Weighted
Average Years
to Maturity
Premium, net of accumulated amortization
Discount, net of accumulated amortization
Capitalized loan fees, net of accumulated
amortization
Mortgages payable, net
1,024
(579)
(615)
1,437
(622)
(5,026)
$
287,068
$
769,184
(a) The fixed rate mortgages had interest rates ranging from 3.75% to 8.00% as of December 31, 2017 and 2016.
During the year ended December 31, 2017, the Company repaid or defeased mortgages payable in the total amount of $481,505,
of which $241,858 related to properties that were disposed of during the period, which had a weighted average fixed interest rate
of 7.10%, and made scheduled principal payments of $4,652 related to amortizing loans. Included within the total repayments and
defeasances for the year ended December 31, 2017 is the defeasance of a portfolio of mortgages payable with a principal balance
of $379,435 as of December 31, 2016 that was cross-collateralized by 45 properties and scheduled to mature in 2019 (known as
the IW JV portfolio of mortgages payable). The Company incurred a defeasance premium and associated fees totaling $60,198 in
connection with this transaction, which are included within “Interest expense” in the accompanying consolidated statements of
operations and other comprehensive income. As a result, the 45 properties that secured the mortgages payable as of December 31,
2016 are no longer encumbered by mortgages.
82
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The majority of the Company’s mortgages payable require monthly payments of principal and interest, and some of the mortgages
require reserves for real estate taxes and certain other costs. The Company’s properties and the related tenant leases are pledged
as collateral for its mortgages payable. At times, the Company has borrowed funds financed as part of a cross-collateralized package,
with cross-default provisions. In those circumstances, one or more of the Company’s properties may secure the debt of another of
the Company’s properties.
Debt Maturities
The following table shows the scheduled maturities and principal amortization of the Company’s indebtedness as of December 31,
2017, for each of the next five years and thereafter and the weighted average interest rates by year. The table does not reflect the
impact of any 2018 debt activity.
2018
2019
2020
2021
2022
Thereafter
Total
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
Variable rate debt:
Variable rate term loan and
revolving line of credit
$
$
4,166
—
—
4,166
$
25,257
—
—
25,257
3,923
—
—
3,923
$
22,820
250,000
100,000
372,820
$ 157,216
—
$
—
157,216
73,856
200,000
600,000
873,856
$
287,238
450,000
700,000
1,437,238
100,000
—
216,000
—
—
—
316,000
Total debt (d)
$ 104,166
$
25,257
$ 219,923
$ 372,820
$ 157,216
$
873,856
$ 1,753,238
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
5.07%
2.93%
3.01%
7.29%
—
7.29%
4.62%
2.92%
2.95%
3.62%
—
3.62%
4.97%
—
4.97%
3.92%
—
3.92%
4.02%
2.92%
3.83%
(a) Excludes mortgage premium of $1,024 and discount of $(579), net of accumulated amortization, as of December 31, 2017.
(b) $250,000 of London Interbank Offered Rate (LIBOR)-based variable rate debt has been swapped to a fixed rate through three interest rate
swaps. The swaps effectively convert one-month floating rate LIBOR to a fixed rate of 2.00% through January 5, 2021. In addition, $200,000
of LIBOR-based variable rate debt has been swapped to a fixed rate through two interest rate swaps. The swaps effectively convert one-
month floating rate LIBOR to a fixed rate of 1.26% through November 22, 2018.
(c) Excludes discount of $(853), net of accumulated amortization, as of December 31, 2017.
(d) The weighted average years to maturity of consolidated indebtedness was 5.1 years as of December 31, 2017. Total debt excludes capitalized
loan fees of $(6,744), net of accumulated amortization, as of December 31, 2017, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2017.
The Company plans on addressing its debt maturities through a combination of proceeds from asset dispositions, capital markets
transactions and its unsecured revolving line of credit.
83
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(8) UNSECURED NOTES PAYABLE
The following table summarizes the Company’s unsecured notes payable:
Unsecured Notes Payable
Maturity Date
December 31, 2017
December 31, 2016
Principal
Balance
Interest Rate/
Weighted Average
Interest Rate
Principal
Balance
Interest Rate/
Weighted Average
Interest Rate
Senior notes – 4.12% due 2021
Senior notes – 4.58% due 2024
Senior notes – 4.00% due 2025
Senior notes – 4.08% due 2026
Senior notes – 4.24% due 2028
Discount, net of accumulated amortization
Capitalized loan fees, net of accumulated amortization
Notes Due 2026 and 2028
June 30, 2021
$
100,000
4.12% $
100,000
June 30, 2024
March 15, 2025
September 30, 2026
December 28, 2028
150,000
250,000
100,000
100,000
700,000
(853)
(3,399)
4.58%
4.00%
4.08%
4.24%
4.19%
150,000
250,000
100,000
100,000
700,000
(971)
(3,886)
Total
$
695,748
$
695,143
4.12%
4.58%
4.00%
4.08%
4.24%
4.19%
On September 30, 2016, the Company issued $100,000 of 4.08% senior unsecured notes due 2026 in a private placement transaction
pursuant to a note purchase agreement it entered into with certain institutional investors on September 30, 2016. Pursuant to the
same note purchase agreement, on December 28, 2016, the Company also issued $100,000 of 4.24% senior unsecured notes due
2028 (Notes Due 2026 and 2028). The proceeds were used to pay down the Company’s unsecured revolving line of credit, early
repay certain longer-dated mortgages payable and for general corporate purposes.
The note purchase agreement governing the Notes Due 2026 and 2028 contains customary representations, warranties and
covenants, and events of default. Pursuant to the terms of the note purchase agreement, the Company is subject to various financial
covenants, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage
ratios; (ii) a minimum interest coverage ratio; (iii) an unencumbered interest coverage ratio (as set forth in the Company’s unsecured
credit facility and the note purchase agreement governing the Notes Due 2021 and 2024); and (iv) a fixed charge coverage ratio
(as set forth in the Company’s unsecured credit facility).
Notes Due 2025
On March 12, 2015, the Company completed a public offering of $250,000 in aggregate principal amount of 4.00% senior unsecured
notes due 2025 (Notes Due 2025). The Notes Due 2025 were priced at 99.526% of the principal amount to yield 4.058% to maturity.
The proceeds were used to repay a portion of the Company’s unsecured revolving line of credit.
The indenture, as supplemented, governing the Notes Due 2025 (the Indenture) contains customary covenants and events of default.
Pursuant to the terms of the Indenture, the Company is subject to various financial covenants, including the requirement to maintain
the following: (i) maximum secured and total leverage ratios; (ii) a debt service coverage ratio; and (iii) maintenance of an
unencumbered assets to unsecured debt ratio.
Notes Due 2021 and 2024
On June 30, 2014, the Company completed a private placement of $250,000 of unsecured notes, consisting of $100,000 of 4.12%
senior unsecured notes due 2021 and $150,000 of 4.58% senior unsecured notes due 2024 (Notes Due 2021 and 2024). The proceeds
were used to repay a portion of the Company’s unsecured revolving line of credit.
The note purchase agreement governing the Notes Due 2021 and 2024 contains customary representations, warranties and
covenants, and events of default. Pursuant to the terms of the note purchase agreement, the Company is subject to various financial
covenants, some of which are based upon the financial covenants in effect in the Company’s unsecured credit facility, including
the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum
interest coverage and unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth.
84
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
As of December 31, 2017, management believes the Company was in compliance with the financial covenants under the Indenture
and the note purchase agreements.
(9) UNSECURED TERM LOANS AND REVOLVING LINE OF CREDIT
The following table summarizes the Company’s term loans and revolving line of credit:
December 31, 2017
December 31, 2016
Maturity Date
Balance
Interest
Rate
Balance
Interest
Rate
Unsecured credit facility term loan due 2021 – fixed rate (a)
January 5, 2021
$
Unsecured credit facility term loan due 2018 – variable rate
May 11, 2018
Unsecured term loan due 2023 – fixed rate (b)
November 22, 2023
Subtotal
Capitalized loan fees, net of accumulated amortization
Term loans, net
Revolving line of credit – variable rate (c)
January 5, 2020
$
$
250,000
100,000
200,000
550,000
(2,730)
547,270
3.30% $
2.93%
2.96%
250,000
200,000
—
450,000
(2,402)
$
447,598
1.97%
2.22%
—%
216,000
2.92% $
86,000
2.12%
(a) As of December 31, 2017 and 2016, $250,000 of LIBOR-based variable rate debt has been swapped to weighted average fixed rates of
2.00% and 0.67%, respectively, plus a credit spread based on a leverage grid ranging from 1.30% to 2.20% through January 5, 2021 and
December 29, 2017, respectively. The applicable credit spread was 1.30% as of December 31, 2017 and 2016.
(b) As of December 31, 2017, $200,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 1.26% plus a credit spread
based on a leverage grid ranging from 1.70% to 2.55% through November 22, 2018. The applicable credit spread was 1.70% as of
December 31, 2017.
(c) Excludes capitalized loan fees, which are included in “Other assets, net” in the accompanying consolidated balance sheets.
Unsecured Credit Facility
On January 6, 2016, the Company entered into its fourth amended and restated unsecured credit agreement (Unsecured Credit
Agreement) with a syndicate of financial institutions led by KeyBank National Association serving as administrative agent and
Wells Fargo Bank, National Association serving as syndication agent to provide for an unsecured credit facility aggregating
$1,200,000 (Unsecured Credit Facility). The Unsecured Credit Facility consists of a $750,000 unsecured revolving line of credit,
a $250,000 unsecured term loan and a second unsecured term loan that had an outstanding balance of $200,000 at inception, of
which the Company repaid $100,000 during the year ended December 31, 2017, and is priced on a leverage grid at a rate of LIBOR
plus a credit spread. The Company received investment grade credit ratings from Moody’s and Standard & Poor’s in 2014. In
accordance with the Unsecured Credit Agreement, the Company may elect to convert to an investment grade pricing grid. As of
December 31, 2017, making such an election would have resulted in a higher interest rate and, as such, the Company has not made
the election to convert to an investment grade pricing grid.
