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2018 ANNUAL REPORT
TO OU R SH A REHOLDER S
RPAI R E / DEFINED
Last year, I highlighted our plan to “turn the page” in 2018, a year of internal
focus that saw the culmination of our multi-year effort to transform RPAI. I am
proud to report the successful conclusion of that initiative, which began in 2013,
marked by the sale of our last remaining office complex in May 2018. In this new
chapter, we will continue to RE/Define retail real estate by curating the new
consumer paradigm within our portfolio, shaped by universal connectedness to
the internet, rising importance of experiential factors in retail, and increasing
consumer demand for convenience.
With nearly 80% of our annualized base rent
(ABR) generated from
neighborhood/community centers and lifestyle/mixed-use assets, our portfolio
holds everyday resonance and relevance with consumers. Further, with 37% of
our asset value concentrated among SuperZips ─ zip codes representing the
95th to 99th percentile of both household income and education ─ our sector-
leading positioning gives us access to consumers with some of the strongest
purchasing power in the country. Additionally, with 65% of our multi-tenant
retail ABR concentrated in the Dallas, Washington, D.C./Baltimore, New York,
Chicago, and Seattle markets, we are positioned to benefit from well-established
urbanization trends while also taking advantage of localized scale.
In 2018, our dedicated employees continued to demonstrate the strength of our portfolio by delivering strong
operational and financial results. We set a company record for leasing volume in the third quarter, which we
then surpassed in the fourth quarter, addressing 17% of our gross leasable area (GLA) for the full year at a
blended re-leasing spread of 6.0% while also adding several digitally native tenants to our roster. Our retail
portfolio ABR per occupied square foot of $19.11, up 2.1% from 2017, highlights the merits of our 105-asset
retail operating portfolio. Combined with improved tenant recoveries and diligent expense control, this top line
strength helped drive full-year same store net operating income (NOI) growth of 2.2% in 2018 and Operating
FFO per diluted share of $1.03, which exceeded our 2018 guidance expectations.
Projected Net Investment in
Expansions & Redevelopment
Projected Incremental NOI From
Expansions & Redevelopment
$200
$150
)
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$100
$50
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$30
$25
$20
$15
$10
$5
2019
2020
2021
2022
2023
2019
2020
2021
2022
2023
Active Projects Near-Term Projects Pipeline Projects
Active Projects Near-Term Projects
As presented at our September 2018 Investor Event
As presented at our September 2018 Investor Event
R E / IN VEST
RPAI
is now poised to grow organically from
sheet to fund these efforts through ongoing cash
internally sourced opportunities. We unveiled
flow and existing availability under our $850 million
approximately $400 million in near-term expansion
revolving line of credit.
and redevelopment
investment across five new
projects at our September 2018 Investor Event and
outlined the expectation of more than $25 million in
incremental NOI from these projects by 2023. Our
active and near-term projects provide a line of sight
to our plans for sustainable earnings and cash flow
growth.
Anchored on expectations for continued base rent
growth and maintenance of our improved recovery
ratio, we outlined 2019 Operating FFO guidance
of $1.03 to $1.07 per diluted share in our fourth
quarter 2018 earnings release, placing us among
a select group in our sector expected to grow this
metric in 2019. Our ability to grow substantially
Since our growth initiatives are driven primarily by
through organic means will allow us considerable
expansions and redevelopment of existing assets, we
flexibility to remain strategic when it comes to capital
expect a negligible impact to our existing NOI. Our
allocation. Furthermore, we will be opportunistic in
net debt to adjusted EBITDAre measures 5.5x and
the transactions market as options for growth within
our financial flexibility is strong. As such, we plan
our core markets become available.
to capitalize on our investment grade-rated balance
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
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 6/17
9/17 12/17 3/18 6/18
9/18 12/18
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, 2013 through December 31, 2018. The graph assumes a $100 investment in each of the indices on December 31, 2013,
and the reinvestment of all dividends. Source: Bloomberg
R E / DE VELOP
Our focus on mixed-use redevelopments embraces
construction of Pads G and H at One Loudoun Downtown
tenants’ increasing emphasis on consumer experience
in the coming months with our multi-family partner.
and convenience across commercial formats from
retail to residential to office. During the fourth quarter
Looking ahead, we hold a compelling blueprint for
of 2018, we added the Reisterstown Road Plaza
continued success from our existing portfolio and
redevelopment, a project we completed on time and on
proven team. Our balance sheet strength and ongoing
budget, back into our operating portfolio. We plan to
operational momentum underscore our ability to execute
complete the redevelopment of the multi-family rental
on our growth initiatives for the foreseeable future. I
units at Plaza del Lago in the third quarter of 2019 at
look forward to providing updates on our continued
projected returns of 8.25%-11.25%. To further build on
progress toward RE/Defining real estate as we RE/
the strength of our One Loudoun Downtown asset, we
Invest in and RE/Develop our industry-leading portfolio.
acquired the adjacent 58-acre land parcel, One Loudoun
Uptown, for $25 million in November 2018, adding 2.3
I would like to thank our Board of Directors and
million square feet of developable GLA to our portfolio.
our
incredible
team
for executing our strategy
during these unprecedented times
in retail real
I expect 2019 to bring marked advancement of our
estate. Equally as important, I would like to thank
expansion plans. AvalonBay continues to make steady
you, our shareholders, for your support of RPAI.
construction progress on the main building at the Circle
Our prospects are many and our outlook is bright.
East redevelopment, the retail portion of which will be
delivered back to us at a predetermined price in late
Sincerely,
2019 or early 2020. The University of Maryland Medical
System has begun construction on the regional medical
center directly adjacent to our Carillon project, where
we expect to break ground in the second or third quarter
Steven P. Grimes
of 2019. We also remain on schedule to commence
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, 2018
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company,
or an emerging growth company. See the 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
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 29, 2018, 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 29, 2018 of $12.78 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 8, 2019:
Class A common stock:
213,482,981 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 23, 2019 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, 2018.
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
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5
19
19
21
21
22
24
25
50
52
102
102
104
104
104
104
104
104
105
107
108
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
open-air shopping centers, including properties with a mixed-use component. As of December 31, 2018, we owned 105 retail
operating properties in the United States representing 20,131,000 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 portfolio as of December 31, 2018:
Property Type
Retail operating portfolio:
Multi-tenant retail:
Neighborhood and community centers
Power centers
Lifestyle centers and mixed-use properties (b)
Total multi-tenant retail
Single-user retail
Total retail operating portfolio
Redevelopment projects:
Circle East – redevelopment portion (c)
Plaza del Lago – multi-family rental units (d)
Carillon (e)
Total number of properties
(a) Includes leases signed but not commenced.
Number of
Properties
GLA
(in thousands)
Occupancy
Percent Leased
Including Leases
Signed (a)
9,783
5,454
4,538
19,775
356
20,131
94.0%
93.4%
93.5%
93.7%
100.0%
93.8%
94.4%
95.6%
94.4%
94.7%
100.0%
94.8%
61
25
16
102
3
105
—
—
1
106
(b) Includes Reisterstown Road Plaza, which was reclassified from active redevelopment into our retail operating portfolio during the three
months ended December 31, 2018.
(c) This portion of the property was formerly known as Towson Circle and the operating portion, which was formerly known as Towson Square,
is included in lifestyle centers and mixed-use properties within the property count for our retail operating portfolio.
(d) We began redevelopment activities on the multi-family rental units at the property during the three months ended December 31, 2018. The
operating portion of the property is included in lifestyle centers and mixed-use properties within the property count for our retail operating
portfolio.
(e) We have begun activities in anticipation of future redevelopment of this property, which was formerly known as Boulevard at the Capital
Centre.
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
1
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
ability to create critical mass and realize operational efficiencies.
We completed our portfolio transformation during the first half of 2018 and as a result of these efforts, we have strengthened our
portfolio and balance sheet and have geographically focused our portfolio. Since our inaugural investor day in 2013, including
our pro rata share of unconsolidated joint ventures, we have (i) improved our retail annualized base rent (ABR) by 32% to $19.11
per square foot as of December 31, 2018 from $14.46 per square foot as of March 31, 2013, (ii) increased our concentration in
lifestyle and mixed-use properties by 18% based on multi-tenant retail ABR to 34% as of December 31, 2018 from 16% as of
March 31, 2013, and (iii) reduced our indebtedness by 37% to $1,628,450 as of December 31, 2018 from $2,601,912 as of March
31, 2013. Additionally, as of December 31, 2018, approximately 87.2% of our multi-tenant retail ABR was 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.
We have been primarily focused on growing our portfolio organically through accretive leasing activity and mixed-use
redevelopment and expansion projects. In 2018, we signed 512 new and renewal leases across 3,407,000 square feet of GLA for
a blended comparable re-leasing spread of 6.0%. In addition, we completed the major redevelopment construction activities at
Reisterstown Road Plaza in 2017 and reclassified the property from active redevelopment into our retail operating portfolio during
the three months ended December 31, 2018. Our active and near-term expansion and redevelopment projects consist of
approximately $390,000 to $430,000 of expected investment during 2019 to 2022 and include the redevelopment portion of Circle
East, the first phase of Carillon and the redevelopment of the existing multi-family rental units at Plaza del Lago, as well as pad
developments and expansions at several of our mixed-use and lifestyle centers, including Downtown Crown, Main Street Promenade
and One Loudoun Downtown. Our current portfolio of assets contains several additional projects in the longer-term pipeline,
including, among others, future projects at Merrifield Town Center, Tysons Corner, Southlake Town Square, Lakewood Towne
Center and One Loudoun Uptown.
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 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 and perceived quality of retailers within individual shopping centers;
• management and operational expertise of the landlord; and
2
•
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.
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.
3
Employees
As of December 31, 2018, we had 211 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.
Recent Tax Updates
This summary is for general information purposes only and is not tax advice. This discussion does not address all aspects of taxation
that may be relevant to particular holders of our securities in light of their personal investment or tax circumstances.
The following discussion supplements and updates the disclosures under “Material U.S. Federal Income Tax Considerations” in
the prospectus dated November 2, 2018 contained in our Registration Statement on Form S-3 filed with the SEC on November 2,
2018.
Recent FATCA Regulations
On December 18, 2018, the Internal Revenue Service (IRS) promulgated proposed Treasury Regulations under Sections 1471-1474
of the Code (commonly referred to as FATCA), which proposed regulations eliminate FATCA withholding on gross proceeds of
a disposition of property that can produce U.S. source interest or dividends and thus implicate certain tax-related disclosures
contained in the prospectus. While these proposed Treasury Regulations have not yet been finalized, taxpayers are generally entitled
to rely on the proposed Treasury Regulations (subject to certain limited exceptions). As a result, the following revisions are made
to the prospectus:
•
In the first sentence under “Material U.S. Federal Income Tax Considerations—Taxation of Holders of Certain Fixed
Rate Debt Securities—Taxation of Non-U.S. Holders of Debt Securities—Disposition of the Debt Securities,” the phrase
“(subject to the discussion below regarding FATCA withholding)” is deleted; and
• The last two sentences in the paragraph under “Material U.S. Federal Income Tax Considerations—Foreign Accounts
Tax Compliance Act Withholding Rules” are replaced with the following: “Withholding under this legislation applies with
respect to any payment of interest, dividends, and certain other types of generally passive income if such payment is from
sources within the United States. However, the following payments are not subject to FATCA withholding: (i) income
from our stock or our debt securities that is treated as income effectively connected with the conduct of a trade or business
within the United States; or (ii) distributions and proceeds from a sale or other disposition of our stock or our debt
securities.”
Recent Partnership Audit Regulations
On December 21, 2018, the IRS adopted final Treasury Regulations under Sections 6221-6241 of the Code to implement the
centralized partnership audit regime and applicable finalized Treasury Regulations retain the ability of a REIT that is a partner in
a partnership to use deficiency dividend procedures with respect to partnership adjustments resulting from a “push-out election.”
Clarifications
Finally, certain discussions in the prospectus are clarified. The discussion of TRSs is clarified in light of the Tax Cuts and Jobs
Act that, among other amendments, deleted former Section 163(j)(3)(C) of the Code, which imposed certain limits on the ability
4
of a TRS of a REIT to deduct interest payments made by such TRS to such REIT. As a result, the following revisions are made to
the prospectus in the second paragraph under “Material U.S. Federal Income Tax Considerations—Investments in TRSs”:
•
•
the third sentence is deleted; and
the fourth sentence is revised as follows: “For example, we will be obligated to pay a 100% penalty tax on some payments
that we receive or on certain expenses deducted by the TRS if the economic arrangements among us, our tenants, and/or
the TRS are not comparable to similar arrangements among unrelated parties.”
Further, the discussion under “Material U.S. Federal Income Tax Considerations—Taxation of Non-U.S. Shareholders—
Distributions” is clarified to explain that the exception to withholding under the Foreign Investment in Real Property Tax Act of
1980 on distributions with respect to a class of our common stock or preferred stock that are attributable to gain from our sale or
exchange of United States real property interests for 10% or smaller holders may apply only if such class of common stock or
preferred stock is regularly traded an established securities market located in the United States.
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 and/or an increase in the number of defaults among our existing tenants, and,
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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.
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, 2018, approximately 82.9% of our GLA and approximately 86.1% of our ABR in our retail operating portfolio was
from 15 of the top 25 MSAs, including amounts attributable to our active and near-term redevelopments, and we may continue to
increase our concentration in these markets. Notably, approximately 33.8% of our GLA and approximately 34.3% of our ABR in
our retail operating portfolio was located in the state of Texas as of December 31, 2018. In addition, approximately 16.5% of our
GLA and approximately 17.1% of our ABR in our retail operating portfolio, including amounts attributable to our active and near-
term redevelopments, was located in the Washington, D.C./Baltimore MSAs as of December 31, 2018. Poor economic or market
conditions in markets where our properties are located, including those in Texas and the Washington, D.C./Baltimore MSAs, 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 or, to facilitate leasing, we may choose
to provide significant lease inducements, rent abatements or incur significant capital expenditures to improve our properties,
which could adversely affect our cash flow, financial condition and results of operations.