The following table summarizes the key terms of the Unsecured Credit Facility:
Unsecured Credit Facility
$250,000 unsecured term loan
$100,000 unsecured term loan
Maturity
Date
1/5/2021
Extension
Option
Extension
Fee
Credit
Spread
Unused Fee
Credit
Spread
Facility Fee
Leverage-Based Pricing
Ratings-Based Pricing
N/A
N/A
1.30% - 2.20%
5/11/2018
2 one year
0.15%
1.45% - 2.20%
N/A
N/A
0.90% - 1.75%
1.05% - 2.05%
N/A
N/A
$750,000 unsecured revolving line of credit
1/5/2020
2 six month
0.075%
1.35% - 2.25% 0.15% - 0.25% 0.85% - 1.55% 0.125% - 0.30%
The Unsecured Credit Facility has a $400,000 accordion option that allows the Company, at its election, to increase the total credit
facility subject to (i) customary fees and conditions including, but not limited to, the absence of an event of default as defined in
the Unsecured Credit Agreement and (ii) the Company’s ability to obtain additional lender commitments.
The Unsecured Credit Agreement contains customary representations, warranties and covenants, and events of default. Pursuant
to the terms of the Unsecured Credit Agreement, the Company is subject to various financial covenants, including the requirement
85
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; and (ii) minimum fixed charge
and unencumbered interest coverage ratios. As of December 31, 2017, management believes the Company was in compliance with
the financial covenants and default provisions under the Unsecured Credit Agreement.
Term Loan Due 2023
On January 3, 2017, the Company received funding on a seven-year $200,000 unsecured term loan with a group of financial
institutions, which closed during the year ended December 31, 2016. The Term Loan Due 2023 is priced on a leverage grid at a
rate of LIBOR plus a credit spread. In accordance with the term loan agreement (Term Loan Agreement), the Company may elect
to convert to an investment grade pricing grid. As of December 31, 2017, making such an election would have resulted in a higher
interest rate and, as such, the Company has not made the election to convert to an investment grade pricing grid.
The following table summarizes the key terms of the Term Loan Due 2023:
Term Loan Due 2023
$200,000 unsecured term loan
Maturity Date
11/22/2023
Leverage-Based Pricing
Credit Spread
1.70% – 2.55%
Ratings-Based Pricing
Credit Spread
1.50% – 2.45%
The Term Loan Due 2023 has a $100,000 accordion option that allows the Company, at its election, to increase the total unsecured
term loan up to $300,000, subject to customary fees and conditions, including the absence of an event of default as defined in the
Term Loan Agreement.
The Term Loan Agreement contains customary representations, warranties and covenants, and events of default, including financial
covenants that require the Company to maintain the following: (i) maximum unencumbered, secured and consolidated leverage
ratios; and (ii) minimum fixed charge and unencumbered interest coverage ratios. As of December 31, 2017, management believes
the Company was in compliance with the financial covenants and default provisions under the Term Loan Agreement.
(10) DERIVATIVES
The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability
to interest expense. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management
strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in
exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional
amount.
As of December 31, 2017, the Company utilized five interest rate swaps to hedge the variable cash flows associated with variable
rate debt. The effective portion of changes in the fair value of derivatives that are designated and that qualify as cash flow hedges
is recorded in “Accumulated other comprehensive income” and is reclassified to interest expense as interest payments are made
on the Company’s variable rate debt. Over the next 12 months, the Company estimates that an additional $257 will be reclassified
as a decrease to interest expense. The ineffective portion of the change in fair value of derivatives is recognized directly in earnings.
The following table summarizes the Company’s interest rate swaps as of December 31, 2017, which effectively convert one-month
floating rate LIBOR to a fixed rate:
Effective Date
January 3, 2017
January 3, 2017
December 29, 2017
December 29, 2017
December 29, 2017
Notional
Fixed
Interest Rate
$
$
$
$
$
100,000
100,000
100,000
100,000
50,000
1.26%
1.26%
2.00%
2.00%
2.00%
Termination Date
November 22, 2018
November 22, 2018
January 5, 2021
January 5, 2021
January 5, 2021
The Company previously had two interest rate swaps with notional amounts totaling $250,000 that matured on December 29,
2017.
86
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The following table summarizes the Company’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivatives
December 31, 2017
December 31, 2016
December 31, 2017
December 31, 2016
Interest rate swaps
5
2
$
450,000
$
250,000
Number of Instruments
Notional
The table below presents the estimated fair value of the Company’s derivative financial instruments, which are presented within
“Other assets, net” in the accompanying consolidated balance sheets. The valuation techniques utilized are described in Note 15
to the consolidated financial statements.
Derivatives designated as cash flow hedges:
Interest rate swaps
Fair Value
December 31, 2017
December 31, 2016
$
1,086
$
743
The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated
statements of operations and other comprehensive income:
Derivatives in
Cash Flow
Hedging
Relationships
Amount of Gain
Recognized in Other
Comprehensive Income
on Derivative
(Effective Portion)
2017
2016
Location of (Gain) Loss
Reclassified from
Accumulated Other
Comprehensive
Income (AOCI)
into Income
(Effective Portion)
Amount of (Gain) Loss
Reclassified from
AOCI into Income
(Effective Portion)
2017
2016
Location of Gain
Recognized In
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Amount of Loss (Gain)
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
2017
2016
Interest rate swaps
$
(985) $
(399)
Interest expense
$
(633) $
408
Other income, net
$
9
$
(21)
Credit-risk-related Contingent Features
The Company has agreements with each of its derivative counterparties that contain a provision whereby if the Company defaults
on the related indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then
the Company could also be declared in default on its corresponding derivative obligation.
The Company’s agreements with each of its derivative counterparties also contain a provision whereby if the Company consolidates
with, merges with or into, or transfers all or substantially all of its assets to another entity and the creditworthiness of the resulting,
surviving or transferee entity is materially weaker than the Company’s, the counterparty has the right to terminate the derivative
obligations. As of December 31, 2017, the Company did not have any derivatives in a net liability position and has not posted any
collateral related to these agreements.
(11) EQUITY
In December 2012, the Company issued 5,400 shares of its 7.00% Series A cumulative redeemable preferred stock at a price of
$25.00 per share. On December 20, 2017, the Company redeemed all 5,400 outstanding shares of its Series A preferred stock for
cash at a redemption price of $25.00 per share, plus $0.3840 per share representing all accrued and unpaid dividends up to, but
excluding, the redemption date. The $4,706 difference between the carrying value of $130,294 and the redemption amount of
$135,000 represents the original underwriting discount and offering costs from 2012 and was recorded as preferred stock dividends.
In December 2015, the Company entered into an at-the-market (ATM) equity program under which it may issue and sell shares
of its Class A common stock, having an aggregate offering price of up to $250,000, from time to time. Actual sales may depend
on a variety of factors, including, among others, market conditions and the trading price of the Company’s Class A common stock.
Any net proceeds are expected to be used for general corporate purposes, which may include the funding of acquisitions and
redevelopment activities and the repayment of debt, including the Company’s unsecured revolving line of credit. The Company
did not sell any shares under its ATM equity program during the years ended December 31, 2017, 2016 and 2015. As of December 31,
2017, the Company had Class A common shares having an aggregate offering price of up to $250,000 remaining available for sale
under its ATM equity program.
87
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
In December 2015, the Company’s board of directors authorized a common stock repurchase program under which the Company
may repurchase, from time to time, up to a maximum of $250,000 of shares of its Class A common stock. On December 14, 2017,
the Company’s board of directors authorized a $250,000 increase to the common stock repurchase program. The shares may be
repurchased in the open market or in privately negotiated transactions and are canceled upon repurchase. The timing and actual
number of shares repurchased will depend on a variety of factors, including price in absolute terms and in relation to the value of
the Company’s assets, corporate and regulatory requirements, market conditions and other corporate liquidity requirements and
priorities. The common stock repurchase program may be suspended or terminated at any time without prior notice. The Company
did not repurchase any shares during the year ended December 31, 2015. During the year ended December 31, 2016, the Company
repurchased 591 shares at an average price per share of $14.93 for a total of $8,841. During the year ended December 31, 2017,
the Company repurchased 17,683 shares at an average price per share of $12.82 for a total of $227,102. As of December 31, 2017,
$264,057 remained available for repurchases under the common stock repurchase program.
(12) EARNINGS PER SHARE
The following table summarizes the components used in the calculation of basic and diluted earnings per share (EPS):
Numerator:
(Loss) income from continuing operations
Gain on sales of investment properties
Net income from continuing operations attributable to noncontrolling interest
Preferred stock dividends
Net income attributable to common shareholders
Earnings allocated to unvested restricted shares
Net income attributable to common shareholders excluding amounts
attributable to unvested restricted shares
Denominator:
Denominator for earnings per common share – basic:
Year Ended December 31,
2016
2015
2017
$
(86,484)
337,975
—
(13,867)
237,624
(513)
$
37,110
129,707
—
(9,450)
157,367
(445)
$
3,832
121,792
(528)
(9,450)
115,646
(481)
$
237,111
$
156,922
$
115,165
Weighted average number of common shares outstanding
230,747 (a)
236,651 (b)
236,380 (c)
Effect of dilutive securities:
Stock options
RSUs
Denominator for earnings per common share – diluted:
Weighted average number of common and common equivalent
shares outstanding
1 (d)
179 (e)
2 (d)
298 (f)
2 (d)
— (g)
230,927
236,951
236,382
(a) Excludes 496 shares of unvested restricted common stock as of December 31, 2017, which equate to 537 shares on a weighted average
basis for the year ended December 31, 2017. These shares will continue to be excluded from the computation of basic EPS until contingencies
are resolved and the shares are released.
(b) Excludes 542 shares of unvested restricted common stock as of December 31, 2016, which equate to 637 shares on a weighted average
basis for the year ended December 31, 2016. These shares were excluded from the computation of basic EPS as the contingencies remained
and the shares had not been released as of the end of the reporting period.
(c) Excludes 788 shares of unvested restricted common stock as of December 31, 2015, which equate to 768 shares on a weighted average
basis for the year ended December 31, 2015. These shares were excluded from the computation of basic EPS as the contingencies remained
and the shares had not been released as of the end of the reporting period.
(d) There were outstanding options to purchase 38, 41 and 53 shares of common stock as of December 31, 2017, 2016 and 2015, respectively,
at a weighted average exercise price of $18.85, $19.25 and $19.39, respectively. Of these totals, outstanding options to purchase 32, 35 and
45 shares of common stock as of December 31, 2017, 2016 and 2015, respectively, at a weighted average exercise price of $20.19, $20.55
and $20.74, respectively, have been excluded from the common shares used in calculating diluted EPS as including them would be anti-
dilutive.
(e) As of December 31, 2017, there were 555 RSUs eligible for future conversion upon completion of the performance periods (see Note 5 to
the consolidated financial statements), which equate to 617 RSUs on a weighted average basis for the year ended December 31, 2017. These
contingently issuable shares are a component of calculating diluted EPS.
88
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(f) As of December 31, 2016, there were 391 RSUs eligible for future conversion upon completion of the performance periods, which equate
to 367 RSUs on a weighted average basis for the year ended December 31, 2016. These contingently issuable shares are a component of
calculating diluted EPS.
(g) As of December 31, 2015, there were 174 RSUs eligible for future conversion upon completion of the performance period, which equate
to 101 RSUs on a weighted average basis for the year ended December 31, 2015. These contingently issuable shares are a component of
calculating diluted EPS.
(13) INCOME TAXES
The Company has elected to be taxed as a REIT under the Code. To qualify as a REIT, the Company must meet a number of
organizational and operational requirements, including a requirement to annually distribute to its shareholders at least 90% of its
REIT taxable income, determined without regard to the dividends paid deduction and excluding net capital gains. The Company
intends to continue to adhere to these requirements and to maintain its REIT status. As a REIT, the Company is entitled to a
deduction for some or all of the distributions it pays to shareholders. Accordingly, the Company is generally subject to U.S. federal
income taxes on any taxable income that is not currently distributed to its shareholders. If the Company fails to qualify as a REIT
in any taxable year, it will be subject to U.S. federal income taxes and may not be able to qualify as a REIT until the fifth subsequent
taxable year.
Notwithstanding the Company’s qualification as a REIT, the Company may be subject to certain state and local taxes on its income
or properties. In addition, the Company’s consolidated financial statements include the operations of one wholly-owned subsidiary
that has jointly elected to be treated as a TRS and is subject to U.S. federal, state and local income taxes at regular corporate tax
rates. The Company did not record any income tax expense related to the TRS for the years ended December 31, 2017, 2016 and
2015. As a REIT, the Company may also be subject to certain U.S. federal excise taxes if it engages in certain types of transactions.
Deferred income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the estimated future consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted rates in effect for
the year in which these temporary differences are expected to reverse. Deferred tax assets are recognized only to the extent that it
is more likely than not that they will be realized based on consideration of available evidence, including future reversal of existing
taxable temporary differences, the magnitude and timing of future projected taxable income and tax planning strategies. The
Company believes that it is not more likely than not that its net deferred tax asset will be realized in future periods and therefore,
has recorded a valuation allowance for the balance, resulting in no effect on the consolidated financial statements.
The Company’s deferred tax assets and liabilities as of December 31, 2017 and 2016 were as follows:
Deferred tax assets:
Basis difference in properties
Capital loss carryforward
Net operating loss carryforward
Other
Gross deferred tax assets
Less: valuation allowance
Total deferred tax assets
Deferred tax liabilities:
Other
Net deferred tax assets
2017
2016
$
$
2
5,751
6,125
469
12,347
(12,347)
—
—
—
$
$
—
9,628
10,677
870
21,175
(21,175)
—
—
—
The Company’s deferred tax assets and liabilities result from the activities of the TRS. As of December 31, 2017, the TRS had a
capital loss carryforward and a federal net operating loss carryforward of $27,385 and $29,169, respectively, which if not utilized,
will begin to expire in 2019 and 2031, respectively.
Differences between net income from the consolidated statements of operations and other comprehensive income and the Company’s
taxable income primarily relate to the recognition of sales of investment properties, impairment charges recorded on investment
properties and the timing of both revenue recognition and investment property depreciation and amortization.
89
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The following table reconciles the Company’s net income to REIT taxable income before the dividends paid deduction for the
years ended December 31, 2017, 2016 and 2015:
Net income attributable to the Company
Book/tax differences
REIT taxable income subject to 90% dividend requirement
2017
2016
2015
$
$
251,491
(59,220)
192,271
$
$
166,817
(50,950)
115,867
$
$
125,096
2,344
127,440
The Company’s dividends paid deduction for the years ended December 31, 2017, 2016 and 2015 is summarized below:
Distributions
Less: non-dividend distributions
Total dividends paid deduction attributable to earnings and profits
2017
2016
2015
$
$
192,271
—
192,271
$
$
166,285
(50,418)
115,867
$
$
166,064
(38,624)
127,440
A summary of the tax characterization per share of the distributions to shareholders of the Company’s preferred stock and common
stock for the years ended December 31, 2017, 2016 and 2015 follows:
Preferred stock
Ordinary dividends
Non-dividend distributions
Capital gain distributions
Total distributions per share
Common stock
Ordinary dividends
Non-dividend distributions
Capital gain distributions
Total distributions per share
2017
2016
2015
$
$
$
$
1.62
—
0.07
1.69
0.76
—
0.03
0.79
$
$
$
$
1.75
—
—
1.75
0.45
0.21
—
0.66
$
$
$
$
1.75
—
—
1.75
0.50
0.16
—
0.66
The Company records a benefit for uncertain income tax positions if the result of a tax position meets a “more likely than not”
recognition threshold. No liabilities have been recorded as of December 31, 2017 or 2016 as a result of this provision. The Company
expects no significant increases or decreases in unrecognized tax benefits due to changes in tax positions within one year of
December 31, 2017. Returns for the calendar years 2014 through 2017 remain subject to examination by federal and various state
tax jurisdictions.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the “Tax Cuts and
Jobs Act” (TCJA). The TCJA makes broad and complex changes to the Code and establishes new tax laws that include, but are
not limited to, the following: (i) reduction of the U.S. federal corporate tax rate; (ii) elimination of the corporate alternative minimum
tax; (iii) limitation on deductible interest expense in certain circumstances; (iv) limitations on the deductibility of certain executive
compensation; and (v) limitations on the use of net operating loss deductions. The changes made to the Code as a result of the
TCJA will be applicable to the Company’s tax filings for tax years beginning after December 31, 2017. The Company has completed
its accounting for the income tax effects under the TCJA that are relevant to the Company and required to be recorded and disclosed
pursuant to FASB ASC 740, Income Taxes, using estimates based on reasonable and supportable assumptions and available inputs
and underlying information as of the reporting date. The Company considers its accounting as of December 31, 2017 final relative
to the enactment of the TCJA and there are no provisional amounts.
90
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(14) PROVISION FOR IMPAIRMENT OF INVESTMENT PROPERTIES
As of December 31, 2017, 2016 and 2015, the Company identified indicators of impairment at certain of its properties. Such
indicators included a low occupancy rate, difficulty in leasing space and related cost of re-leasing, financially troubled tenants or
reduced anticipated holding periods. The following table summarizes the results of these analyses as of December 31, 2017, 2016
and 2015:
2017
December 31,
2016
2015
Number of properties for which indicators of impairment were identified
Less: number of properties for which an impairment charge was recorded
Less: number of properties that were held for sale as of the date the analysis was performed
for which indicators of impairment were identified but no impairment charge was recorded
Remaining properties for which indicators of impairment were identified but
no impairment charge was considered necessary
6
1
1
4
(a)
7
2
2
3
(b)
3
—
—
3
Weighted average percentage by which the projected undiscounted cash flows exceeded
its respective carrying value for each of the remaining properties (c)
14%
21%
42%
(a) Includes three properties which have subsequently been sold as of December 31, 2017.
(b) Includes one property which has subsequently been sold as of December 31, 2017.
(c) Based upon the estimated holding period for each asset where an undiscounted cash flow analysis was performed.
The Company recorded the following investment property impairment charges during the year ended December 31, 2017:
Property Name
Century III Plaza, excluding the Home Depot parcel (a)
Lakepointe Towne Center (b)
Saucon Valley Square (c)
Schaumburg Towers (d)
High Ridge Crossing (e)
Home Depot Plaza (f)
Property Type
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Office
Multi-tenant retail
Multi-tenant retail
Impairment Date
Various (a)
June 30, 2017
September 30, 2017
September 30, 2017
December 22, 2017
December 31, 2017
Square
Footage
152,200
196,600
80,700
895,400
76,900
135,600
Provision for
Impairment of
Investment
Properties
$
$
3,304
9,958
184
45,638
3,480
4,439
67,003
Estimated fair value of impaired properties as of impairment date $
107,400
(a) The Company recorded an impairment charge on June 30, 2017 based upon the terms and conditions of a bona fide purchase offer and
additional impairment was recognized upon sale pursuant to the terms and conditions of an executed sales contract. This property was
classified as held for sale as of December 31, 2016 and was sold on December 15, 2017. The Home Depot parcel of Century III Plaza was
sold on March 15, 2017.