Approximately 5.2% of the total GLA in our retail operating portfolio was vacant as of December 31, 2018, excluding leases
signed but not commenced. In addition, as of December 31, 2018, leases accounting for approximately 33.6% 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 lease
inducements, rent abatements, tenant improvements, 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
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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.
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, many of which are anchor tenants, represent 36.7% of occupied GLA
and 27.8% of ABR as of December 31, 2018. 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 31.8% of occupied
GLA, but 48.2% of ABR as of December 31, 2018. 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 values 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
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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
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’s 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.
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Joint venture investments could be adversely affected by our lack of sole decision-making authority.
As of December 31, 2018, we had entered into joint ventures in connection with two of our expansion and redevelopment projects,
One Loudoun Downtown and Carillon, and we expect to enter into additional joint venture arrangements in the future. Our existing
joint ventures and any additional joint venture arrangements in which we may engage in the future are or could be subject to various
risks, including the following:
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•
•
•
•
•
lack of exclusive control over the joint venture, which may prevent us from taking actions that are in our best interest;
future capital constraints of our partners or failure of our partners to fund their share of required capital contributions,
which may require us to contribute more capital than we anticipated to fund the developments and/or cover the joint
venture’s liabilities;
actions by our partners that could jeopardize our REIT status, require us to pay taxes or subject the properties owned by
the joint venture to liabilities greater than those contemplated by the terms of the joint venture agreements;
disputes between us and our partners may result in litigation or arbitration that would increase our expenses and prevent
our officers and/or directors from focusing their time and effort on our business;
joint venture agreements may require prior consent of our joint venture partners for a sale or transfer to a third party of
our interest in the joint venture, which would restrict our ability to dispose of our interest in such a joint venture; and
joint venture agreements may contain buy-sell provisions pursuant to which one partner may initiate procedures requiring
us to buy the other partner’s interest.
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, 2018, we had two projects in active redevelopment, the redevelopment portion of Circle East and the multi-
family rental units at Plaza del Lago. We have invested a total of approximately $11,000 in these projects, which is net of proceeds
of $11,820 from the sale of air rights at the redevelopment portion of Circle East. These projects are at various stages of completion,
and based on our current plans and estimates, we anticipate that it will require approximately $24,000 to $26,000 of additional
funds to complete these projects. 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.
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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 seven 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
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.
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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 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
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
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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, 2018, 2017 and 2016, we recognized aggregate impairment charges related to investment properties of $2,079,
$67,003 and $20,376, respectively. We may be required to recognize additional asset impairment charges in the future.
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 unsecured term loan, 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. As
of December 31, 2018, we had $273,000 of unhedged London Interbank Offered Rate (LIBOR)-based variable rate debt outstanding.
During 2018, LIBOR increased, and interest rates may continue to increase in the future, which would increase our interest expense
on any outstanding unhedged variable rate debt and could 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 use sources of cash 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
13
that are different from, and possibly riskier than, the investments and businesses described in this report. In addition, our board of
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. 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 in 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 in 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 in 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 in 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, the effect of
non-deductible expenses, such as capital expenditures, limitations on interest deductions, payments of compensation for which
Section 162(m) of the Code denies a deduction, the creation of reserves or required amortization payments or limitations on the
deduction of net operating losses. 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, subject to certain
limitations). 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 went
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 enacted. The TCJA made major changes
to the Code, including a number of provisions of the Code that affect the taxation of REITs and their stockholders. The long-term
effect of the significant changes made by the TCJA remains uncertain, and additional administrative guidance will be required in
order to fully evaluate the effect of many provisions. The effect of any technical corrections with respect to the TCJA could have
an adverse effect on us or our stockholders or holders of our debt securities.
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.
17
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,
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 currently have $700,000 of unsecured notes outstanding and 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
18
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 (ROU) asset for operating leases where we are the lessee, such as
ground leases and office leases. We have assessed the impact of adoption of this new standard and expect to record a lease liability
and a ROU asset of approximately $95,000 to $110,000 as of January 1, 2019 for existing leases as of that date. The ROU asset
will be presented net of our existing straight-line ground rent liability of $31,030 and our acquired ground lease intangible liability
of $11,898. We continue to assess the impact of this new standard and are unable to predict the full impact 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.
ITEM 2. PROPERTIES
The following table sets forth summary information regarding our retail operating portfolio as of December 31, 2018. 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.
Division
Eastern Division
Florida, Georgia, Maryland, Massachusetts,
Michigan, New Jersey, New York, North Carolina,
Pennsylvania, South Carolina, Tennessee, Virginia
Western Division
Arizona, California, Illinois, Missouri, Texas,
Washington
Total retail operating portfolio (b)
Number of
Properties
ABR
% of Total
ABR
ABR per
Occupied
Sq. Ft.
GLA
% of Total
GLA
Occupancy
(a)
42
$
150,130
41.6% $
19.33
8,279
41.1%
93.8%
63
105
210,804
58.4%
$
360,934
100.0% $
18.96
19.11
11,852
20,131
58.9%
100.0%
93.8%
93.8%
(a) Calculated as the percentage of economically occupied GLA as of December 31, 2018. Including leases signed but not commenced, our
retail operating portfolio was 94.8% leased as of December 31, 2018.
(b) Excludes (i) the redevelopment portion of Circle East, which is in active redevelopment, (ii) the multi-family rental units at Plaza del Lago,
which are in active redevelopment, and (ii) Carillon, where we have begun activities in anticipation of future redevelopment.
19
The following table sets forth information regarding the 20 largest tenants in our retail operating portfolio based on ABR as of
December 31, 2018. 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
Regal Entertainment Group
Edwards Cinema
Bed Bath & Beyond Inc.
Bed Bath & Beyond, Buy Buy
Baby, Cost Plus World Market
AB Acquisition LLC
Safeway, Jewel-Osco, Tom Thumb
Ross Stores, Inc.
PetSmart, Inc.
Ahold U.S.A. Inc.
Michaels Stores, Inc.
Ascena Retail Group Inc.
Gap Inc.
BJ’s Wholesale Club, Inc.
Lowe’s Companies, Inc.
Ross Dress for Less
Stop & Shop, Giant Eagle
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
The Kroger Co.
Kroger, Harris Teeter, QFC
Party City Holdings Inc.
The Home Depot, Inc.
Office Depot, Inc.
Barnes & Noble, Inc.
Pier 1 Imports, Inc.
Petco Animal Supplies, Inc.
Total Top Retail Tenants
Office Depot, OfficeMax
Number
of Stores
ABR
% of
Total ABR
ABR per
Occupied
Sq. Ft.
Occupied
GLA
% of
Occupied
GLA
$
12
23
2
18
9
20
17
4
17
40
22
2
4
7
17
3
11
7
16
13
8,443
7,020
6,968
6,780
6,649
6,566
5,626
5,389
4,997
4,734
4,676
4,659
3,944
3,638
3,495
3,484
3,449
3,415
3,172
3,147
2.3% $
1.9%
1.9%
1.9%
1.8%
1.8%
1.6%
1.5%
1.4%
17.20
10.68
31.82
14.13
13.68
11.24
16.26
22.27
13.05
1.3%
22.65
1.3%
1.3%
1.1%
1.0%
1.0%
1.0%
1.0%
0.9%
0.9%
0.9%
18.41
19.02
6.47
10.42
14.09
9.60
13.96
19.85
19.70
17.58
14.48
491
657
219
480
486
584
346
242
383
209
254
245
610
349
248
363
247
172
161
179
2.6%
3.5%
1.2%
2.5%
2.6%
3.1%
1.8%
1.3%
2.0%
1.1%
1.3%
1.3%
3.2%
1.9%
1.3%
1.9%
1.3%
0.9%
0.9%
1.0%
6,925
36.7%
264
$ 100,251
27.8% $
The following table sets forth a summary, as of December 31, 2018, of lease expirations scheduled to occur during 2019 and each
of the nine calendar years from 2020 to 2028 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, 2018. 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
2019 (a)
2020
2021
2022
2023
2024
2025
2026
2027
2028
Thereafter
Month-to-month
Total
(a) Excludes month-to-month leases.
329
341
303
316
333
283
115
81
81
80
80
21
2,363
$
$
37,190
36,756
46,169
49,522
49,017
42,273
22,134
16,116
13,025
18,632
29,162
938
360,934
10.3% $
10.2%
12.8%
13.7%
13.5%
11.7%
6.1%
4.5%
3.6%
5.2%
8.1%
0.3%
100.0% $
22.14
20.77
19.57
16.60
19.28
17.94
16.58
21.66
15.96
22.95
20.22
20.39
19.11
1,680
1,770
2,359
2,984
2,543
2,356
1,335
744
816
812
1,442
46
18,887
8.9%
9.4%
12.5%
15.8%
13.5%
12.4%
7.1%
4.0%
4.3%
4.3%
7.6%
0.2%
100.0%
20
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
Our Class A common stock trades on the NYSE under the trading symbol RPAI. The closing share price of our Class A common
stock on February 8, 2019, as reported on the NYSE, was $13.17.
As of February 8, 2019, there were approximately 12,600 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.
We declared quarterly distributions totaling $0.6625 per share of our Class A common stock during 2018 and 2017.
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, expansion 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 other
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, 2018.
22
Issuer Purchases of Equity Securities
The following table summarizes our common stock repurchases during the quarter ended December 31, 2018, 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, 2018 to October 31, 2018
November 1, 2018 to November 30, 2018
December 1, 2018 to December 31, 2018
Total
Total number
of shares of
Class A common
stock purchased
Average price
paid per share
of Class A
common stock
1,526
459
1,822
3,807
$
$
$
$
12.11
11.91
11.03
11.57
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)
1,526
459
1,789
3,774
$
$
$
$
214,354
208,879
189,105
189,105
(a) As disclosed on the Current Reports on Form 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.
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.
RETAIL PROPERTIES OF AMERICA, INC.
As of and for the years ended December 31, 2018, 2017, 2016, 2015 and 2014
(Amounts in thousands, except per share amounts)
Net investment properties
Total assets
Total debt
Total shareholders’ equity
Total revenues
Total expenses
Interest expense
Gain on sales of investment properties, net
Other, 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 per common share – basic and diluted
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2018 (a)
3,379,152
3,647,470
1,622,049
1,746,591
482,497
(368,987)
(73,746)
37,211
665
77,640
—
77,640
—
77,640
0.35
$
$
$
$
$
$
$
— $
— $
— $
$
$
$
$
$
144,409
0.66
204,163
87,275
(358,172)
217,830
218,231
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2017
3,569,937
3,918,264
1,746,086
1,885,700
538,139
(478,904)
(146,092)
337,975
373
251,491
—
251,491
(13,867)
237,624
1.03
9,161
1.70
4,706
151,612
0.66
247,516
608,302
(851,832)
230,747
230,927
2016
4,056,173
4,452,973
1,997,925
2,152,086
583,143
(456,997)
(109,730)
129,707
20,694
166,817
—
166,817
(9,450)
157,367
0.66
9,450
1.75
$
$
$
$
$
$
$
$
$
2015
4,254,647
4,621,251
2,166,238
2,155,337
603,960
(462,890)
(138,938)
121,792
1,700
125,624
(528)
125,096
(9,450)
115,646
0.49
9,450
1.75
$
$
$
$
$
$
$
$
$
— $
— $
$
$
$
$
$
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
2014
4,314,905
4,787,989
2,318,735
2,187,881
600,614
(497,969)
(133,835)
42,196
32,294
43,300
—
43,300
(9,450)
33,850
0.14
9,450
1.75
—
156,742
0.66
263,161
95,721
(286,509)
236,184
236,187
(a) On January 1, 2018, we adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, on a modified
retrospective basis. The selected financial data for the years ended December 31, 2017, 2016, 2015 and 2014 was not retrospectively adjusted.
24
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” 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;
adverse impact of e-commerce developments and shifting consumer retail behavior on our 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;
25
•
•
•
•
•
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 open-air shopping centers,
including properties with a mixed-use component. As of December 31, 2018, we owned 105 retail operating properties in the
United States representing 20,131,000 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 portfolio as of December 31, 2018:
Property Type
Number of
Properties
GLA
(in thousands)
Occupancy
Percent Leased
Including Leases
Signed (a)
Retail operating portfolio:
Multi-tenant retail:
Neighborhood and community centers
Power centers
Lifestyle centers and mixed-use properties (b)
Total multi-tenant retail
Single-user retail
Total retail operating portfolio
Redevelopment projects:
Circle East – redevelopment portion (c)
Plaza del Lago – multi-family rental units (d)
Carillon (e)
Total number of properties
(a) Includes leases signed but not commenced.
9,783
5,454
4,538
19,775
356
20,131
94.0%
93.4%
93.5%
93.7%
100.0%
93.8%
94.4%
95.6%
94.4%
94.7%
100.0%
94.8%
61
25
16
102
3
105
—
—
1
106
(b) Includes Reisterstown Road Plaza, which was reclassified from active redevelopment into our retail operating portfolio during the three
months ended December 31, 2018.
(c) This portion of the property was formerly known as Towson Circle and the operating portion, which was formerly known as Towson Square,
is included in lifestyle centers and mixed-use properties within the property count for our retail operating portfolio.
(d) We began redevelopment activities on the multi-family rental units at the property during the three months ended December 31, 2018. The
operating portion of the property is included in lifestyle centers and mixed-use properties within the property count for our retail operating
portfolio.
(e) We have begun activities in anticipation of future redevelopment of this property, which was formerly known as Boulevard at the Capital
Centre.
26
During the first half of 2018, we completed our portfolio transformation, 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.