(b) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. This property was classified
as held for sale as of June 30, 2017 and was sold on August 4, 2017.
(c) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. This property was classified
as held for sale as of September 30, 2017 and was sold on October 27, 2017.
(d) The Company recorded an impairment charge based upon the terms and conditions of a bona fide purchase offer.
(e) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. The property was sold on
December 22, 2017.
(f) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract.
91
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The Company recorded the following investment property impairment charges during the year ended December 31, 2016:
Square
Footage
Provision for
Impairment of
Investment
Properties
— $
235,600
80,700
74,200
10,900
$
3,007
4,142
4,742
5,985
2,500
20,376
40,850
Property Name
South Billings Center (a)
Mid-Hudson Center (b)
Saucon Valley Square (c)
Crown Theater (d)
Rite Aid Store (Eckerd), Culver Rd.–Rochester, NY (e)
Property Type
Development
Multi-tenant retail
Multi-tenant retail
Single-user retail
Single-user retail
Impairment Date
Various (a)
June 30, 2016
September 30, 2016
December 31, 2016
December 31, 2016
Estimated fair value of impaired properties as of impairment date $
(a) An impairment charge was recorded on March 31, 2016 based upon the terms and conditions of an executed sales contract, which was
subsequently terminated. The property, which was not under active development, was sold on December 16, 2016 and additional impairment
was recognized pursuant to the terms and conditions of an executed sales contract.
(b) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. This property was classified
as held for sale as of June 30, 2016 and was sold on July 21, 2016.
(c) The Company recorded an impairment charge driven by a change in the estimated holding period for the property.
(d) The Company recorded an impairment charge upon re-evaluating the strategic alternatives for the property.
(e) The Company recorded an impairment charge based upon the terms and conditions of a bona fide purchase offer. This property was sold
on January 27, 2017.
The Company recorded the following investment property impairment charges during the year ended December 31, 2015:
Provision for
Impairment of
Investment
Properties
$
$
2,289
1,655
169
2,484
13,340
19,937
43,720
Property Name
Massillon Commons (a)
Traveler’s Office Building (a)
Shaw’s Supermarket (a)
Southgate Plaza (a)
Bellevue Mall (a)
Property Type
Multi-tenant retail
Single-user office
Single-user retail
Multi-tenant retail
Development
Impairment Date
June 4, 2015
June 30, 2015
August 6, 2015
December 18, 2015
December 31, 2015
Square
Footage
245,900
50,800
65,700
86,100
369,300
Estimated fair value of impaired properties as of impairment date $
(a) The Company recorded impairment charges based upon the terms and conditions of an executed sales contract for the respective properties,
which were sold during 2015.
The Company provides no assurance that material impairment charges with respect to its investment properties will not occur in
future periods.
92
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(15) FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of the Company’s financial instruments:
Financial assets:
Derivative asset
Financial liabilities:
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
December 31, 2017
December 31, 2016
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$
$
$
$
$
1,086
287,068
695,748
547,270
216,000
$
$
$
$
$
1,086
298,635
693,823
552,555
216,222
$
$
$
$
$
743
769,184
695,143
447,598
86,000
$
$
$
$
$
743
833,210
679,212
450,421
86,130
The carrying value of the derivative asset is included in “Other assets, net” in the accompanying consolidated balance sheets.
Fair Value Hierarchy
A fair value measurement is based on the assumptions that market participants would use in pricing an asset or liability in an
orderly transaction. The hierarchy for inputs used in measuring fair value are as follows:
• Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities.
• Level 2 Inputs – Observable inputs other than quoted prices in active markets for identical assets and liabilities.
• Level 3 Inputs – Prices or valuation techniques that require inputs that are both significant to the fair value measurement
and unobservable.
When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement
is categorized is based on the lowest level input that is significant to the fair value measurement.
Recurring Fair Value Measurements
The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the
level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value
of these instruments are described after the table.
December 31, 2017
Derivative asset
December 31, 2016
Derivative asset
Level 1
Level 2
Level 3
Total
Fair Value
$
$
—
—
$
$
1,086
743
$
$
—
—
$
$
1,086
743
Derivative asset: The fair value of the derivative asset is determined using a discounted cash flow analysis on the expected future
cash flows of each derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities
to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of
the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated
to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect
both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although
the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value
hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit
93
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31, 2017 and 2016, the
Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative
positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the
Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In
adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable
credit enhancements. The Company’s derivative instruments are further described in Note 10 to the consolidated financial
statements.
Nonrecurring Fair Value Measurements
The following table presents the Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2017 and
2016, aggregated by the level within the fair value hierarchy in which those measurements fall. The table includes information
related to properties remeasured to fair value during the years ended December 31, 2017 and 2016, except for those properties
sold prior to December 31, 2017 and 2016, respectively. Methods and assumptions used to estimate the fair value of these assets
are described after the table.
December 31, 2017
Investment properties
December 31, 2016
Investment properties
Fair Value
Level 1
Level 2
Level 3
Total
$
$
—
—
$
$
74,250 (b) $
—
$
74,250
500 (c) $
10,600 (d) $
11,100
Provision for
Impairment (a)
$
$
50,077
13,227
(a) Excludes impairment charges recorded on investment properties sold prior to December 31, 2017.
(b) Represents the fair value of the Company’s Schaumburg Towers and Home Depot Plaza investment properties. The estimated fair value of
Schaumburg Towers was based on an expected sales price of $87,600 from a bona fide purchase offer, determined to be a Level 2 input,
which contemplates historically deferred maintenance and capital requirements. The estimated fair value of $58,000 as of September 30,
2017, the date the asset was measured at fair value, reflects (i) capital expenditures expected to be incurred by the Company prior to sale
and (ii) tenant-related costs expected to be credited to the buyer at close. The estimated fair value of Home Depot Plaza of $16,250 as of
December 31, 2017, the date the asset was measured at fair value, is based upon the expected sales price for an executed sales contract and
determined to be a Level 2 input.
(c) Represents the fair value of the Company’s Rite Aid Store (Eckerd), Culver Rd. investment property as of December 31, 2016, the date the
asset was measured at fair value. The estimated fair value of Rite Aid Store (Eckerd), Culver Rd. was based upon the expected sales price
from a bona fide purchase offer and determined to be a Level 2 input.
(d) Represents the fair values of the Company’s Crown Theater and Saucon Valley Square investment properties. The estimated fair values of
Crown Theater and Saucon Valley Square of $4,000 and $6,600, respectively, were determined using the income approach. The income
approach involves discounting the estimated income stream and reversion (presumed sale) value of a property over an estimated holding
period to a present value at a risk-adjusted rate. Discount rates, growth assumptions and terminal capitalization rates utilized in this approach
are derived from property-specific information, market transactions and other financial and industry data. The terminal capitalization rate
and discount rate are significant inputs to this valuation. The following were the key Level 3 inputs used in estimating the fair values of
Crown Theater as of December 31, 2016 and Saucon Valley Square as of September 30, 2016, the date the assets were measured at fair
value:
Rental growth rates
Operating expense growth rates
Discount rates
Terminal capitalization rates
2016
Low
Varies (i)
3.10%
9.35%
8.35%
High
Varies (i)
18.02%
10.00%
9.50%
(i) Since cash flow models are established at the tenant level, projected rental revenue growth rates fluctuate over the
course of the estimated holding period based upon the timing of lease rollover, amount of available space and other
property and space-specific factors.
94
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Fair Value Disclosures
The following table presents the Company’s financial liabilities, which are measured at fair value for disclosure purposes, by the
level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value
of these instruments are described after the table.
December 31, 2017
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
December 31, 2016
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loan, net
Unsecured revolving line of credit
Level 1
Level 2
Level 3
Total
Fair Value
$
$
$
$
$
$
$
$
—
243,183
—
—
—
234,700
—
—
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
298,635
450,640
552,555
216,222
833,210
444,512
450,421
86,130
$
$
$
$
$
$
$
$
298,635
693,823
552,555
216,222
833,210
679,212
450,421
86,130
Mortgages payable, net: The Company estimates the fair value of its mortgages payable by discounting the anticipated future
cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable
maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rate
for each of the Company’s individual mortgages payable based upon the specific terms of the agreement, including the term to
maturity, the quality and nature of the underlying property and its leverage ratio. The rates used range from 3.5% to 4.2% and
2.9% to 4.6% as of December 31, 2017 and 2016, respectively.
Unsecured notes payable, net: The quoted market price as of December 31, 2017 was used to value the Notes Due 2025. The
Company estimates the fair value of its Notes Due 2021 and 2024 and Notes Due 2026 and 2028 by discounting the future cash
flows at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used
are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The weighted average
rates used were 4.28% and 4.48% as of December 31, 2017 and 2016, respectively.
Unsecured term loans, net: The Company estimates the fair value of its unsecured term loans, net by discounting the anticipated
future cash flows related to the credit spreads at rates currently offered to the Company by its lenders for similar instruments of
comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the
appropriate rates. The weighted average rates used to discount the credit spreads were 1.33% and 1.30% as of December 31, 2017
and 2016, respectively.
Unsecured revolving line of credit: The Company estimates the fair value of its unsecured revolving line of credit by discounting
the anticipated future cash flows related to the credit spreads at rates currently offered to the Company by its lenders for similar
facilities of comparable maturity. The rates used are not directly observable in the marketplace and judgment is used in determining
the appropriate rates. The rate used to discount the credit spreads was 1.30% as of December 31, 2017 and 2016.
There were no transfers between the levels of the fair value hierarchy during the years ended December 31, 2017 and 2016.
(16) COMMITMENTS AND CONTINGENCIES
On December 1, 2014, the Company formed a wholly-owned captive insurance company, Birch Property and Casualty LLC (Birch),
which insures the Company’s first layer of property and general liability insurance claims subject to certain limitations. The
Company capitalized Birch in accordance with the applicable regulatory requirements and Birch established annual premiums
based on projections derived from the past loss experience of the Company’s properties.
As of December 31, 2017, the Company had letters of credit outstanding totaling $9,645 that serve as collateral for certain capital
improvements and performance obligations on certain redevelopment projects, which will be satisfied upon completion of the
projects, and reduced the available borrowings on its unsecured revolving line of credit.
95
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
As of December 31, 2017, the Company had active redevelopments at Reisterstown Road Plaza located in Baltimore, Maryland
and Towson Circle located in Towson, Maryland. The Company estimates that it will incur net costs of approximately $9,500 to
$10,500 related to the Reisterstown Road Plaza redevelopment and approximately $33,000 to $35,000 related to the Towson Circle
redevelopment, of which $7,133 and $13,461, respectively, has been incurred as of December 31, 2017.
(17) LITIGATION
The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business.
While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available
information, that the final outcome of such matters will not have a material effect on the consolidated financial statements of the
Company.
(18) SUBSEQUENT EVENTS
Subsequent to December 31, 2017, the Company:
•
•
•
•
closed on the disposition of Crown Theater, a 74,200 square foot single-user retail operating property located in Hartford,
Connecticut, which was classified as held for sale as of December 31, 2017, for a sales price of $6,900 with an anticipated
gain on sale;
granted 99 restricted shares at a grant date fair value of $13.34 per share and 268 RSUs at a grant date fair value of $14.13
per RSU to the Company’s executives in conjunction with its long-term equity compensation plan. The restricted shares
will vest over three years and the RSUs granted are subject to a three-year performance period. Refer to Note 5 to the
consolidated financial statements for additional details regarding the terms of the RSUs;
issued 42 shares of common stock and 65 restricted shares with a one year vesting term for the RSUs with a performance
period that concluded on December 31, 2017. An additional 16 shares of common stock were also issued for dividends
that would have been paid on the common stock and restricted shares during the performance period; and
declared the cash dividend for the first quarter of 2018 of $0.165625 per share on its outstanding Class A common stock,
which will be paid on April 10, 2018 to Class A common shareholders of record at the close of business on March 27,
2018.
On February 6, 2018, the Company’s board of directors appointed Julie M. Swinehart as the Company’s Executive Vice President,
Chief Financial Officer and Treasurer. Ms. Swinehart has served as the Company’s Senior Vice President and Chief Accounting
Officer since 2015 and as the Company’s principal accounting officer since 2013. She has also held various accounting and financial
reporting positions with the Company since 2008.
96
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(19) QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following table sets forth selected quarterly financial data for the Company:
Total revenues
Net income (loss)
Net income (loss) attributable to common shareholders
Net income (loss) per common share attributable to common
shareholders – basic and diluted
Weighted average number of common shares outstanding – basic
Weighted average number of common shares outstanding – diluted
Total revenues
Net income
Net income attributable to common shareholders
Net income per common share attributable to common
shareholders – basic and diluted
Dec 31
126,588
109,924
103,144
0.46
2017
Sep 30
130,519
35,904
33,542
0.15
$
$
$
$
Jun 30
137,339
114,763
112,400
0.48
$
$
$
$
Mar 31
143,693
(9,100)
(11,462)
(0.05)
$
$
$
$
222,942
229,508
234,243
236,294
223,095
230,104
234,818
236,294
2016
Dec 31
Sep 30
Jun 30
Mar 31
142,752
18,295
15,932
0.07
$
$
$
$
144,526
72,494
70,132
0.30
$
$
$
$
147,226
28,602
26,239
0.11
$
$
$
$
148,639
47,426
45,064
0.19
$
$
$
$
$
$
$
$
Weighted average number of common shares outstanding – basic
236,528
236,783
236,716
236,578
Weighted average number of common shares outstanding – diluted
236,852
237,108
236,902
236,680
97
RETAIL PROPERTIES OF AMERICA, INC.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2017, 2016 and 2015
(in thousands)
Year ended December 31, 2017
Allowance for doubtful accounts
Tax valuation allowance
Year ended December 31, 2016
Allowance for doubtful accounts
Tax valuation allowance
Year ended December 31, 2015
Allowance for doubtful accounts
Tax valuation allowance
Balance at
beginning
of year
Charged to
costs and
expenses
Write-offs
Balance at
end of year
$
$
$
$
$
$
6,886
21,175
7,910
23,618
7,497
20,355
2,143
(8,828)
2,466
(2,443)
3,069
3,263
(2,462)
—
(3,490)
—
(2,656)
—
$
$
$
$
$
$
6,567
12,347
6,886
21,175
7,910
23,618
98
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
815
13,850
21,052
13,850
21,894
35,744
9,935
2002
Date
Acquired
05/05
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
842
70
313
4,573
4,530
9,497
11,901
4,573
4,530
9,567
14,140
1,148
2005
11/14
12,214
16,744
5,436
2000-2002
07/05
15,261
114,703
(48,721)
15,261
65,982
81,243
25,126
2004
09/04
45,300
23,923
13,000
19,000
8,500
1,775
5,023
16,700
12,000
2,919
10,200
3,000
750
26,657
13,829
47,559
7,868
368
9,590
8,406
17,139
16,060
7,026
12,382
22,775
35,887
13,281
26,178
18,736
1,958
2,456
1,182
226
3,683
5,800
178
3,197
1,409
—
99
45,300
23,923
13,000
18,700
8,500
1,775
5,023
16,700
12,000
34,525
79,825
15,146
1977/2004
04/05
14,197
38,120
1,961
2013
57,149
70,149
22,002
2004
25,845
44,545
10,784
2005
18,516
27,016
8,281
2004
02/15
12/06
02/06
05/05
8,208
9,983
3,769
2003-2004
04/05
12,608
17,631
1,164
1991
26,458
43,158
10,685
1997
41,687
53,687
18,040
1999
2,919
13,459
16,378
2,286
1999
10,200
29,375
39,575
14,014
2004
3,000
750
20,145
23,145
9,873
1996-1997
07/04
1,958
2,708
903
1999
05/05
08/15
05/06
04/05
10/13
12/04
Property Name
Ashland & Roosevelt
Chicago, IL
Avondale Plaza
Redmond, WA
Bed Bath & Beyond Plaza
Westbury, NY
Boulevard at the Capital Centre (a)
Largo, MD
The Brickyard
Chicago, IL
Cedar Park Town Center
Cedar Park, TX
Central Texas Marketplace
Waco, TX
Centre at Laurel
Laurel, MD
Chantilly Crossing
Chantilly, VA
Clearlake Shores
Clear Lake, TX
Coal Creek Marketplace
Newcastle, WA
Colony Square
Sugar Land, TX
The Commons at Temecula
Temecula, CA
Coppell Town Center
Coppell, TX
Coram Plaza
Coram, NY
Cranberry Square
Cranberry Township, PA
CVS Pharmacy
Lawton, OK
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Property Name
Cypress Mill Plaza
Cypress, TX
Davis Towne Crossing
North Richland Hills, TX
Denton Crossing
Denton, TX
Downtown Crown
Gaithersburg, MD
East Stone Commons
Kingsport, TN
Eastside
Richardson, TX
Eastwood Towne Center
Lansing, MI
Edwards Multiplex
Fresno, CA
Edwards Multiplex
Ontario, CA
Fairgrounds Plaza
Middletown, NY
Fordham Place
Bronx, NY
Fort Evans Plaza II
Leesburg, VA
Fullerton Metrocenter
Fullerton, CA
Galvez Shopping Center
Galveston, TX
Gardiner Manor Mall
Bay Shore, NY
Gateway Pavilions
Avondale, AZ
Gateway Plaza
Southlake, TX
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
4,962
1,850
6,000
9,976
5,681
179
1,184
43,434
13,586
4,962
1,671
6,000
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
10,155
15,117
1,890
2004
Date
Acquired
10/13
7,044
8,715
3,358
2003-2004
06/04
57,020
63,020
26,483
2003-2004
10/04
43,367
110,785
2,080
43,367
112,865
156,232
12,743
2014
2,900
4,055
28,714
17,620
(200)
77
2,826
4,055
28,588
31,414
11,947
2005
17,697
21,752
1,232
2008
12,000
65,067
5,806
12,000
70,873
82,873
34,051
2002
—
11,800
35,421
33,098
—
—
—
35,421
35,421
16,450
1988
11,800
33,098
44,898
15,370
1997
01/15
06/06
06/16
05/04
05/05
05/05
4,800
13,490
4,716
5,431
17,575
23,006
7,983
2002-2004
01/05
17,209
16,118
96,547
44,880
273
383
17,209
16,118
96,820
114,029
14,581
Redev: 2009
11/13
45,263
61,381
5,620
2008
—
47,403
3,301
—
50,704
50,704
24,714
1988
1,250
5,342
6,592
2,443
2004
12,348
56,991
69,339
7,591
2000
9,880
56,618
66,498
26,984
2003-2004
12/04
—
31,875
31,875
14,711
2000
07/04
01/15
06/04
06/05
06/14
1,250
34,930
12,348
—
—
9,880
—
4,947
56,199
55,195
26,371
395
792
1,423
5,504
100
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Property Name
Gateway Station
College Station, TX
Gateway Station II & III
College Station, TX