We have been primarily focused on growing our portfolio organically through accretive leasing activity and mixed-use
redevelopment and expansion projects. We completed the major redevelopment construction activities at Reisterstown Road Plaza
in 2017 and reclassified the property from active redevelopment into our retail operating portfolio during the three months ended
December 31, 2018. Our active and near-term expansion and redevelopment projects consist of approximately $390,000 to $430,000
of expected investment during 2019 to 2022 and include the redevelopment portion of Circle East, the first phase of Carillon and
the redevelopment of the existing multi-family rental units at Plaza del Lago, as well as pad developments and expansions at
several of our mixed-use and lifestyle centers, including Downtown Crown, Main Street Promenade and One Loudoun Downtown.
Our current portfolio of assets contains several additional projects in the longer-term pipeline, including, among others, future
projects at Merrifield Town Center, Tysons Corner, Southlake Town Square, Lakewood Towne Center and One Loudoun Uptown.
2018 Company Highlights
Acquisitions
During the year ended December 31, 2018, we acquired One Loudoun Uptown, a 58-acre land parcel, of which 32 acres are
developable, located adjacent to One Loudoun Downtown, our multi-tenant retail operating property located in Ashburn, Virginia,
for a purchase price of $25,000. The acquired land parcel is classified as land held for development and is included in “Developments
in progress” in the accompanying consolidated balance sheets.
Developments in Progress
During the year ended December 31, 2018, we:
•
•
•
•
invested $12,226 in our active redevelopment projects at Reisterstown Road Plaza, Circle East and Plaza del Lago;
received net proceeds of $11,820 in connection with the sale of air rights to a third party to develop multi-family rental
units at the redevelopment portion of Circle East, which is shown net in the “Developments in progress” balance as of
December 31, 2018 in the accompanying consolidated balance sheets;
commenced active redevelopment on the multi-family rental units at Plaza del Lago; and
placed the Reisterstown Road Plaza redevelopment project in service and reclassified the related costs from “Developments
in progress” into “Buildings and other improvements” in the accompanying consolidated balance sheets.
The following table summarizes developments in progress as of December 31, 2018:
Property Name
Active developments/redevelopments:
Circle East – redevelopment portion
Plaza del Lago – multi-family rental units
Land held for development:
One Loudoun Uptown
Total developments in progress
Dispositions
MSA
Baltimore
Chicago
Washington, D.C.
December 31, 2018
$
$
22,383
536
22,919
25,450
48,369
During the year ended December 31, 2018, we continued to pursue targeted dispositions of select non-target and single-user
properties. Consideration from dispositions totaled $201,400 and included the sales of six multi-tenant retail operating properties
aggregating 836,900 square feet for total consideration of $104,500, three single-user retail properties aggregating 98,900 square
feet for total consideration of $10,300 and Schaumburg Towers, an 895,400 square foot office complex, for consideration of
$86,600.
27
The following table summarizes our 2018 dispositions:
Date
January 19, 2018
February 15, 2018
March 7, 2018
March 20, 2018
March 21, 2018
March 28, 2018
April 19, 2018
May 31, 2018
December 28, 2018
Property Name
Crown Theater
Cranberry Square
Rite Aid Store (Eckerd) – Crossville, TN
Home Depot Plaza
Governor's Marketplace
Stony Creek I & Stony Creek II
CVS Pharmacy – Lawton, OK
Schaumburg Towers
Orange Plaza (Golfland Plaza)
Property Type
Single-user retail
Multi-tenant retail
Single-user retail
Multi-tenant retail
Multi-tenant retail
Multi-tenant retail
Single-user retail
Office
Multi-tenant retail
Square
Footage
74,200
195,200
13,800
135,600
243,100
204,800
10,900
895,400
58,200
1,831,200
Consideration
6,900
$
23,500
1,800
16,250
23,500
32,800
1,600
86,600
8,450
201,400
$
In addition to the property dispositions listed above, during the year ended December 31, 2018, we received (i) consideration of
$11,970 in connection with the sale of air rights at the redevelopment portion of Circle East and (ii) consideration of $1,800 in
connection with the first phase of the sale of a land parcel, which included rights to develop eight residential units, at One Loudoun
Downtown.
Market Summary
The following table summarizes our retail operating portfolio by market as of December 31, 2018:
Property Type/Market
Multi-Tenant Retail:
Top 25 MSAs (b)
Dallas
Washington, D.C.
New York
Chicago
Baltimore (c)
Seattle
Atlanta
Houston
San Antonio
Phoenix
Los Angeles
Riverside
St. Louis
Charlotte
Tampa
Subtotal
Non-Top 25 MSAs (b)
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)
19
8
9
8
5
8
9
9
3
3
1
1
1
1
1
86
16
$
81,616
38,101
36,287
29,341
21,791
21,432
19,695
15,746
12,715
10,556
5,394
4,610
4,163
3,060
2,374
306,881
23.2% $
10.8%
10.3%
8.3%
6.2%
6.1%
5.6%
4.5%
3.6%
3.0%
1.5%
1.3%
1.2%
0.9%
0.7%
87.2%
22.36
28.44
28.76
23.20
14.71
15.63
13.77
14.73
17.65
17.79
28.23
15.76
9.67
12.71
19.47
19.85
3,938
1,387
1,292
1,358
1,603
1,477
1,513
1,141
721
632
241
292
453
320
126
16,494
19.9%
7.0%
6.5%
6.9%
8.1%
7.5%
7.7%
5.8%
3.6%
3.2%
1.2%
1.5%
2.3%
1.6%
0.6%
83.4%
92.7%
96.6%
97.6%
93.1%
92.4%
92.8%
94.6%
93.7%
99.8%
94.0%
79.4%
100.0%
95.0%
75.3%
97.0%
93.7%
93.2%
97.2%
97.6%
93.4%
96.9%
93.6%
94.6%
94.3%
100.0%
94.0%
79.4%
100.0%
95.0%
90.6%
97.0%
94.8%
45,103
12.8%
14.68
3,281
16.6%
93.6%
94.3%
Total Multi-Tenant Retail
102
351,984
100.0%
18.99
19,775
100.0%
93.7%
94.7%
Single-User Retail
3
8,950
25.19
356
100.0%
100.0%
Total Retail
Operating Portfolio (d)
105
360,934
$
19.11
20,131
93.8%
94.8%
(a) Excludes $2,271 of multi-tenant retail ABR and 395 square feet of multi-tenant retail GLA attributable to (i) the redevelopment portion of
Circle East, which is in active redevelopment and (ii) Carillon, where we have begun activities in anticipation of future redevelopment,
which are located in the Baltimore and Washington, D.C. MSAs, respectively. Including these amounts, 87.3% of our multi-tenant retail
ABR and 83.7% 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.
28
(c) Includes Reisterstown Road Plaza, a formerly active redevelopment that was reclassified into our retail operating portfolio during the three
months ended December 31, 2018.
(d) Excludes the multi-family rental units at Plaza del Lago, which are in active redevelopment.
Leasing Activity
The following table summarizes the leasing activity in our retail operating portfolio during the year ended December 31, 2018.
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
350
53
109
512
2,439
$
312
656
3,407
$
20.13
24.09
19.65
20.58
$
$
19.20
21.06
N/A
19.41
4.8%
14.4%
N/A
6.0%
4.8
9.4
6.6
5.6
$
$
1.29
44.68
34.23
11.62
(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 2019 will focus on (i) vacant anchor and small shop space, (ii) upcoming lease expirations and
(iii) spaces within our redevelopment and expansion projects. 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.
Capital Markets
During the year ended December 31, 2018, we:
•
•
•
•
•
•
•
entered into our fifth amended and restated unsecured credit agreement (Unsecured Credit Agreement) with a syndicate
of financial institutions to provide for an unsecured credit facility aggregating $1,100,000, comprised of an $850,000
unsecured revolving line of credit and a $250,000 unsecured term loan (collectively, the Unsecured Credit Facility), which
increased capacity on the unsecured revolving line of credit by $100,000, extended its maturity date by 2.3 years and
improved the pricing on borrowings under the unsecured revolving line of credit and unsecured term loan by 0.30% and
0.10%, respectively;
repaid the remaining $100,000 of our unsecured term loan due 2018 in conjunction with the execution of the Unsecured
Credit Agreement;
amended the agreement governing our term loan due 2023 to improve our credit spread by 0.50%;
entered into two agreements to swap a total of $200,000 of LIBOR-based variable rate debt to a fixed interest rate of
2.85% through November 22, 2023 upon the expiration of the previous swap agreements;
borrowed $57,000, net of repayments, on our unsecured revolving line of credit;
repaid $77,987 of mortgages payable, incurred $5,791 of debt prepayment fees and made scheduled principal payments
of $3,801 related to amortizing loans; and
repurchased 6,341 shares of our Class A common stock at an average price per share of $11.80 for a total of $74,952,
resulting in $189,105 remaining available for repurchases under our $500,000 common stock repurchase program.
Distributions
We declared quarterly distributions totaling $0.6625 per share of our Class A common stock during 2018.
29
Results of Operations
Comparison of Results for the Years Ended December 31, 2018 to 2017
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
Other (expense) income
Interest expense
Gain on sales of investment properties
Other income, net
Net income
Preferred stock dividends
Net income attributable to common shareholders
Year Ended December 31,
2017
2018
Change
$
$
370,638
105,170
6,689
482,497
74,885
73,683
175,977
2,079
42,363
368,987
(73,746)
37,211
665
77,640
—
77,640
$
$
414,804
115,944
7,391
538,139
84,556
82,755
203,866
67,003
40,724
478,904
(146,092)
337,975
373
251,491
(13,867)
237,624
$
$
(44,166)
(10,774)
(702)
(55,642)
(9,671)
(9,072)
(27,889)
(64,924)
1,639
(109,917)
72,346
(300,764)
292
(173,851)
13,867
(159,984)
We owned 112 retail operating properties and one office complex as of December 31, 2017, which decreased to 105 retail operating
properties as of December 31, 2018 as a result of the completion of our portfolio transformation during the first half of 2018.
Net income attributable to common shareholders decreased $159,984 from $237,624 for the year ended December 31, 2017 to
$77,640 for the year ended December 31, 2018 primarily as a result of the following:
•
•
a $300,764 decrease in gain on sales of investment properties related to the sales of 10 investment properties and a land
parcel, representing approximately 1,831,200 square feet of GLA, and the sale of air rights at the redevelopment portion
of Circle East during the year ended December 31, 2018 compared to the sales of 47 investment properties, representing
approximately 5,810,700 square feet of GLA, during the year ended December 31, 2017; and
a $44,166 decrease in rental income primarily consisting of a $46,084 decrease in base rent, which resulted from the
operating properties sold during 2017 and 2018, partially offset by the growth from our same store portfolio and an
increase in base rent from the operating properties acquired during 2017;
partially offset by
•
a $72,346 decrease in interest expense primarily consisting of:
•
a $62,675 decrease in prepayment penalties and defeasance premiums and a $4,079 decrease 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; and
•
a $5,357 decrease in interest on mortgages payable due to a reduction in mortgage debt;
•
a $64,924 decrease 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 $2,079 and $67,003 for the year ended December 31, 2018 and 2017, respectively. Impairment charges recorded
during 2017 were primarily related to Schaumburg Towers, which was sold on May 31, 2018;
30
•
•
a $27,889 decrease in depreciation and amortization primarily due to the investment properties sold during 2017 and
2018; and
a $13,867 decrease in preferred stock dividends due to 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 (non-cash), (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 lease termination fee expense and non-cash ground rent expense, which is comprised of
straight-line ground rent expense and amortization of acquired ground lease intangibles. 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 “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.
Same store portfolio – 2018 and 2017
For the year ended December 31, 2018, our same store portfolio consisted of 101 retail operating properties acquired or placed in
service and stabilized prior to January 1, 2017. The number of properties in our same store portfolio decreased to 101 as of
December 31, 2018 from 102 as of December 31, 2017 as a result of the following:
•
the removal of eight same store investment properties sold during the year ended December 31, 2018;
partially offset by
•
the addition of seven same store investment properties acquired prior to January 1, 2017.
The sale of Crown Theater on January 19, 2018 did not impact the number of same store investment properties as it was classified
as held for sale as of December 31, 2017. In addition, the sale of Schaumburg Towers on May 31, 2018 did not impact the number
of same store investment properties as it was not previously included in our same store portfolio.
The properties and financial results reported in “Other investment properties” primarily include the following:
•
properties acquired after December 31, 2016, including Plaza del Lago, of which the multi-family rental units are in active
redevelopment;
• Reisterstown Road Plaza, which was reclassified from active redevelopment into our retail operating portfolio during
2018;
•
the redevelopment portion of Circle East, which is in active redevelopment;
• Carillon, where we have begun activities in anticipation of future redevelopment;
•
•
properties that were sold or held for sale in 2017 and 2018, including Schaumburg Towers; and
the net income from our wholly-owned captive insurance company.
31
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, 2018 and 2017:
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
Interest expense
Straight-line rental income, net
Amortization of acquired above and below market lease intangibles, net
Amortization of lease inducements
Lease termination fees, net
Non-cash ground rent expense, net
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,
2017
2018
Change
$
77,640
$
237,624
$
(159,984)
—
(37,211)
175,977
2,079
42,363
73,746
(5,717)
(5,467)
1,020
179
1,844
(665)
325,788
(19,114)
306,674
$
13,867
(337,975)
203,866
67,003
40,724
146,092
(4,646)
(3,313)
1,065
(2,021)
2,150
(373)
364,063
(64,115)
299,948
Year Ended December 31,
2017
2018
$
329,512
3,624
99,140
4,616
436,892
60,049
1,706
68,463
130,218
325,398
3,819
96,594
4,111
429,922
61,577
1,123
67,274
129,974
(13,867)
300,764
(27,889)
(64,924)
1,639
(72,346)
(1,071)
(2,154)
(45)
2,200
(306)
(292)
(38,275)
45,001
6,726
Change
4,114
(195)
2,546
505
6,970
(1,528)
583
1,189
244
$
$
$
$
Same Store NOI
$
306,674
$
299,948
$
6,726
Same Store NOI increased $6,726, or 2.2%, primarily due to the following:
•
•
base rent increased $4,114 primarily due to increases of $2,753 from contractual rent changes and $1,620 from re-leasing
spreads; and
property operating expenses and real estate taxes, net of tenant recovery income, decreased $2,885 primarily due to
decreases in certain non-recoverable property operating expenses, partially offset by increases in net real estate taxes
resulting from higher real estate tax assessments and increases in net recoverable property operating expenses.