Gateway Village
Annapolis, MD
Gerry Centennial Plaza
Oswego, IL
Governor's Marketplace
Tallahassee, FL
Grapevine Crossing
Grapevine, TX
Green's Corner
Cumming, GA
Gurnee Town Center
Gurnee, IL
Henry Town Center
McDonough, GA
Heritage Square
Issaquah, WA
Heritage Towne Crossing
Euless, TX
Home Depot Center
Pittsburgh, PA
Home Depot Plaza
Orange, CT
HQ Building
San Antonio, TX
Huebner Oaks Center
San Antonio, TX
Humblewood Shopping Center
Humble, TX
Jefferson Commons
Newport News, VA
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
Date
Acquired
5,142
6,192
2,357
2003-2004
12/04
11,701
14,981
4,287
2006-2007
05/07
—
—
34,069
—
—
—
—
—
—
—
—
—
10,695
—
—
—
—
1,050
3,280
8,550
5,370
—
4,100
3,200
7,000
10,650
6,377
3,065
—
9,700
5,200
18,087
2,200
23,097
3,911
11,557
39,298
12,968
30,377
16,938
8,663
35,147
46,814
11,385
10,729
16,758
1,231
144
5,744
9,374
3,360
391
898
4,281
5,175
2,223
1,524
—
17,137
(11,214)
10,010
64,731
12,823
52,762
4,212
1,768
1,172
2,978
101
1,050
3,280
8,550
5,370
7,561
5,200
45,042
53,592
21,469
1996
22,342
27,712
8,367
2006
—
33,737
33,737
16,312
2001
3,894
3,200
7,000
17,535
21,429
8,040
2001
9,561
12,761
4,339
1997
39,428
46,428
18,533
2000
10,650
51,989
62,639
23,838
2002
6,377
3,065
13,608
19,985
1,837
1985
12,253
15,318
6,195
2002
—
16,758
16,758
7,680
1996
07/04
06/07
08/04
04/05
12/04
10/04
12/04
02/14
03/04
06/05
06/05
8,062
15,623
—
1992
14,222
19,422
6,498
Redev: 2004
12/05
18,087
66,499
84,586
8,533
1996
06/14
2,200
13,995
16,195
5,861
Renov: 2005
11/05
23,097
55,740
78,837
19,879
2005
02/08
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
14,295
24,989
39,284
3,539
2004
Date
Acquired
06/14
74,612
(10,897)
12,555
63,715
76,270
29,587
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
14,446
3,710
16,005
6,600
12,555
38,329
13,000
7,423
4,710
4,317
14,700
3,300
18,678
28,797
4,390
14,568
15,100
23,932
19,144
37,744
30,910
906
(148)
5,374
9,145
17,772
605
46,482
23,064
799
(8)
16,265
2,200
83,276
39,738
12,195
36,496
14,698
11,313
5,562
53
8,447
3,642
600
22
793
44
33,987
6,967
102
3,710
18,996
22,706
8,504
2005
11/05
16,005
43,118
59,123
20,830
1996/1999
01/04
6,600
40,055
46,655
15,528
2005
06/06
06/04
06/14
1998/2002-
2003
1997
18,377
56,706
2,542
69,436
82,546
30,012
2001-2004
09/05
799
8,214
657
2005
08/05
18,465
23,175
9,290
1995-1996
02/04
83,329
87,646
3,104
2003 & 2014
01/17
14,700
48,185
62,885
21,000
1994-1995
08/04
3,300
15,837
19,137
7,616
2003-2004
11/04
37,096
55,774
4,179
2008
14,720
43,517
4,390
12,106
16,496
5,606
20,174
40,954
56,054
19,736
1,068
2,012
120
1972 Renov:
2006-2007
2003
1964 Renov:
2011
1999 &
2004
01/15
01/16
10/13
07/17
12/03 &
02/04
38,329
13,110
7,415
4,710
4,317
18,678
28,797
14,568
15,100
Property Name
John's Creek Village
John's Creek, GA
King Philip's Crossing
Seekonk, MA
La Plaza Del Norte
San Antonio, TX
Lake Worth Towne Crossing
Lake Worth, TX
Lakewood Towne Center
Lakewood, WA
Lincoln Park
Dallas, TX
Lincoln Plaza
Worcester, MA
Lowe's/Bed, Bath & Beyond
Butler, NJ
MacArthur Crossing
Los Colinas, TX
Main Street Promenade
Naperville, IL
Manchester Meadows
Town and Country, MO
Mansfield Towne Crossing
Mansfield, TX
Merrifield Town Center
Falls Church, VA
Merrifield Town Center II
Falls Church, VA
New Forest Crossing
Houston, TX
New Hyde Park Shopping Center
New Hyde Park, NY
Newnan Crossing I & II
Newnan, GA
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Property Name
Newton Crossroads
Covington, GA
North Rivers Towne Center
Charleston, SC
Northgate North
Seattle, WA
Northpointe Plaza
Spokane, WA
Oak Brook Promenade
Oak Brook, IL
One Loudoun Downtown I - VI
Ashburn, VA
Orange Plaza (Golfland Plaza)
Orange, CT
Oswego Commons
Oswego, IL
Paradise Valley Marketplace
Phoenix, AZ
Parkway Towne Crossing
Frisco, TX
Pavilion at Kings Grant I & II
Concord, NC
Pelham Manor Shopping Plaza
Pelham Manor, NY
Peoria Crossings I & II
Peoria, AZ
Plaza at Marysville
Marysville, WA
Plaza del Lago
Wilmette, IL
Pleasant Run
Cedar Hill, TX
26,799
122,224
4,350
6,454
6,590
6,142
4,834
16,004
20,425
20,423
—
—
25,705
—
—
—
—
—
—
—
—
—
24,091
8,346
—
—
3,350
3,350
7,540
13,800
10,343
—
6,995
6,600
12,042
4,200
6,927
15,720
571
1,020
49,078
(13,796)
37,707
50,057
4,515
1,523
470
2,379
1,023
824
9,380
67,870
32,816
13,728
33,382
29,085
70,372
380
4,263
956
—
7,092
8,235
103
3,350
3,350
7,540
13,800
10,343
4,350
6,454
6,590
6,142
8,495
6,600
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
7,498
10,848
3,415
1997
Date
Acquired
12/04
16,740
20,090
8,085
2003-2004
04/04
35,282
42,822
17,939
1999-2003
06/04
42,222
56,022
20,839
1991-1993
05/04
51,580
61,923
3,757
2006
03/16
26,799
122,694
149,493
4,735
2013-2017
7,213
11,563
3,220
1995
17,027
23,481
2,692
2002-2004
06/14
21,249
27,839
10,825
2002
29,803
35,945
12,696
2010
—
68,250
68,250
11,300
35,579
44,074
17,551
14,684
21,284
7,093
105
12,042
33,382
45,424
4,200
36,177
40,377
15,827
2002-2003
& 2005
2008
2002-2003
& 2005
1995
1928 Renov:
1996
2004
11/16, 2/17
4/17, 5/17
& 8/17
05/05
04/04
08/06
12/03 &
06/06
11/13
03/04 &
05/05
07/04
12/17
12/04
Reisterstown Road Plaza (b)
45,947
15,800
Baltimore, MD
15,790
78,617
94,407
37,326
1986/2004
08/04
10,274
12,392
14,849
10,274
27,241
37,515
10,440
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Property Name
Rite Aid Store (Eckerd)
Crossville, TN
Rivery Town Crossing
Georgetown, TX
Royal Oaks Village II
Houston, TX
Sawyer Heights Village
Houston, TX
Schaumburg Towers
Schaumburg, IL
Shoppes at Hagerstown
Hagerstown, MD
The Shoppes at Quarterfield
Severn, MD
—
—
—
600
2,900
3,450
18,796
24,214
—
—
—
7,900
4,034
2,190
The Shoppes at Union Hill
13,987
12,666
Denville, NJ
Shoppes of New Hope
Dallas, GA
Shoppes of Prominence Point I & II
Canton, GA
Shops at Forest Commons
Round Rock, TX
The Shops at Legacy
Plano, TX
Shops at Park Place
Plano, TX
Southlake Corners
Southlake, TX
Southlake Town Square I - VII (c)
Southlake, TX
Stilesboro Oaks
Acworth, GA
Stonebridge Plaza
McKinney, TX
3,275
—
—
—
7,381
21,062
—
—
—
1,350
3,650
1,050
8,800
9,096
6,612
2,033
6,814
17,000
15,797
1
405
272
680
137,096
(82,728)
21,937
8,840
45,227
11,045
12,652
6,133
249
299
337
169
126
307
108,940
16,943
13,175
23,605
4,211
262
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
Date
Acquired
2,034
2,634
1,012
2003-2004
06/04
7,219
10,119
3,050
2005
10/06
17,272
20,722
5,687
2004-2005
11/05
24,214
16,477
40,691
2,834
2007
10/13
57,870
62,268
944
1986 & 1990
11/04
600
2,900
3,450
4,398
4,034
2,190
22,186
26,220
1,965
2008
9,139
11,329
4,570
1999
12,666
45,564
58,230
3,473
2003
1,350
3,650
1,050
8,800
9,096
6,612
11,214
12,564
5,492
2004
12,778
16,428
6,271
2004 & 2005
6,440
7,490
3,078
2002
125,883
134,683
48,756
2002
17,386
26,482
7,544
2001
23,867
30,479
3,909
2004
01/16
01/04
04/16
07/04
06/04 &
09/05
12/04
06/07
10/03
10/13
12/04, 5/07,
9/08 & 3/09
12/04
43,790
207,354
26,172
41,604
235,712
277,316
93,779
1998-2007
2,200
1,000
9,426
5,783
2,200
1,000
536
724
104
9,962
12,162
4,612
1997
6,507
7,507
2,868
1997
08/05
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2017
(in thousands)
Initial Cost (A)
Gross amount carried at end of period
Property Name
Stony Creek I
Noblesville, IN
Stony Creek II
Noblesville, IN
Streets of Yorktown
Houston, TX
Tacoma South
Tacoma, WA
Target South Center
Austin, TX
Tollgate Marketplace
Bel Air, MD
Towson Circle (b)
Towson, MD
Towson Square
Towson, MD
Tysons Corner
Vienna, VA
Walter's Crossing
Tampa, FL
Watauga Pavilion
Watauga, TX
Winchester Commons
Memphis, TN
Woodinville Plaza
Woodinville, WA
Total
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
6,735
1,900
3,440
17,564
1,730
5,106
79
22,111
2,908
6,735
1,900
3,440
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
19,294
26,029
10,120
2003
5,185
7,085
2,306
2005
25,019
28,459
10,936
2005
Date
Acquired
12/03
11/05
12/05
10,976
22,898
10,976
22,990
33,966
1,542
1984-2015
05/16
2,300
8,700
9,050
13,757
22,525
14,500
5,185
4,400
7,184
10,874
16,914
27,504
7,471
16,073
25,433
92
697
22
52
492
1,599
573
2,295
8,760
61,247
6,930
17,840
(26,890)
2,300
8,700
—
9,457
11,757
4,297
1999
11/05
68,177
76,877
31,506
1979/1994
07/04
—
—
—
1998
21,958
(174)
13,757
21,784
35,541
1,781
2014
07/04
11/15
05/15
08/04
07/06
22,525
7,206
29,731
683
2,200
10,926
13,126
5,380
1980
Renov:2004,
2012/2013
2004
14,500
17,406
31,906
7,420
2005
5,185
4,400
29,103
34,288
14,030
2003-2004
05/04
8,044
12,444
3,735
1999
11/04
16,073
27,728
43,801
2,512
1981
06/15 &
8/16
—
—
—
—
—
34,946
—
—
—
—
—
—
—
Village Shoppes at Simonton
Lawrenceville, GA
3,023
2,200
287,068
1,082,269
3,538,413
132,223
1,066,705
3,686,200
4,752,905
1,215,990
Developments in Progress
—
—
—
33,022
15,691
17,331
33,022
—
Total Investment Properties
$
287,068
$ 1,082,269
$
3,538,413
$
165,245
$
1,082,396
$
3,703,531
$ 4,785,927
$
1,215,990
105
(a) The Company has begun activities in anticipation of future redevelopment at this property.