32
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
Other income (expense)
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Gain on sales of investment properties
Other income, net
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
—
—
(146,092)
337,975
373
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
13,653
6,978
(109,730)
129,707
63
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
(13,653)
(6,978)
(36,362)
208,268
310
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
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 decreases
from 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;
33
•
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.
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.
34
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
Non-cash ground rent expense, net
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,
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)
2,150
(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)
2,693
(63)
408,269
(127,002)
281,267
Year Ended December 31,
2016
2017
$
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
4,417
(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
Change
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 increases of $2,429 from contractual rent changes and $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.
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
35
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, gain on sale and impairment charges on 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
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
Gain on sale of non-depreciable investment property
Provision for impairment of non-depreciable investment property
Gain on extinguishment of other liabilities
Impact on earnings from executive separation (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,
2017
2016
2018
77,640
174,672
2,079
(33,747)
220,644
1.01
220,644
5,944
—
(3,464)
—
—
1,737
—
629
225,490
1.03
$
$
$
$
$
$
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
$
$
$
$
$
$
(a) Reflected as an increase (decrease) within “General and administrative expenses” in the accompanying consolidated statements of operations
and other comprehensive (loss) income.
(b) Included within “Preferred stock dividends” in the accompanying consolidated statements of operations and other comprehensive (loss)
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 (loss) income.
36
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
Proceeds from the sales of air rights
Tenant allowances and leasing costs
Improvements made to individual properties, certain of which are not
recoverable through common area maintenance charges to tenants
Debt repayments
Distribution payments
Redevelopment, expansion and pad development activities
Acquisitions
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, improved financial flexibility 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, 2018, we had $3,090 of principal amortization due through the end of
2019, which we plan on satisfying through a combination of cash flows from operations, working capital, capital markets
transactions and our unsecured revolving line of credit.
The table below summarizes our consolidated indebtedness as of December 31, 2018:
Debt
Aggregate
Principal
Amount
Weighted
Average
Interest Rate
Fixed rate mortgages payable (a)
$
205,450
4.65%
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)
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
273,000
523,000
200,000
Maturity Date
Various
June 30, 2021
June 30, 2024
March 15, 2025
September 30, 2026
December 28, 2028
January 5, 2021
April 22, 2022 (c)
4.12%
4.58%
4.00%
4.08%
4.24%
4.19%
3.20%
3.57%
3.40%
4.05%
November 22, 2023
Weighted
Average Years
to Maturity
4.5 years
2.5 years
5.5 years
6.2 years
7.8 years
10.0 years
6.3 years
2.0 years
3.3 years
2.7 years
4.9 years
4.7 years
Total consolidated indebtedness
$
1,628,450
3.98%
(a) Fixed rate mortgages payable excludes mortgage premium of $775, discount of $(536) and capitalized loan fees of $(369), net of accumulated
amortization, as of December 31, 2018. Unsecured notes payable excludes discount of $(734) and capitalized loan fees of $(2,904), net of
accumulated amortization, as of December 31, 2018. Term loans exclude capitalized loan fees of $(2,633), net of accumulated amortization,
as of December 31, 2018. Capitalized loan fees related to the revolving line of credit are included in “Other assets, net” in the accompanying
consolidated balance sheets.
(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 1.20% to 1.70% through January 5, 2021. The applicable credit spread was 1.20% as of December 31, 2018.
37
(c) We have 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 0.075% of the commitment amount being extended.
(d) Reflects $200,000 of LIBOR-based variable rate debt that has been swapped to a fixed rate of 2.85% plus a credit spread based on a leverage
grid ranging from 1.20% to 1.85% through November 22, 2023. The applicable credit spread was 1.20% as of December 31, 2018.
Mortgages Payable
During the year ended December 31, 2018, we repaid mortgages payable in the total amount of $77,987, which had a weighted
average fixed interest rate of 5.89%, incurred $5,791 of debt prepayment fees and made scheduled principal payments of $3,801
related to amortizing loans.
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 described below); 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 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 our unsecured revolving line of credit.
The indenture, as supplemented (the Indenture), governing the Notes Due 2025 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.
As of December 31, 2018, management believes we were in compliance with the financial covenants under the Indenture and the
note purchase agreements.
38
Unsecured Term Loans and Revolving Line of Credit
Unsecured Credit Facility
On April 23, 2018, we entered into our fifth amended and restated unsecured credit agreement (Unsecured Credit Agreement) with
a syndicate of financial institutions led by Wells Fargo Bank, National Association serving as syndication agent and KeyBank
National Association serving as administrative agent to provide for an unsecured credit facility aggregating $1,100,000 (Unsecured
Credit Facility). The Unsecured Credit Facility consists of an $850,000 unsecured revolving line of credit and a $250,000 unsecured
term loan and is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with the Unsecured Credit
Agreement, we may elect to convert to an investment grade pricing grid. As of December 31, 2018, 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
Maturity
Date
1/5/2021
Extension
Option
Extension
Fee
Credit
Spread
Facility Fee
Credit
Spread
Facility Fee
N/A
N/A
1.20% - 1.70%
N/A
0.90% - 1.75%
N/A
$850,000 unsecured revolving line of credit
4/22/2022
2 six month
0.075%
1.05% - 1.50% 0.15% - 0.30% 0.825%-1.55% 0.125% - 0.30%
Leverage-Based Pricing
Investment Grade Pricing
The Unsecured Credit Facility has a $500,000 accordion option that allows us, at our election, to increase the total Unsecured
Credit Facility up to $1,600,000, 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, 2018, management believes we were in compliance with the financial
covenants and default provisions under the Unsecured Credit Agreement.
As of December 31, 2018, we had letters of credit outstanding totaling $433 that serve as collateral for certain capital improvements
at two of our properties and reduce 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 (Term Loan Due 2023) with a group of
financial institutions, which closed during the year ended December 31, 2016 and was amended on November 20, 2018. The Term
Loan Due 2023 is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with the amended term loan
agreement (Term Loan Agreement), we may elect to convert to an investment grade pricing grid. As of December 31, 2018, 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
1.20% – 1.85%
Investment Grade Pricing
Credit Spread
0.85% – 1.65%
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 (i) customary fees and conditions, including the absence of an event of default as defined in the Term
Loan Agreement and (ii) our ability to obtain additional lender commitments.
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, 2018, management believes we were
in compliance with the financial covenants and default provisions under the Term Loan Agreement.
39
Debt Maturities
The following table summarizes the scheduled maturities and principal amortization of our indebtedness as of December 31, 2018
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, 2018. The table does not reflect the impact of any 2019 debt activity.
2019
2020
2021
2022
2023
Thereafter
Total
Fair Value
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
3,090
3,228
Variable rate debt:
$
3,090
$
3,228
$ 22,080
$ 113,946
$ 31,758
$ 31,348
$ 205,450
$
208,173
—
—
—
—
250,000
100,000
372,080
—
—
200,000
—
113,946
231,758
—
600,000
631,348
450,000
700,000
449,266
671,492
1,355,450
1,328,931
Variable rate revolving line of credit
—
—
—
273,000
—
—
273,000
272,553
Total debt (d)
$
3,090
$
3,228
$ 372,080
$ 386,946
$ 231,758
$ 631,348
$1,628,450
$ 1,601,484
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
4.47%
—
4.47%
4.48%
—
4.48%
3.56%
—
3.56%
4.90%
3.57%
3.96%
4.06%
—
4.06%
4.20%
—
4.20%
4.06%
3.57%
3.98%
(a) Excludes mortgage premium of $775 and discount of $(536), net of accumulated amortization, as of December 31, 2018.
(b) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage grid through
January 5, 2021. As of December 31, 2018, the applicable credit spread was 1.20%. In addition, $200,000 of LIBOR-based variable rate
debt has been swapped to a fixed rate of 2.85% plus a credit spread based on a leverage grid through November 22, 2023. As of December 31,
2018, the applicable credit spread was 1.20%.
(c) Excludes discount of $(734), net of accumulated amortization, as of December 31, 2018.
(d) The weighted average years to maturity of consolidated indebtedness was 4.7 years as of December 31, 2018. Total debt excludes capitalized
loan fees of $(5,906), net of accumulated amortization, as of December 31, 2018, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2018.
We plan on addressing our debt maturities through a combination of cash flows from operations, working capital, 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, expansion 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 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.
40
In December 2015, we entered into an at-the-market (ATM) equity program under which we had the ability to issue and sell shares
of our Class A common stock, having an aggregate offering price of up to $250,000, from time to time. We did not sell any shares
under the ATM equity program during the years ended December 31, 2018, 2017 and 2016. The ATM equity program expired in
November 2018.
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. In December 2017, our 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 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. During the years ended December 31, 2018, 2017 and 2016, we
repurchased 6,341, 17,683 and 591 shares, respectively, at an average price per share of $11.80, $12.82 and $14.93, respectively,
for a total of $74,952, $227,102 and $8,841, respectively. As of December 31, 2018, $189,105 remained available for repurchases
under the common stock repurchase program.
Capital Expenditures and Redevelopment Activity
We anticipate that obligations related to capital improvements and redevelopments, including expansions and pad developments,
in 2019 can be met with cash flows from operations, working capital, capital markets transactions and our unsecured revolving
line of credit.
As of December 31, 2018, we have active redevelopment projects at Circle East and the multi-family rental units at Plaza del Lago.
We have invested a total of approximately $11,000 in these projects, which is net of proceeds of $11,820 from the sale of air rights
at the redevelopment portion of Circle East. We anticipate that it will require approximately $24,000 to $26,000 of additional funds
to complete these projects. In addition, we expect to begin active redevelopment activities on the first phase of Carillon as well as
pad development and expansions at Downtown Crown, Main Street Promenade and One Loudoun Downtown during 2019.
We capitalized $2,128, $1,202 and $302 of indirect project costs, which includes $1,123, $268 and $44 of internal salaries and
related benefits of personnel directly involved in the redevelopment projects and $462, $485 and $69 of interest, related to expansions
and redevelopment projects during the years ended December 31, 2018, 2017 and 2016, respectively.
In addition, we capitalized $2,032, $1,187 and $1,152 of internal salaries and related benefits of personnel directly involved in
capital upgrades and tenant improvements during the years ended December 31, 2018, 2017 and 2016, respectively. We also
capitalized $384, $368 and $423 of internal leasing incentives, all of which were incremental to signed leases, during the years
ended December 31, 2018, 2017 and 2016, respectively.
Dispositions
The following table highlights our property dispositions during 2018, 2017 and 2016 pursuant to our portfolio transformation
strategy of disposing of select non-target and single-user properties.
2018 Dispositions
2017 Dispositions
2016 Dispositions
Number of
Properties Sold (a)
10
47
46
Square
Footage
1,831,200
5,810,700
3,013,900
Consideration
201,400
$
917,808
$
540,362
$
Aggregate
Proceeds, Net (b)
184,109
$
896,301
$
448,216
$
Debt
Extinguished
10,750
$
27,353 (c)
$
94,353 (c) (d)
$
(a) 2018 dispositions include the disposition of Crown Theater, which was classified as held for sale as of December 31, 2017. 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, which was not under active
development.
(b) Represents total consideration net of transaction costs, as well as capital and tenant-related costs credited to the buyer at close, as applicable.
2017 dispositions include proceeds of $54,087, which were temporarily restricted related to potential 1031 Exchanges as of December 31,
2017.
(c) Excludes $214,505 and $10,695 of mortgages payable repayments or defeasances completed prior to disposition of the respective property
for the years ended December 31, 2017 and 2016, 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
41
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, during the year ended December 31, 2018, we received (i) net
proceeds of $11,820 in connection with the sale of air rights at the redevelopment portion of Circle East, (ii) net proceeds of $1,789
in connection with the sale of the first phase of a land parcel, which included rights to develop eight residential units, at One
Loudoun Downtown and (iii) proceeds of $169 from a condemnation award. During the year ended December 31, 2017, we also
received net proceeds of $155 from other transactions, including escrow funds related to a property disposition and a condemnation
award. During the year ended December 31, 2016, we also received net proceeds of $2,549 from the sale of a parcel at one of our
properties.
Acquisitions
During the years ended December 31, 2018, 2017 and 2016, 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:
2018 Acquisition (a)
2017 Acquisitions (b)
2016 Acquisitions (c)
Number of
Assets Acquired
1
10
9
Square Footage
—
443,800
1,102,300
Acquisition Price
25,000
$
202,915
$
408,308
$
Mortgage Debt
—
$
—
$
15,971
$
(a) 2018 acquisition is a 58-acre land parcel, of which 32 acres are developable, located adjacent to our One Loudoun Downtown multi-tenant
retail operating property. The total number of properties in our portfolio was not affected by this transaction.
(b) 2017 acquisitions include the purchase of the following: 1) the fee interest in our Carillon multi-tenant retail 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 were 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.
(c) 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.