(b) The cost basis associated with this property or a portion of this property was reclassified to Developments in Progress as the property is an active redevelopment.
RETAIL PROPERTIES OF AMERICA, INC.
(c) The Company acquired a parcel at this property during 2017.
Notes:
(A) The initial cost to the Company represents the original purchase price of the property, including amounts incurred subsequent to acquisition which were contemplated
at the time the property was acquired.
(B) The aggregate cost of real estate owned as of December 31, 2017 for U.S. federal income tax purposes was approximately $4,815,043.
(C) Adjustments to basis include payments received under master lease agreements as well as additional tangible costs associated with the investment properties, including
any earnout of tenant space.
(D) Reconciliation of real estate owned:
Balance as of January 1,
Purchases and additions to investment property
Sale and write-offs of investment property
Property held for sale
Provision for asset impairment
Change in acquired lease intangible assets
Change in acquired lease intangible liabilities
Balance as of December 31,
(E) Reconciliation of accumulated depreciation:
Balance as of January 1,
Depreciation expense
Sale and write-offs of investment property
Property held for sale
Provision for asset impairment
Other disposals
Balance as of December 31,
2017
5,499,506
272,145
(829,170)
(2,791)
(153,763)
—
—
4,785,927
2017
1,443,333
171,823
(308,662)
(27)
(90,477)
—
1,215,990
$
$
$
$
2016
5,687,842
435,989
(526,970)
(47,151)
(47,159)
4,586
(7,631)
5,499,506
2016
1,433,195
191,493
(122,872)
(15,769)
(18,500)
(24,214)
1,443,333
$
$
$
$
2015
5,680,376
508,924
(498,833)
—
(4,786)
(15,311)
17,472
5,687,842
2015
1,365,471
183,639
(113,418)
—
(2,497)
—
1,433,195
$
$
$
$
Depreciation is computed based upon the following estimated useful lives in the accompanying consolidated statements of operations and other comprehensive income:
Building and improvements
Site improvements
Tenant improvements
106
Years
30
15
Life of related lease
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated
subsidiaries, is made known to the officers who certify our financial reports and to the members of senior management and the
board of directors.
Based on management’s evaluation as of December 31, 2017, our President and Chief Executive Officer and our Executive Vice
President, Chief Financial Officer and Treasurer have concluded that our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are effective to ensure that the information required to be disclosed by
us in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our President
and Chief Executive Officer and our Executive Vice President, Chief Financial Officer and Treasurer, to allow timely decisions
regarding required disclosure.
Changes in Internal Controls
There were no changes to our internal controls over financial reporting during the fiscal quarter ended December 31, 2017 that
have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company,
as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal
control over financial reporting based on the framework in Internal Control — Integrated Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal
Control — Integrated Framework (2013), our management concluded that our internal control over financial reporting was effective
as of December 31, 2017. The effectiveness of our internal control over financial reporting as of December 31, 2017 has been
audited by Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included
herein.
107
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the Board of Directors of Retail Properties of America, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Retail Properties of America, Inc. and subsidiaries (the “Company”)
as of December 31, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal
Control – Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2017, of the Company and our report
dated February 14, 2018, expressed an unqualified opinion on those consolidated financial statements and included an explanatory
paragraph regarding the Company’s adoption of Accounting Standards Update 2016-18, Statement of Cash Flows (Topic 230)
Restricted Cash.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal
Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial
reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Chicago, Illinois
February 14, 2018
108
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item 10 will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
Information required by this Item 12 will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Information required by this Item 13 will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders
and is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by this Item 14 will be included in our definitive proxy statement for our 2018 Annual Meeting of Stockholders
and is incorporated herein by reference.
109
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) List of documents filed:
PART IV
(1) The consolidated financial statements of the Company are set forth in this report in Item 8.
(2) Financial Statement Schedules:
The following financial statement schedules for the year ended December 31, 2017 are submitted herewith:
Valuation and Qualifying Accounts (Schedule II)
Real Estate and Accumulated Depreciation (Schedule III)
Page
98
99
Schedules not filed:
All schedules other than those indicated in the index have been omitted as the required information is inapplicable or the information
is presented in the consolidated financial statements or related notes.
Exhibit No.
Description
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
10.1
10.2
Sixth Articles of Amendment and Restatement of the Registrant, dated March 20, 2012 (Incorporated herein by reference to
Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on March 22, 2012).
Articles of Amendment to the Sixth Articles of Amendment and Restatement of the Registrant, dated March 20, 2012
(Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K filed on March 22, 2012).
Articles of Amendment to the Sixth Articles of Amendment and Restatement of the Registrant, dated March 20, 2012
(Incorporated herein by reference to Exhibit 3.3 to the Registrant’s Current Report on Form 8-K filed on March 22, 2012).
Articles Supplementary to the Sixth Articles of Amendment and Restatement of the Registrant, as amended, dated March 20,
2012 (Incorporated herein by reference to Exhibit 3.4 to the Registrant’s Current Report on Form 8-K filed on March 22, 2012).
Articles Supplementary for the Series A Preferred Stock (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed on December 17, 2012).
Certificate of Correction (Incorporated herein by reference to Exhibit 3.2 to the Registrant’s Current Report/Amended on Form
8-K/A filed on December 20, 2012).
Sixth Amended and Restated Bylaws of the Registrant (Incorporated herein by reference to Exhibit 3.1 to the Registrant’s
Current Report on Form 8-K filed on July 20, 2012).
Amendment No. 1 to the Sixth Amended and Restated Bylaws of the Registrant, dated February 11, 2014 (Incorporated herein
by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed on February 12, 2014).
Amendment No. 2 to the Sixth Amended and Restated Bylaws of the Registrant, dated May 25, 2017 (Incorporated herein by
reference to Exhibit 3.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017 and filed on
August 2, 2017).
Indenture, dated March 12, 2015, by and between the Registrant as Issuer and U.S. Bank National Association as Trustee
(Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 12, 2015).
First Supplemental Indenture, dated March 12, 2015, by and between the Registrant as Issuer and U.S. Bank National Association
as Trustee (Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on March 12,
2015).
Form of 4.00% Senior Notes due 2025 (attached as Exhibit A to the First Supplemental Indenture filed as Exhibit 4.2)
(Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on March 12, 2015).
2014 Long-Term Equity Compensation Plan of the Registrant (Incorporated herein by reference to Appendix A to the
Registrant’s Definitive Proxy Statement on Schedule 14A filed on March 31, 2014).
Third Amended and Restated Independent Director Stock Option and Incentive Plan of the Registrant (Incorporated herein by
reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on August 2, 2013).
110
Exhibit No.
10.3
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
Description
Indemnification Agreements by and between the Registrant and its directors and officers (Incorporated herein by reference to
Exhibits 10.6B, 10.6C, 10.6D and 10.6E to the Registrant’s Annual Report/Amended on Form 10-K/A for the year ended
December 31, 2006 and filed on April 27, 2007, Exhibits 10.560 and 10.570 to the Registrant’s Annual Report on Form 10-
K for the year ended December 31, 2007 and filed on March 31, 2008, Exhibit 10.4 to the Registrant’s Quarterly Report on
Form 10-Q for the quarter ended June 30, 2013 and filed on August 6, 2013, Exhibit 10.3 to the Registrant’s Quarterly Report
on Form 10-Q for the quarter ended June 30, 2014 and filed on August 5, 2014, Exhibit 10.3 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended June 30, 2015 and filed on August 5, 2015, Exhibit 10.1 to the Registrant’s Quarterly
Report on Form 10-Q for the quarter ended September 30, 2015 and filed on November 4, 2015, Exhibit 10.2 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and filed on November 2, 2016 and Exhibit 10.28
to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 and filed on February 15, 2017).
Note Purchase Agreement dated as of May 16, 2014 among the Registrant as Issuer and Certain Institutions as Purchasers
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 22, 2014).