Summary of Cash Flows
Net cash provided by operating activities
Net cash provided by investing activities
Net cash used in financing activities
(Decrease) increase 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,
2017
2018
Change
$
$
204,163
87,275
(358,172)
(66,734)
86,335
19,601
$
$
247,516
608,302
(851,832)
3,986
82,349
86,335
$
(43,353)
(521,027)
493,660
(70,720)
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 and (iii) gains on sales of investment
properties. Net cash provided by operating activities in 2018 decreased $43,353 primarily due to the following:
•
a $38,275 decrease in NOI, consisting of a decrease in NOI from properties that were sold or held for sale in 2017 and
2018 and other properties not included in our same store portfolio of $45,001, partially offset by an increase in Same
Store NOI of $6,726; and
•
ordinary course fluctuations in working capital accounts;
partially offset by
42
•
•
•
a $7,206 decrease in cash paid for leasing fees and inducements;
a $5,056 decrease in cash paid for interest, excluding debt prepayment fees; and
a $1,924 decrease in cash bonuses paid.
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 2018 decreased $521,027 due to the following:
•
a $698,569 decrease in proceeds from the sales of investment properties;
partially offset by
•
•
•
a $175,305 decrease in cash paid to purchase investment properties;
a $1,423 decrease in investment in developments in progress; and
an $814 decrease in capital expenditures and tenant improvements.
In 2019, we expect to fund redevelopment, expansion and pad development activities, capital expenditures and tenant improvements
through cash flows generated from operations, working capital, capital markets transactions and our unsecured revolving line of
credit.
Cash Flows from Financing Activities
Cash flows used in financing activities primarily consist of repayments of our unsecured revolving line of credit and unsecured
term loans, distribution payments, principal payments on mortgages payable, debt prepayment costs, payment of loan fees and
deposits, shares repurchased through our common stock repurchase program, the redemption of our preferred stock and the purchase
of U.S. Treasury securities in connection with defeasance of mortgages payable, partially offset by proceeds from our unsecured
revolving line of credit and the issuance of debt instruments. Net cash flows used in financing activities in 2018 decreased $493,660
primarily due to the following:
•
•
•
•
•
the $439,403 purchase of U.S. Treasury securities in connection with defeasance of the IW JV portfolio of mortgages
payable during the year ended December 31, 2017;
a $152,150 decrease in cash paid to repurchase common shares through our common stock 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;
a $24,934 decrease in principal payments on mortgages payable;
an $18,351 decrease in distributions paid as a result of a decrease in common shares outstanding due to the repurchase
of common shares through our common stock repurchase program and the redemption of our 7.00% Series A cumulative
preferred stock in December 2017; and
•
a $2,707 decrease in debt prepayment fees;
partially offset by
•
•
•
a $200,000 decrease in proceeds from the issuance of unsecured term loans related to the funding of the Term Loan Due
2023 in January 2017;
a $73,000 decrease in net proceeds from our unsecured revolving line of credit; and
a $5,944 increase in the payment of loan fees and deposits.
43
In 2019, we plan to continue to address our debt maturities through a combination of cash flows from operations, working capital,
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, 2018 and excludes the following:
•
•
•
•
the impact of any 2019 debt activity;
recorded debt premiums, discounts and capitalized loan fees, which are not obligations;
obligations related to developments, redevelopments, expansions and pad site developments as well as recurring capital
additions, as payments are only due upon satisfactory performance under the contracts; and
letters of credit totaling $433 that serve as collateral for certain capital improvements at two of our properties, 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 (c)
3-5
years (d)
More than
5 years
Total
Payment due by period
$
$
3,090
—
65,114
6,448
74,652
$
$
375,308
—
119,253
13,372
507,933
$
$
345,704
273,000
74,534
13,530
706,768
$
$
631,348
—
52,660
279,916
963,924
$
$
1,355,450
273,000
311,561
313,266
2,253,277
(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, 2018.
(b) We plan on addressing our 2019 scheduled principal payments on our mortgages payable through a combination of cash flows from operations,
working capital, 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 2023.
(e) Represents expected interest payments on our consolidated debt obligations as of December 31, 2018, including any capitalized interest.
(f) We lease land under non-cancellable leases at certain of our properties expiring in various years from 2035 to 2073, 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 2019 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 capitalization of development costs; provision
for impairment, including estimates of holding periods, capitalization rates and discount rates (where applicable); 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.
44
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 allocate the purchase price of each acquired investment property 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.
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.
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:
•
•
•
•
•
•
•
•
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 reduction 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
45
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 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.
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.
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. 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. A property is
considered stabilized upon reaching 90% occupancy, but generally no later than one year from the completion of major construction
activity, and is included in our same store portfolio when it is stabilized for the annual periods presented.
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;
46
• 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.
Gains on sale of investment properties are recognized, and the related real estate derecognized, when (i) the parties to the sale
contract have approved the contract and are committed to perform their respective obligations; (ii) we can identify each party’s
rights regarding the property transferred; (iii) we can identify the payment terms for the property transferred; (iv) the contract has
commercial substance (that is, the risk, timing or amount of the entity’s future cash flows is expected to change as a result of the
contract); and (v) we have satisfied our performance obligations by transferring control of the property. Typically, the timing of
payment and satisfaction of performance obligations occur simultaneously on the disposition date upon transfer of the property’s
ownership.
Impact of Recently Issued Accounting Pronouncements
Recently Adopted Accounting Pronouncements – Prior to 2019
Effective January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers, on a modified retrospective basis.
This new guidance replaces 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. Substantially all of our revenue follows the existing leasing
guidance and is not impacted by the adoption of this standard; however, the sale of investment property is required to follow the
new guidance as well as ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial Assets discussed
below. The sale of investment property is reported as “gain on sales of investment properties” in the accompanying consolidated
statements of operations and other comprehensive (loss) income. The adoption of ASU 2014-09, Revenue from Contracts with
Customers, did not have a material effect on our consolidated financial statements as substantially all of our revenue falls outside
of the scope of this guidance.
Effective January 1, 2018, we adopted ASU 2017-05, Other Income–Gains and Losses from the Derecognition of Nonfinancial
Assets, on a modified retrospective basis. This 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 sale of investment
property is reported as “gain on sales of investment properties” in the accompanying consolidated statements of operations and
other comprehensive (loss) income. The adoption of this pronouncement did not have a material effect on our consolidated financial
47
statements as the adoption of the new guidance did not result in a change to the timing or amount of gain recognized upon disposition
as compared to the previous guidance.
Effective January 1, 2018, we adopted ASU 2016-01, Financial Instruments – Overall, on a prospective basis. This new guidance
requires 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 no longer requires disclosure of the methods and
significant assumptions used, including any changes, to estimate fair value. In addition, companies are required to disclose all
financial assets and financial liabilities grouped by (i) measurement category and (ii) form of financial instrument. The adoption
of this pronouncement did not have a material effect on our consolidated financial statements.
We elected to early adopt ASU 2017-12, Derivatives and Hedging, as of January 1, 2018. This new guidance amends the designation
and measurement guidance for qualifying hedging relationships and the presentation of hedge results in an entity’s financial
statements. It also eliminates the requirement to separately measure and report hedge ineffectiveness. Entities are now 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. Beginning January 1, 2018, disclosure
requirements have been modified to include a tabular disclosure related to the effect of hedging instruments on the income statement
and the requirement to disclose the ineffective portion of the change in fair value of such instruments has been eliminated. The
amended presentation and disclosure guidance is required only prospectively, as such, disclosures related to periods prior to January
1, 2018 were not impacted. The adoption of this pronouncement resulted in a cumulative effect adjustment of $12 to accumulated
other comprehensive (loss) income and accumulated distributions in excess of earnings related to eliminating the separate
measurement of ineffectiveness.
Recently Adopted Accounting Pronouncements – 2019
In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance, including related ASUs that have subsequently
been issued, was effective January 1, 2019 and requires 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 are permitted to make an accounting policy election by class of underlying asset to not recognize
lease liabilities and lease assets. The guidance allows lessors to make an accounting policy election, by class of underlying asset,
to not separate non-lease components from lease components if certain requirements are met. The guidance also provides an
optional transition method which would allow entities to initially apply the new guidance in the period of adoption, recognizing
a cumulative-effect adjustment to the opening balance of retained earnings, if necessary, and provides a package of three practical
expedients whereby companies are not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii)
the lease classification (operating vs. capital/financing leases) for any expired or existing leases and (iii) initial direct costs for any
existing leases (Package of Three Practical Expedients). Further, the guidance requires (i) lease-related revenues to be presented
in a single line item rather than the current presentation which separates them between “rental income” and “tenant recovery
income” on the consolidated statements of operations and other comprehensive (loss) income and (ii) bad debt expense to be
presented as an adjustment to revenue rather than the current presentation within “operating expenses” on the consolidated
statements of operations and other comprehensive (loss) income.
Upon adoption, we expect to recognize a lease liability and a ROU asset of approximately $95,000 to $110,000 for operating leases
where we are the lessee, such as ground leases and office leases. The ROU asset will be presented net of our existing straight-line
ground rent liability of $31,030 and our acquired ground lease intangible liability of $11,898. For leases with a term of 12 months
or less, we have made an accounting policy election to not recognize lease liabilities and lease assets. For leases where we are the
lessor, the accounting for lease components is largely unchanged from existing GAAP and we have elected the practical expedient
to not separate non-lease components from lease components. Only incremental direct leasing costs may be capitalized under the
new guidance, which is consistent with our previous policies, and as such, will not have any effect on our consolidated financial
statements at adoption. We adopted this new guidance on January 1, 2019, applied the requirements as of that date, elected the
Package of Three Practical Expedients and expect to present income related to leases as a single line item, net of bad debt expense,
on the consolidated statements of operations and other comprehensive (loss) income beginning in 2019. The guidance regarding
capitalization of leasing costs did not have any effect on our consolidated financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging. Due to our early adoption of ASU 2017-12 discussed
above, this new guidance is effective January 1, 2019 and permits use of the Overnight Index Swap (OIS) Rate based on the
Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. SOFR represents the
fifth permissible U.S. benchmark rate in addition to the following current eligible benchmark interest rates: (i) direct Treasury
48
obligations of the U.S. government (UST), (ii) the LIBOR swap rate, (iii) the OIS Rate based on the Fed Funds Effective Rate and
(iv) the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap Rate. The adoption of this pronouncement
on January 1, 2019 did not have any effect on our consolidated financial statements as we did not change our benchmark rate.
Recently Issued Accounting Pronouncements
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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial
Instruments – Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of this new
guidance. Generally, the pronouncement requires a modified retrospective method of adoption. We will continue to evaluate the
impact of this guidance until it becomes effective.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. This new guidance is effective January 1, 2020, with
early adoption permitted, and provides new, and in some cases eliminates or modifies the existing disclosure requirements on fair
value measurements. Public entities will now be required to disclose the following: (i) the changes in unrealized gains and losses
for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting
period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
In addition, public entities will no longer be required to disclose the following: (i) the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes
for Level 3 fair value measurements. The new pronouncement also clarifies and modifies certain existing provisions to promote
the appropriate exercise of discretion by entities when considering fair value measurement disclosures and clarifies that materiality
is an appropriate consideration when evaluating disclosure requirements. As permitted by the new pronouncement, we have removed
the discussion of our valuation processes for Level 3 fair value measurements in this Form 10-K for the year ended December 31,
2018. No other disclosures were removed as we did not have any transfers between levels of the fair value hierarchy during the
current and comparative periods. We expect to adopt the new disclosures on a prospective basis as of January 1, 2020.
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, 2018, we:
•
•
•
granted 128 restricted shares at a grant date fair value of $10.92 per share and 382 RSUs at a grant date fair value of
$10.98 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 82 shares of common stock and 125 restricted shares with a one year vesting term for the RSUs with a performance
period that concluded on December 31, 2018. An additional 29 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 2019 of $0.165625 per share on our outstanding Class A common stock,
which will be paid on April 10, 2019 to Class A common shareholders of record at the close of business on March 27,
2019.
49
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, 2018, 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, 2018 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
Maturity Date
January 5, 2021
November 22, 2023
Fair Value of
Derivative
Asset (Liability)
2,324
$
(3,846)
A decrease of 1% in market interest rates would result in a hypothetical increase in the net liability associated with our derivatives
of approximately $14,087.
The combined carrying amount of our mortgages payable, unsecured notes payable, Term Loan Due 2023 and Unsecured Credit
Facility is approximately $20,565 higher than the fair value as of December 31, 2018.
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.
50
Debt Maturities
Our interest rate risk is monitored using a variety of techniques. The following table summarizes the scheduled maturities and
principal amortization of our indebtedness as of December 31, 2018, 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, 2018. The table does not reflect the
impact of any 2019 debt activity.
2019
2020
2021
2022
2023
Thereafter
Total
Fair Value
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
3,090
3,228
Variable rate debt:
$
3,090
$
3,228
$ 22,080
$ 113,946
$ 31,758
$ 31,348
$ 205,450
$
208,173
—
—
—
—
250,000
100,000
372,080
—
—
200,000
—
113,946
231,758
—
600,000
631,348
450,000
700,000
449,266
671,492
1,355,450
1,328,931
Variable rate revolving line of credit
—
—
—
273,000
—
—
273,000
272,553
Total debt (d)
$
3,090
$
3,228
$ 372,080
$ 386,946
$ 231,758
$ 631,348
$1,628,450
$ 1,601,484
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
4.47%
—
4.47%
4.48%
—
4.48%
3.56%
—
3.56%
4.90%
3.57%
3.96%
4.06%
—
4.06%
4.20%
—
4.20%
4.06%
3.57%
3.98%
(a) Excludes mortgage premium of $775 and discount of $(536), net of accumulated amortization, as of December 31, 2018.
(b) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage grid through
January 5, 2021. As of December 31, 2018, the applicable credit spread was 1.20%. In addition, $200,000 of LIBOR-based variable rate
debt has been swapped to a fixed rate of 2.85% plus a credit spread based on a leverage grid through November 22, 2023. As of December 31,
2018, the applicable credit spread was 1.20%.
(c) Excludes discount of $(734), net of accumulated amortization, as of December 31, 2018.
(d) The weighted average years to maturity of consolidated indebtedness was 4.7 years as of December 31, 2018. Total debt excludes capitalized
loan fees of $(5,906), net of accumulated amortization, as of December 31, 2018, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2018.
We had $273,000 of variable rate debt, excluding $450,000 of variable rate debt that has been swapped to fixed rate debt, with an
interest rate of 3.57% based upon LIBOR as of December 31, 2018. 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, 2018, interest expense would increase
by approximately $2,730 on an annualized basis.
The table incorporates only those interest rate exposures that existed as of December 31, 2018 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.
51
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, 2018 and 2017
Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Years Ended
December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the Years Ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the Years Ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Valuation and Qualifying Accounts (Schedule II)
Real Estate and Accumulated Depreciation (Schedule III)
Schedules not filed:
53
54
55
56
57
59
93
94
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.
52
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, 2018 and 2017, the related consolidated statements of operations and other comprehensive (loss)
income, equity, and cash flows, for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017, and the results
of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 13, 2019, 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 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 13, 2019
We have served as the Company’s auditor since 2009.
53
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 $7,976 and $6,567, 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
Other liabilities
Total liabilities
Commitments and contingencies (Note 16)
Equity:
Preferred stock, $0.001 par value, 10,000 shares authorized, none issued or outstanding
Class A common stock, $0.001 par value, 475,000 shares authorized, 213,176 and 219,237
shares issued and outstanding as of December 31, 2018 and 2017, respectively
Additional paid-in capital
Accumulated distributions in excess of earnings
Accumulated other comprehensive (loss) income
Total shareholders’ equity
Noncontrolling interests
Total equity
Total liabilities and equity
See accompanying notes to consolidated financial statements
December 31,
2018
December 31,
2017
$
$
$
$
1,036,901
3,607,484
48,369
4,692,754
(1,313,602)
3,379,152
14,722
78,398
97,090
—
78,108
3,647,470
205,320
696,362
447,367
273,000
82,942
35,387
86,543
73,540
1,900,461
—
213
4,504,702
(2,756,802)
(1,522)
1,746,591
418
1,747,009
3,647,470
$
$
$
$
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
—
219
4,574,428
(2,690,021)
1,074
1,885,700
—
1,885,700
3,918,264
54
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Operations and Other Comprehensive (Loss) 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
Other income (expense)
Gain on extinguishment of debt
Gain on extinguishment of other liabilities
Interest expense
Gain on sales of investment properties
Other income, net
Net income
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 (loss) income:
Net unrealized (loss) gain on derivative instruments (Note 10)
Comprehensive income attributable to the Company
Year Ended December 31,
2017
2018
2016
370,638
105,170
6,689
482,497
74,885
73,683
175,977
2,079
42,363
368,987
—
—
(73,746)
37,211
665
77,640
—
77,640
0.35
77,640
(2,608)
75,032
$
$
$
$
$
414,804
115,944
7,391
538,139
84,556
82,755
203,866
67,003
40,724
478,904
—
—
(146,092)
337,975
373
251,491
(13,867)
237,624
1.03
251,491
352
251,843
$
$
$
$
$
455,658
118,569
8,916
583,143
85,895
81,774
224,430
20,376
44,522
456,997
13,653
6,978
(109,730)
129,707
63
166,817
(9,450)
157,367
0.66
166,817
807
167,624
$
$
$
$
$
Weighted average number of common shares outstanding – basic
217,830
230,747
236,651
Weighted average number of common shares outstanding – diluted
218,231
230,927
236,951
See accompanying notes to consolidated financial statements
55
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
Interests
Total Equity
Balance as of January 1, 2016
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 common stock 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 common stock repurchase program
Issuance of restricted shares
Stock-based compensation expense, net of forfeitures
Shares withheld for employee taxes
Balance as of December 31, 2017
Cumulative effect of accounting change
Net income
Other comprehensive loss
Contributions from noncontrolling interests
Distributions declared to common shareholders
($0.6625 per share)
Issuance of common stock
Shares repurchased through common stock repurchase program
Issuance of restricted shares
Stock-based compensation expense, net of forfeitures
Shares withheld for employee taxes
Balance as of December 31, 2018
5,400
—
—
—
—
—
—
—
—
—
—
—
5,400
$
$
— $
—
(5,400)
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
—
— $
5
—
—
—
—
—
—
—
—
—
—
—
5
—
—
(5)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Additional
Paid-in
Capital
$ 4,931,395
17
—
—
—
—
(100)
(8,841)
—
23
7,209
(2,548)
$ 4,927,155
$
$
237
—
—
—
—
—
—
—
—
—
—
—
237
— $
—
—
— $
—
(130,289)
—
—
(18)
—
—
—
219
—
—
(227,084)
—
6,059
(1,413)
$ 4,574,428
$
(2,776,215)
(17)
166,817
—
(9,450)
(157,168)
—
—
—
—
—
—
(2,776,033)
251,491
—
(4,706)
(9,161)
(151,612)
—
—
—
—
(2,690,021)
$
237,267
—
—
—
—
—
—
(591)
274
2
(10)
(172)
236,770
$
— $
—
—
—
—
(17,683)
285
(40)
(95)
219,237
$
— $
—
—
—
— $
—
—
—
— $
—
—
—
(12)
77,640
—
—
—
(144,409)
—
59
(6,341)
382
(12)
(149)
213,176
$
—
—
(6)
—
—
—
213
—
(74,946)
—
6,992
(1,772)
$ 4,504,702
—
—
—
—
(2,756,802)
$
$
$
$
$
$
$
(85)
—
—
807
—
—
—
—
—
—
—
—
722
$
$
— $
352
—
—
—
—
—
—
—
1,074
12
—
(2,608)
—
—
—
—
—
—
—
(1,522)
$
$
$
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
$
$
$
$
— $
77,640
(2,608)
—
(144,409)
—
(74,952)
—
6,992
(1,772)
1,746,591
$
— $
—
—
—
—
—
—
—
—
—
—
—
— $
— $
—
—
—
—
—
—
—
—
— $
— $
—
—
418
—
—
—
—
—
—
418
$
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
—
77,640
(2,608)
418
(144,409)
—
(74,952)
—
6,992
(1,772)
1,747,009
See accompanying notes to consolidated financial statements
56
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2017
2016
2018
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
$
77,640
$
251,491
$
166,817
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:
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 common stock repurchase program
Other, net
Net cash used in financing activities
Net (decrease) increase 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
175,977
2,079
(37,211)
—
—
3,416
6,992
—
5,791
(8,775)
(8,395)
(6,398)
(672)
(6,281)
204,163
(25,450)
(72,936)
197,887
(12,226)
—
87,275
(81,788)
—
—
(100,000)
482,000
(425,000)
(5,954)
(5,791)
—
—
(145,333)
(74,952)
(1,354)
(358,172)
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)
(66,734)
86,335
19,601
$
3,986
82,349
86,335
$
(4,879)
87,228
$
82,349
(continued)
57
RETAIL PROPERTIES OF AMERICA, INC.
Consolidated Statements of Cash Flows
(in thousands)
Year Ended December 31,
2017
2018
2016
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 into 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
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
$
$
$
$
$
$
$
$
$
$
$
$
$
70,564
35,387
16,007
530
41
$
$
$
$
$
78,327
36,311
7,902
547
750
$
$
$
$
$
101,789
39,222
9,286
952
4,816
— $
— $
17,261
11,997
$
— $
—
— $
439,403
— $
379,435
$
$
12,430
10,695
(25,450) $ (198,984) $ (375,022)
(40,989)
(15,451)
19,259
11,156
—
15,316
—
2,524
(25,450) $ (200,755) $ (381,436)
—
—
—
—
156,248
11,279
(6,851)
—
—
—
37,211
197,887
$
$
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
See accompanying notes to consolidated financial statements
58
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 open-air shopping centers, including properties with a mixed-use component. As of December 31,
2018, the Company owned 105 retail operating properties 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 capitalization of development costs, provision for impairment, including estimates of holding periods,
capitalization rates and discount rates (where applicable), 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, 2018 is summarized below:
Retail operating properties
Redevelopment projects:
Circle East – redevelopment portion (a)
Plaza del Lago – multi-family rental units (b)
Carillon (c)
Total number of properties
Property Count
105
—
—
1
106
(a) This portion of the property was formerly known as Towson Circle and the operating portion, which was formerly known
as Towson Square, is included within the property count for retail operating properties.
(b) The Company began redevelopment activities on the multi-family rental units at the property during the three months ended
December 31, 2018. The operating portion of this property is included within the property count for retail operating properties.
(c) The Company has begun activities in anticipation of future redevelopment of this property, which was formerly known as
Boulevard at the Capital Centre.
During the year ended December 31, 2018, the Company entered into two joint venture agreements related to expansion and
redevelopment projects at One Loudoun Downtown and Carillon. The joint ventures are considered VIEs and the Company is
considered the primary beneficiary. As such, the Company has consolidated these joint ventures and presented the joint venture
partners’ interests as noncontrolling interest.
59
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(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 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.
If an acquisition was considered a business combination, the Company allocates the purchase price of each acquired investment
property based upon the estimated acquisition date fair value of the individual assets acquired and liabilities assumed, which
generally included (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 (loss) 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.
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 $21,014, $25,284 and $27,443 for the years ended December 31, 2018,
2017 and 2016, 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 $4,403, $4,696 and $4,406 for the years ended December 31,
2018, 2017 and 2016, respectively, was recorded as a reduction to rental income. Amortization pertaining to below market lease
intangibles of $9,870, $8,009 and $7,396 for the years ended December 31, 2018, 2017 and 2016, 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 operating expenses. Amortization pertaining to above market ground lease intangibles of $560, $560 and $560 for the years
ended December 31, 2018, 2017 and 2016, respectively, was recorded as a reduction to operating expenses.
60
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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, 2018:
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)
2019
2020
2021
2022
2023
Thereafter
Total
$
$
$
$
2,636
12,528
15,164
(5,946)
(560)
(6,506)
$
$
$
$
2,042
10,358
12,400
(5,691)
(560)
(6,251)
$
$
$
$
1,549
9,400
10,949
(5,351)
(560)
(5,911)
$
$
$
$
1,280
8,335
9,615
(5,055)
(560)
(5,615)
$
$
$
$
1,102
7,154
8,256
(4,824)
(560)
(5,384)
$
$
$
$
3,224
37,482
40,706
(47,778)
(9,098)
(56,876)
$
$
$
$
11,833
85,257
97,090
(74,645)
(11,898)
(86,543)
(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 $272,680 and $54,085 of accumulated
amortization, respectively, as of December 31, 2018.
(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 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 $384, $368 and $423 of internal leasing incentives, all of which were
incremental to signed leases, during the years ended December 31, 2018, 2017 and 2016, 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 reduction 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 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
61
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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 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, 2018, 2017 and 2016:
2018
Year Ended December 31,
2017
2016
Impairment of consolidated properties (a)
$
2,079
$
67,003
$
20,376
(a) Included within “Provision for impairment of investment properties” in the accompanying consolidated statements of operations and other
comprehensive (loss) income.
The Company’s assessment of impairment as of December 31, 2018 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 2019 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 development, (ii) ground-up developments
and (iii) redevelopment properties undergoing significant renovations and improvements. As of December 31, 2018, the Company
had $25,450 in land held for development. 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 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 $2,128, $1,202 and $302 of indirect project costs related to expansions and
62
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
redevelopment projects and $2,032, $1,187 and $1,152 related to capital upgrades and tenant improvements during the years ended
December 31, 2018, 2017 and 2016, respectively.
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. No properties qualified for held for sale accounting treatment as of December 31, 2018 and one property was classified as
held for sale as of December 31, 2017.
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.
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 (loss) 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.
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 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
2018
December 31,
2017
$
$
14,722
4,879
19,601
$
$
25,185
61,150
86,335
$
$
2016
53,119
29,230
82,349
63
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Derivative and Hedging Activities: Derivatives are recorded in the accompanying consolidated balance sheets at fair value within
“Other assets, net” and “Other liabilities.” The Company uses interest rate derivatives to manage differences in the amount, timing
and duration of the 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 fair value of a derivative that is designated and that qualifies as a cash flow hedge are recorded in “Accumulated other
comprehensive (loss) income” and are reclassified into interest expense as interest payments are made on the Company’s variable
rate debt. As of December 31, 2018, the balance in accumulated other comprehensive (loss) income relating to derivatives was
$1,522.
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 entity’s control. 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, 2018 and 2017.
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 that 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
64
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 $1,721, $2,021 and $3,339 for the years ended December 31, 2018, 2017 and 2016, respectively.
The Company recorded contingent percentage rental income and percentage rental income in lieu of base rent of $3,426, $4,451
and $4,082 for the years ended December 31, 2018, 2017 and 2016, 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.
Beginning January 1, 2018, gains on sale of investment properties are recognized, and the related real estate derecognized, when
(i) the parties to the sale contract have approved the contract and are committed to perform their respective obligations; (ii) the
Company can identify each party’s rights regarding the property transferred; (iii) the Company can identify the payment terms for
the property transferred; (iv) the contract has commercial substance (that is, the risk, timing or amount of the entity’s future cash
flows is expected to change as a result of the contract); and (v) the Company has satisfied its performance obligations by transferring
control of the property. Typically, the timing of payment and satisfaction of performance obligations occur simultaneously on the
disposition date upon transfer of the property’s ownership.
Prior to January 1, 2018, profits from sales of real estate were recognized under the full accrual method when the following criteria
were met: (i) a sale was consummated; (ii) the buyer’s initial and continuing investments were adequate to demonstrate a
commitment to pay for the property; (iii) the Company’s receivable, if applicable, was not subject to future subordination; (iv) the
Company had transferred to the buyer the usual risks and rewards of ownership; and (v) the Company did not have substantial
continuing involvement with the property. The Company sold 10, 47 and 46 consolidated investment properties during the years
ended December 31, 2018, 2017 and 2016, 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 2015 through 2018 remain subject
to examination by federal and various state tax jurisdictions.