Fourth Amended and Restated Credit Agreement dated as of January 6, 2016 among the Registrant as Borrower and KeyBank
National Association as Administrative Agent, Wells Fargo Securities LLC as Co-Lead Arranger and Joint Book Manager,
and Wells Fargo Bank, National Association as Syndication Agent, KeyBanc Capital Markets Inc., U.S. Bank National
Association, PNC Capital Markets LLC, and Regions Capital Markets as Co-Lead Arrangers and Joint Book Managers, each
of U.S. Bank National Association, PNC Capital Markets LLC, Regions Capital Markets, Bank of America, N.A., Citibank,
N.A., The Bank of Nova Scotia, Capital One, N.A., Deutsche Bank Securities Inc., and Morgan Stanley Senior Funding, Inc.
as Documentation Agents, and Certain Lenders from time to time parties hereto, as Lenders (Incorporated herein by reference
to Exhibit 10.8 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2015 and filed on February
17, 2016).
Note Purchase Agreement dated as of September 30, 2016, among the Registrant as Issuer and Certain Institutions as Purchasers
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on October 5, 2016).
Term Loan Agreement, dated as of November 22, 2016, by and among the Registrant as Borrower and Capital One, National
Association as Administrative Agent, Capital One, National Association, PNC Capital Markets LLC, TD Bank, N.A., and
Regions Bank as Joint Lead Arrangers and Joint Book Managers, TD Bank, N.A. as Syndication Agent, PNC Capital Markets
LLC and Regions Bank as Co-Documentation Agent, and Certain Lenders from time to time parties hereto, as Lenders
(Incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on November 29, 2016).
Retention Agreement dated February 19, 2013 by and between the Registrant and Steven P. Grimes (Incorporated herein by
reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and filed on
February 20, 2013).
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Steven P. Grimes (Incorporated
herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
and filed on May 5, 2015).
Amended and Restated Retention Agreement dated October 31, 2016 by and between the Registrant and Steven P. Grimes
(Incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2016 and filed on November 2, 2016).
Retention Agreement dated February 19, 2013 by and between the Registrant and Shane C. Garrison (Incorporated herein by
reference to Exhibit 10.12 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012 and filed
on February 20, 2013).
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Shane C. Garrison (Incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2015
and filed on May 5, 2015).
Amended and Restated Retention Agreement dated October 31, 2016 by and between the Registrant and Shane C. Garrison
(Incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2016 and filed on November 2, 2016).
Retention Agreement dated October 31, 2016 by and between the Registrant and Heath R. Fear (Incorporated herein by reference
to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and filed on
November 2, 2016).
Offer Letter, dated March 24, 2016, by and between the Registrant and Paula C. Maggio (Incorporated herein by reference to
Exhibit 10.27 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 and filed on February
15, 2017).
Retention Agreement dated October 31, 2016 by and between the Registrant and Paula C. Maggio (Incorporated herein by
reference to Exhibit 10.6 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2016 and
filed on November 2, 2016).
111
Exhibit No.
Description
10.17
Indemnification Agreement, dated October 12, 2010, by and between the Registrant and Julie M. Swinehart (filed herewith).
12.1
21.1
23.1
31.1
31.2
32.1
101
Computation of Ratio of Earnings to Combined Fixed Charges and Preferred Stock Dividends (filed herewith).
List of Subsidiaries of Registrant (filed herewith).
Consent of Deloitte & Touche LLP (filed herewith).
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
(filed herewith).
Certification of Executive Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities
Exchange Act of 1934 (filed herewith).
Certification of President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Treasurer
pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C Section 1350 (furnished herewith).
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language):
(i) Consolidated Balance Sheets as of December 31, 2017 and 2016, (ii) Consolidated Statements of Operations and Other
Comprehensive Income for the Years Ended December 31, 2017, 2016 and 2015, (iii) Consolidated Statements of Equity for
the Years Ended December 31, 2017, 2016 and 2015, (iv) Consolidated Statements of Cash Flows for the Years Ended December
31, 2017, 2016 and 2015, (v) Notes to Consolidated Financial Statements and (vi) Financial Statement Schedules.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
112
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
RETAIL PROPERTIES OF AMERICA, INC.
/s/ STEVEN P. GRIMES
By:
Date:
Steven P. Grimes
President and Chief Executive Officer
February 14, 2018
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the dates indicated:
/s/ STEVEN P. GRIMES
/s/ FRANK A. CATALANO, JR.
/s/ PETER L. LYNCH
By:
Steven P. Grimes
Director, President and
Chief Executive Officer
(Principal Executive Officer)
By:
Frank A. Catalano, Jr.
Director
By:
Peter L. Lynch
Director
Date: February 14, 2018
Date:
February 14, 2018
Date:
February 14, 2018
/s/ JULIE M. SWINEHART
/s/ PAUL R. GAUVREAU
/s/ THOMAS J. SARGEANT
By:
Julie M. Swinehart
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
By:
Paul R. Gauvreau
Director
By:
Thomas J. Sargeant
Director
Date: February 14, 2018
Date:
February 14, 2018
Date:
February 14, 2018
/s/ GERALD M. GORSKI
/s/ ROBERT G. GIFFORD
By:
Gerald M. Gorski
Chairman of the Board and Director
Date: February 14, 2018
By:
Date:
Robert G. Gifford
Director
February 14, 2018
/s/ BONNIE S. BIUMI
/s/ RICHARD P. IMPERIALE
By:
Bonnie S. Biumi
Director
Date: February 14, 2018
By:
Date:
Richard P. Imperiale
Director
February 14, 2018
113
Reconciliation of Non-GAAP Financial Measures
(amounts in thousands, except ratio)
Reconciliation of Mortgages Payable, Net, Unsecured Notes Payable, Net,
Unsecured Term Loans, Net and Unsecured Revolving Line of Credit to Total Net Debt
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
Total
Mortgage premium, net of accumulated amortization
Mortgage discount, net of accumulated amortization
Unsecured notes payable discount, net of accumulated amortization
Capitalized loan fees, net of accumulated amortization
Total notional debt
Less: consolidated cash and cash equivalents
Less: disposition proceeds temporarily restricted related to potential Internal
Revenue Code Section 1031 tax-deferred exchanges
Total net debt
Net Debt to Adjusted EBITDA (a)
December 31, 2017
$
287,068
695,748
547,270
216,000
1,746,086
(1,024)
579
853
6,744
1,753,238
(25,185)
$
(54,087)
1,673,966
5.5x
Reconciliation of Net Income Attributable to Common Shareholders to Adjusted EBITDA
Three Months Ended
December 31, 2017
Net income attributable to common shareholders
Preferred stock dividends
Interest expense
Depreciation and amortization
Gain on sales of investment properties
Provision for impairment of investment properties
Adjusted EBITDA
Annualized
(a) For purposes of this ratio calculation, annualized three months ended figures were used.
$
103,144
6,780
18,015
46,598
(107,101)
8,147
75,583
302,332
$
$
Board Of Directors
Investor Information
Executive Officers
Current stockholder information,
including the Annual Report,
SEC filings and press releases, is
available on our website at
www.rpai.com or by e-mail request
to ir@rpai.com.
Legal Counsel
Goodwin Procter LLP
Boston, MA
Independent Auditors
Deloitte & Touche LLP
Chicago, IL
Transfer Agent
Computershare
P.O. Box 505000
Louisville, KY 40233
800.368.5948
www.computershare.com
Steven P. Grimes
President and Chief Executive
Officer
Shane C. Garrison
Executive Vice President,
Chief Operating Officer and
Chief Investment Officer
Julie M. Swinehart
Executive Vice President,
Chief Financial Officer and Treasurer
Corporate Office
Retail Properties of America, Inc.
2021 Spring Road, Suite 200
Oak Brook, Illinois 60523
855.247.RPAI
www.rpai.com
Gerald M. Gorski, Chairman
Former Partner, Gorski & Good LLP
Bonnie S. Biumi
Former President and Chief
Financial Officer of Kerzner
International Resorts, Inc.
Frank A. Catalano, Jr.
President of Catalano & Associates
Paul R. Gauvreau
Former Chief Financial Officer,
Financial Vice President and
Treasurer of Pittway Corporation
Robert G. Gifford
Former President and Chief
Executive Officer of AIG Global
Real Estate
Steven P. Grimes
President and Chief Executive
Officer
Richard P. Imperiale
President and Founder of the
Uniplan Companies
Peter L. Lynch
Former Chairman of the Board
of Directors, President and Chief
Executive Officer of Winn-Dixie
Stores, Inc.
Thomas J. Sargeant
Former Chief Financial Officer of
AvalonBay Communities, Inc.
This Annual Report and the Letter to Stockholders contain “forward-looking statements.” Forward-looking statements are statements that are not historical, including
statements regarding management’s intentions, beliefs, expectations, representations, plans or predictions of the future and are typically identified by such words as “believes,”
“expects,” “may,” “should,” “intends,” “plans,” “estimates,” “will,” “continue,” or “anticipates” and variations of such words or similar expressions or the negative of such words.
We intend that such forward-looking statements be subject to the safe harbor provisions set forth in Section 27A of the Securities Act of 1933, as amended, Section 21E of the
Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, and we include this statement for the purpose of complying with such safe
harbor provisions. Future events and actual results, performance, transactions or achievements, financial or otherwise, may differ materially from the results, performance,
transactions or achievements expressed or implied by the forward-looking statements. Important factors that could cause our actual results to be materially different from the
forward-looking statements are discussed in our Annual Report on Form 10-K. We assume no obligation to update or revise any forward-looking statements or to update the
reasons why actual results could differ from those projected in any forward-looking statements.
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2021 Spring Road, Suite 200
Oak Brook, IL 60523
www.rpai.com | NYSE: RPAI