65
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Segment Reporting: The Company’s chief operating decision maker, which is comprised of its Chief Executive Officer, Chief
Operating Officer and Chief Financial 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.
Recently Adopted Accounting Pronouncements – Prior to 2019
Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with
Customers, on a modified retrospective basis. This new guidance replaces 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. Substantially all
of the Company’s revenue follows the existing leasing guidance and is not impacted by the adoption of this standard; however,
the sale of investment property is required to follow the new guidance as well as ASU 2017-05, Other Income–Gains and Losses
from the Derecognition of Nonfinancial Assets discussed below. The sale of investment property is reported as “gain on sales of
investment properties” in the accompanying consolidated statements of operations and other comprehensive (loss) income. The
adoption of ASU 2014-09, Revenue from Contracts with Customers, did not have a material effect on the Company’s consolidated
financial statements as substantially all of its revenue falls outside of the scope of this guidance.
Effective January 1, 2018, the Company adopted ASU 2017-05, Other Income–Gains and Losses from the Derecognition of
Nonfinancial Assets, on a modified retrospective basis. This 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 sale
of investment property is reported as “gain on sales of investment properties” in the accompanying consolidated statements of
operations and other comprehensive (loss) income. The adoption of this pronouncement did not have a material effect on the
Company’s consolidated financial statements as the adoption of the new guidance did not result in a change to the timing or amount
of gain recognized upon disposition as compared to the previous guidance.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments – Overall, on a prospective basis. This new
guidance requires 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 no longer requires disclosure
of the methods and significant assumptions used, including any changes, to estimate fair value. In addition, companies are required
to disclose all financial assets and financial liabilities grouped by (i) measurement category and (ii) form of financial instrument.
The adoption of this pronouncement did not have a material effect on the Company’s consolidated financial statements.
The Company elected to early adopt ASU 2017-12, Derivatives and Hedging, as of January 1, 2018. This new guidance amends
the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results in an entity’s
financial statements. It also eliminates the requirement to separately measure and report hedge ineffectiveness. Entities are now
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. Beginning January 1, 2018, disclosure
requirements have been modified to include a tabular disclosure related to the effect of hedging instruments on the income statement
and the requirement to disclose the ineffective portion of the change in fair value of such instruments has been eliminated. The
amended presentation and disclosure guidance is required only prospectively, as such, disclosures related to periods prior to January
1, 2018 were not impacted. The adoption of this pronouncement resulted in a cumulative effect adjustment of $12 to accumulated
other comprehensive (loss) income and accumulated distributions in excess of earnings related to eliminating the separate
measurement of ineffectiveness.
Recently Adopted Accounting Pronouncements – 2019
In February 2016, the FASB issued ASU 2016-02, Leases. This new guidance, including related ASUs that have subsequently
been issued, was effective January 1, 2019 and requires lessees to recognize a liability to make lease payments and a right-of-use
66
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(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 are permitted to make an accounting policy election by class of underlying asset to not recognize
lease liabilities and lease assets. The guidance allows lessors to make an accounting policy election, by class of underlying asset,
to not separate non-lease components from lease components if certain requirements are met. The guidance also provides an
optional transition method which would allow entities to initially apply the new guidance in the period of adoption, recognizing
a cumulative-effect adjustment to the opening balance of retained earnings, if necessary, and provides a package of three practical
expedients whereby companies are not required to reassess (i) whether any expired or existing contracts are or contain leases, (ii)
the lease classification (operating vs. capital/financing leases) for any expired or existing leases and (iii) initial direct costs for any
existing leases (Package of Three Practical Expedients). Further, the guidance requires (i) lease-related revenues to be presented
in a single line item rather than the current presentation which separates them between “rental income” and “tenant recovery
income” on the consolidated statements of operations and other comprehensive (loss) income and (ii) bad debt expense to be
presented as an adjustment to revenue rather than the current presentation within “operating expenses” on the consolidated
statements of operations and other comprehensive (loss) income.
Upon adoption, the Company expects to recognize a lease liability and a ROU asset of approximately $95,000 to $110,000 for
operating leases where it is the lessee, such as ground leases and office leases. The ROU asset will be presented net of the Company’s
existing straight-line ground rent liability of $31,030 and the Company’s acquired ground lease intangible liability of $11,898. For
leases with a term of 12 months or less, the Company has made an accounting policy election to not recognize lease liabilities and
lease assets. For leases where the Company is the lessor, the accounting for lease components is largely unchanged from existing
GAAP and the Company has elected the practical expedient to not separate non-lease components from lease components. Only
incremental direct leasing costs may be capitalized under the new guidance, which is consistent with the Company’s previous
policies, and as such, will not have any effect on the Company’s consolidated financial statements at adoption. The Company
adopted this new guidance on January 1, 2019, applied the requirements as of that date, elected the Package of Three Practical
Expedients and expects to present income related to leases as a single line item, net of bad debt expense, on the consolidated
statements of operations and other comprehensive (loss) income beginning in 2019. The guidance regarding capitalization of
leasing costs did not have any effect on the Company’s consolidated financial statements.
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging. Due to the Company’s early adoption of ASU 2017-12
discussed above, this new guidance is effective January 1, 2019 and permits use of the Overnight Index Swap (OIS) Rate based
on the Secured Overnight Financing Rate (SOFR) as a U.S. benchmark interest rate for hedge accounting purposes. SOFR represents
the fifth permissible U.S. benchmark rate in addition to the following current eligible benchmark interest rates: (i) direct Treasury
obligations of the U.S. government (UST), (ii) the London Interbank Offered Rate (LIBOR) swap rate, (iii) the OIS Rate based
on the Fed Funds Effective Rate and (iv) the Securities Industry and Financial Markets Association (SIFMA) Municipal Swap
Rate. The adoption of this pronouncement on January 1, 2019 did not have any effect on the Company’s consolidated financial
statements as the Company did not change its benchmark rate.
Recently Issued Accounting Pronouncements
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. In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial
Instruments – Credit Losses, which clarifies that receivables arising from operating leases are not within the scope of this new
guidance. 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.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement. This new guidance is effective January 1, 2020, with
early adoption permitted, and provides new, and in some cases eliminates or modifies the existing disclosure requirements on fair
value measurements. Public entities will now be required to disclose the following: (i) the changes in unrealized gains and losses
for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting
period and (ii) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements.
In addition, public entities will no longer be required to disclose the following: (i) the amount of and reasons for transfers between
Level 1 and Level 2 of the fair value hierarchy, (ii) the policy for timing of transfers between levels and (iii) the valuation processes
67
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
for Level 3 fair value measurements. The new pronouncement also clarifies and modifies certain existing provisions to promote
the appropriate exercise of discretion by entities when considering fair value measurement disclosures and clarifies that materiality
is an appropriate consideration when evaluating disclosure requirements. As permitted by the new pronouncement, the Company
has removed the discussion of its valuation processes for Level 3 fair value measurements in this Form 10-K for the year ended
December 31, 2018. No other disclosures were removed as the Company did not have any transfers between levels of the fair
value hierarchy during the current and comparative periods. The Company expects to adopt the new disclosures on a prospective
basis as of January 1, 2020.
(3) ACQUISITIONS AND DEVELOPMENTS IN PROGRESS
During the year ended December 31, 2018, the Company acquired One Loudoun Uptown for an acquisition price of $25,000. The
58-acre land parcel, of which 32 acres are developable, is located adjacent to One Loudoun Downtown, the Company’s multi-
tenant retail operating property in Ashburn, Virginia. The acquisition price does not include capitalized closing costs and adjustments
totaling $450. The acquired land parcel is classified as land held for development and is included in “Developments in progress”
in the accompanying consolidated balance sheets. The total number of properties in the Company’s portfolio was not affected by
this transaction.
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
$
January 25, 2017
Carillon – 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
88,000
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 two consolidated VIEs and was used to facilitate a 1031 Exchange.
(b) The 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 multi-family rental 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.
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RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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
(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 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 (loss) 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 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 following table summarizes the acquisition date values, before prorations, the Company recorded in conjunction with the
acquisitions completed during the years ended December 31, 2018, 2017 and 2016 discussed above:
Land
Developments in progress
Building and other improvements, net
Acquired lease intangible assets (a)
Acquired lease intangible liabilities (b)
Other liabilities
Mortgages payable, net (c)
Net assets acquired
2018
2017
2016
—
25,450
—
—
—
—
—
25,450
$
$
50,876
—
148,108
15,608
(8,095)
(1,076)
—
205,421
$
$
106,947
—
268,075
41,002
(8,258)
—
(15,316)
392,450
$
$
(a) The weighted average amortization period for acquired lease intangible assets is seven years and nine years for acquisitions completed
during the years ended December 31, 2017 and 2016, respectively.
(b) The weighted average amortization period for acquired lease intangible liabilities is 13 years and 18 years for acquisitions completed during
the years ended December 31, 2017 and 2016, 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 2018 and 2017 were considered asset
69
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
acquisitions and, as such, transaction costs were capitalized upon closing. Transaction costs related to acquisitions that were
accounted for as business combinations totaling $913 for the year ended December 31, 2016 were expensed as incurred and are
included in “General and administrative expenses” in the accompanying consolidated statements of operations and other
comprehensive (loss) income. In addition, total revenues of $87,161 and net income attributable to common shareholders of $22,283
are included in the Company’s consolidated statements of operations and other comprehensive (loss) income for the year ended
December 31, 2016 from the properties acquired during the year ended December 31, 2016 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, 2016. 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. Pro forma
financial information is not presented for acquisitions completed during 2017 and 2018 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 period 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
Developments in Progress
The Company’s developments in progress are as follows:
Property Name
Active developments/redevelopments:
Circle East – redevelopment portion (a)
Plaza del Lago – multi-family rental units (b)
Reisterstown Road Plaza (c)
Land held for development:
One Loudoun Uptown (d)
Total developments in progress
MSA
Baltimore
Chicago
Baltimore
Washington, D.C.
70
Year Ended
December 31, 2016
587,374
$
165,696
$
156,246
$
$
0.66
236,651
December 31,
2018
2017
$
$
22,383
536
—
22,919
25,450
48,369
$
$
23,306
—
9,716
33,022
—
33,022
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(a) During the year ended December 31, 2018, the Company received net proceeds of $11,820 in connection with the sale of air rights to a third
party to develop multi-family rental units at the redevelopment portion of Circle East, which is shown net in the “Developments in progress”
balance as of December 31, 2018 in the accompanying consolidated balance sheets.
(b) Redevelopment of the existing multi-family rental units commenced in 2018.
(c) During 2018, this redevelopment project was placed in service and reclassified into “Building and other improvements” in the accompanying
consolidated balance sheets.
(d) During 2018, the Company acquired One Loudoun Uptown, a 58-acre land parcel, of which 32 acres are developable.
Variable Interest Entities
During the year ended December 31, 2018, the Company entered into two joint ventures related to expansion and redevelopment
projects at One Loudoun Downtown and Carillon, of which the Company owns 90% and 95%, respectively. The joint ventures
are considered VIEs and the Company is considered the primary beneficiary for each joint venture, as it has a controlling financial
interest in each. As such, it has consolidated these joint ventures and presented the joint venture partners’ interests as noncontrolling
interests. The projects are in the predevelopment stage and each is currently being funded evenly by the Company and the respective
joint venture partner. As of December 31, 2018, the Company had recorded $414 and $422 of predevelopment costs, which are
included in “Other assets, net” in the accompanying consolidated balance sheets, related to the expansion and redevelopment
projects at One Loudoun Downtown and Carillon, respectively. No income was attributed to the noncontrolling interests during
the year ended December 31, 2018.
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
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.
During 2017 and 2016, prior to the completion of the 1031 Exchanges, the Company was deemed to be the primary beneficiary
of the VIEs related to the 1031 Exchanges as it had the ability to direct the activities of the VIEs that most significantly impacted
their economic performance and it had all of the risks and rewards of ownership. Accordingly, the Company consolidated the VIEs
related to the 1031 Exchanges. No value or income was attributed to the noncontrolling interests during the years ended December
31, 2017 and 2016. The assets of the VIEs related to the 1031 Exchanges consisted of the investment properties that were operated
by the Company.
71
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, 2018:
Date
Property Name
January 19, 2018
Crown Theater
February 15, 2018
Cranberry Square
Property Type
Single-user retail
Multi-tenant retail
March 7, 2018
Rite Aid Store (Eckerd)–Crossville, TN
Single-user retail
March 20, 2018
Home Depot Plaza (b)
March 21, 2018
Governor's Marketplace (c)
Multi-tenant retail
Multi-tenant retail
March 28, 2018
Stony Creek I & Stony Creek II (d)
Multi-tenant retail
April 19, 2018
May 31, 2018
CVS Pharmacy – Lawton, OK
Single-user retail
Schaumburg Towers
Office
December 28, 2018 Orange Plaza (Golfland Plaza)
Multi-tenant retail
Square
Footage
Consideration
Aggregate
Proceeds, Net (a)
Gain
74,200
$
6,900
$
6,350
$
195,200
13,800
135,600
243,100
204,800
10,900
895,400
58,200
23,500
1,800
16,250
23,500
32,800
1,600
86,600
8,450
23,163
1,768
15,873
22,400
32,078
1,596
73,315
7,566
2,952
10,174
157
—
8,836
11,628
—
—
—
1,831,200
$
201,400
$
184,109
$
33,747
(a) Aggregate proceeds are net of transaction costs, as well as capital and tenant-related costs credited to the buyer at close, as applicable, and
exclude $169 of condemnation proceeds, which did not result in any additional gain recognition.
(b) The Company repaid a $10,750 mortgage payable in conjunction with the disposition of the property.
(c) The Company recorded an additional gain on sale of $1,407 during the three months ended September 30, 2018 upon satisfaction of
performance obligations associated with escrow agreements executed upon disposition of the property.
(d) The terms of the disposition of Stony Creek I and Stony Creek II were negotiated as a single transaction.
During the year ended December 31, 2018, the Company also received net proceeds of $11,820 and recognized a gain of $2,179
in connection with the sale of air rights at the redevelopment portion of Circle East. In addition, the Company received net proceeds
of $1,789 and recognized a gain of $1,285 in connection with the sale of the first phase of a land parcel, which included rights to
develop eight residential units, at One Loudoun Downtown. The aggregate proceeds from the property dispositions and other
transactions during the year ended December 31, 2018 totaled $197,887, with aggregate gains of $37,211.
As of December 31, 2018, no properties qualified for held for sale accounting treatment. Crown Theater was classified as held for
sale as of December 31, 2017 and was sold on January 19, 2018.
The following table presents the assets and liabilities associated with the investment property classified as held for sale as of
December 31, 2017:
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
$
$
$
$
2,791
(27)
2,764
883
3,647
—
—
72
Rite Aid Store (Eckerd) – Columbia, SC
Single-user retail
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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
Century III Plaza
December 20, 2017
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
54,786
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
53,740
—
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
—
25,832
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
269,800
5,810,700
$
917,808
$
896,301
$ 333,965
73
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(a) Aggregate proceeds are net of transaction costs, as well as capital and tenant-related costs credited to the buyer at close, as applicable, 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 were temporarily restricted related to potential 1031 Exchanges and are
included in “Other assets, net” in the accompanying consolidated balance sheets: (i) $15,643 for Irmo Station, (ii) $23,255 for Northwoods
Center and (iii) $15,189 for Quakertown.
(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 Carillon on January 25, 2017 (refer
to Note 3 to the consolidated financial statements for further discussion of this transaction). The aggregate proceeds 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.
During the year ended December 31, 2016, the Company sold 46 properties aggregating 3,013,900 square feet for total consideration
of $540,362. The dispositions and the sale of a single-user outparcel resulted in aggregate proceeds of $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.
(5) EQUITY COMPENSATION PLANS
On May 24, 2018, the Company’s shareholders approved the Company’s Amended and Restated 2014 Long-Term Equity
Compensation Plan (Amended 2014 Plan), which amends and restates the Company’s 2014 Long-Term Equity Compensation
Plan. The Amended 2014 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 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, 2016, 2017
and 2018:
Balance as of January 1, 2016
Shares granted (a)
Shares vested
Shares forfeited
Balance as of December 31, 2016
Shares granted (a)
Shares vested
Shares forfeited
Balance as of December 31, 2017
Shares granted (a)
Shares vested
Shares forfeited
Balance as of December 31, 2018 (b)
Unvested
Restricted
Shares
788
274
(510)
(10)
542
285
(291)
(40)
496
382
(426)
(12)
440
Weighted Average
Grant Date Fair
Value per
Restricted Share
$
$
$
$
$
$
$
$
$
$
$
$
$
15.52
14.76
15.38
14.70
15.28
14.60
15.44
15.12
14.81
12.81
14.52
13.26
13.40
(a) Shares granted in 2016, 2017 and 2018 vest over periods ranging from 0.4 years to 3.9 years, one year to three years and 0.9 years to three
years, respectively, in accordance with the terms of applicable award agreements.
(b) As of December 31, 2018, total unrecognized compensation expense related to unvested restricted shares was $1,955, which is expected to
be amortized over a weighted average term of 1.2 years.
74
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
In addition, during the years ended December 31, 2018, 2017 and 2016, 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)
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 on the earned awards during the performance
period. 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, 2016, 2017 and 2018:
RSUs eligible for future conversion as of January 1, 2016
RSUs granted (a)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2016
RSUs granted (b)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2017
RSUs granted (c)
Conversion of RSUs to common stock and restricted shares (d)
RSUs ineligible for conversion
RSUs eligible for future conversion as of December 31, 2018 (e) (f)
Unvested
RSUs
Weighted Average
Grant Date Fair
Value per RSU
174
246
(29)
391
253
(89)
555
291
(141)
(56)
649
$
$
$
$
$
$
$
$
$
$
$
14.20
13.85
13.56
14.02
15.52
14.68
14.60
14.36
14.10
15.36
14.54
(a) 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%.
(b) 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%.
(c) Assumptions and inputs as of the grant dates included a weighted average risk-free interest rate of 2.04%, 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 5.00%.
(d) On February 5, 2018, 141 RSUs converted into 42 shares of common stock and 65 restricted shares that vested on December 31, 2018, 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 representing the dividends that would
have been paid on the earned awards during the performance period.
(e) As of December 31, 2018, total unrecognized compensation expense related to unvested RSUs was $4,448, which is expected to be amortized
over a weighted average term of 2.3 years.
(f) Subsequent to December 31, 2018, 192 RSUs converted into 82 shares of common stock and 125 restricted shares with a one year vesting
term after applying a conversion rate of 107.5% based upon the Company’s TSR relative to the TSRs of its Peer Companies, for the
performance period that concluded on December 31, 2018. An additional 29 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, 2018, 2017 and 2016, the Company recorded compensation expense of $6,992, $6,059 and
$7,209, 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, 2018 is compensation expense of $330 related to the
accelerated vesting of 23 restricted shares and remaining amortization related to the 29 RSUs that remain eligible for future
75
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
conversion in conjunction with the departure of the Company’s former Executive Vice President, General Counsel and Secretary.
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 into compensation expense. The total
fair value of restricted shares vested during the years ended December 31, 2018, 2017 and 2016 was $5,091, $4,232 and $7,596,
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
been granted under the plan. As of December 31, 2018, options to purchase 22 shares of common stock remained outstanding and
exercisable. The Company did not grant any options in 2018, 2017 or 2016 and no compensation expense related to stock options
was recorded during the years ended December 31, 2018, 2017 and 2016, 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 (loss) 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 (loss) 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 (loss) income. Such taxes remitted to governmental authorities,
which are reimbursed by tenants, were $545, $1,414 and $1,986 for the years ended December 31, 2018, 2017 and 2016, 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:
2019
2020
2021
2022
2023
Thereafter
Total
Minimum
Lease Payments
351,145
$
314,081
274,135
227,417
180,199
569,758
1,916,735
$
The remaining lease terms range from less than one year to approximately 64 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
76
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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.
The Company leases land under non-cancellable operating leases at certain of its properties expiring in various years from 2035
to 2073, exclusive of any available option periods. In addition, the Company leases office space for certain management offices
and its corporate offices. The following table summarizes rent expense included in the accompanying consolidated statements of
operations and other comprehensive (loss) income, including straight-line rent expense.
Ground lease rent expense (a)
Office rent expense (b)
2018
Year Ended December 31,
2017
$
$
7,638
1,293
$
$
9,188
1,311
$
$
2016
10,464
1,317
(a) Included in “Operating expenses” in the accompanying consolidated statements of operations and other comprehensive (loss) income.
Includes straight-line ground rent expense of $2,404, $2,710 and $3,253 for the years ended December 31, 2018, 2017 and 2016, 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 (loss) income.
Minimum future rental obligations to be paid under the ground and office leases, including fixed rental increases, are as follows:
2019
2020
2021
2022
2023
Thereafter
Total
Minimum
Lease Obligations
6,448
$
6,656
6,716
6,761
6,769
279,916
313,266
$
(7) MORTGAGES PAYABLE
The following table summarizes the Company’s mortgages payable:
Fixed rate mortgages payable (a)
$
205,450
4.65%
4.5
$
287,238
4.99%
5.2
December 31, 2018
December 31, 2017
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
775
(536)
(369)
1,024
(579)
(615)
$
205,320
$
287,068
(a) The fixed rate mortgages had interest rates ranging from 3.75% to 7.48% and 3.75% and 8.00% as of December 31, 2018 and 2017,
respectively.
During the year ended December 31, 2018, the Company repaid mortgages payable in the total amount of $77,987, which had a
weighted average fixed interest rate of 5.89%, incurred $5,791 of debt prepayment fees and made scheduled principal payments
of $3,801 related to amortizing loans. Certain of the Company’s mortgages payable require monthly payments of principal and
interest. The Company’s properties and the related tenant leases are pledged as collateral for its mortgages payable.
77
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Debt Maturities
The following table summarizes the scheduled maturities and principal amortization of the Company’s indebtedness as of
December 31, 2018, 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 2019 debt activity.
2019
2020
2021
2022
2023
Thereafter
Total
Debt:
Fixed rate debt:
Mortgages payable (a)
Fixed rate term loans (b)
Unsecured notes payable (c)
Total fixed rate debt
3,090
3,228
$
3,090
$
3,228
$
22,080
$ 113,946
$
31,758
$
31,348
$
205,450
—
—
—
—
250,000
100,000
372,080
—
—
200,000
—
113,946
231,758
—
600,000
631,348
450,000
700,000
1,355,450
Variable rate debt:
Variable rate revolving line of credit
Total debt (d)
Weighted average interest rate on debt:
Fixed rate debt
Variable rate debt (e)
Total
—
3,090
$
—
3,228
—
$ 372,080
273,000
$ 386,946
—
$ 231,758
—
631,348
$
273,000
$ 1,628,450
$
4.47%
—
4.47%
4.48%
—
4.48%
3.56%
—
3.56%
4.90%
3.57%
3.96%
4.06%
—
4.06%
4.20%
—
4.20%
4.06%
3.57%
3.98%
(a) Excludes mortgage premium of $775 and discount of $(536), net of accumulated amortization, as of December 31, 2018.
(b) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage grid through
January 5, 2021. As of December 31, 2018, the applicable credit spread was 1.20%. In addition, $200,000 of LIBOR-based variable rate
debt has been swapped to a fixed rate of 2.85% plus a credit spread based on a leverage grid through November 22, 2023. As of December 31,
2018, the applicable credit spread was 1.20%.
(c) Excludes discount of $(734), net of accumulated amortization, as of December 31, 2018.
(d) The weighted average years to maturity of consolidated indebtedness was 4.7 years as of December 31, 2018. Total debt excludes capitalized
loan fees of $(5,906), net of accumulated amortization, as of December 31, 2018, which are included as a reduction to the respective debt
balances.
(e) Represents interest rates as of December 31, 2018.
The Company plans on addressing its debt maturities through a combination of cash flows generated from operations, working
capital, capital markets transactions and its unsecured revolving line of credit.
(8) UNSECURED NOTES PAYABLE
The following table summarizes the Company’s unsecured notes payable:
Unsecured Notes Payable
Maturity Date
December 31, 2018
December 31, 2017
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
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
(734)
(2,904)
4.58%
4.00%
4.08%
4.24%
4.19%
150,000
250,000
100,000
100,000
700,000
(853)
(3,399)
Total
$
696,362
$
695,748
4.12%
4.58%
4.00%
4.08%
4.24%
4.19%
78
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
Notes Due 2026 and 2028
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 described below); 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 (the Indenture), governing the Notes Due 2025 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.
As of December 31, 2018, management believes the Company was in compliance with the financial covenants under the Indenture
and the note purchase agreements.
79
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(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, 2018
December 31, 2017
Maturity Date
Balance
Interest
Rate
Balance
Interest
Rate
Unsecured credit facility term loan due 2021 – fixed rate (a)
January 5, 2021
$
250,000
3.20% $
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
Unsecured credit facility revolving line of credit –
variable rate (c)
April 22, 2022
$
$
—%
4.05%
—
200,000
450,000
(2,633)
447,367
3.30%
2.93%
2.96%
250,000
100,000
200,000
550,000
(2,730)
$
547,270
273,000
3.57% $
216,000
2.92%
(a) $250,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.00% plus a credit spread based on a leverage grid through
January 5, 2021. As of December 31, 2018, the leverage grid ranged from 1.20% to 1.70% and the applicable credit spread was 1.20%. As
of December 31, 2017, the leverage grid ranged from 1.30% to 2.20% and the applicable credit spread was 1.30%.
(b) $200,000 of LIBOR-based variable rate debt has been swapped to a fixed rate of 2.85% as of December 31, 2018, plus a credit spread based
on a leverage grid through November 22, 2023. As of December 31, 2018, the leverage grid ranged from 1.20% to 1.85% and the applicable
credit spread was 1.20%. As of December 31, 2017, $200,000 of LIBOR-based variable rate debt was swapped to a fixed rate of 1.26%
plus a credit spread based on a leverage grid. As of December 31, 2017, the leverage grid ranged from 1.70% to 2.55% and the applicable
credit spread was 1.70%.
(c) Excludes capitalized loan fees, which are included in “Other assets, net” in the accompanying consolidated balance sheets.
Unsecured Credit Facility
On April 23, 2018, the Company entered into its fifth amended and restated unsecured credit agreement (Unsecured Credit
Agreement) with a syndicate of financial institutions led by Wells Fargo Bank, National Association serving as syndication agent
and KeyBank National Association serving as administrative agent to provide for an unsecured credit facility aggregating
$1,100,000 (Unsecured Credit Facility). The Unsecured Credit Facility consists of an $850,000 unsecured revolving line of credit
and a $250,000 unsecured term loan and is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with
the Unsecured Credit Agreement, the Company may elect to convert to an investment grade pricing grid. As of December 31,
2018, 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
Maturity
Date
1/5/2021
Extension
Option
Extension
Fee
Credit
Spread
Facility Fee
Credit
Spread
Facility Fee
N/A
N/A
1.20% - 1.70%
N/A
0.90% - 1.75%
N/A
$850,000 unsecured revolving line of credit
4/22/2022
2 six month
0.075%
1.05% - 1.50% 0.15% - 0.30% 0.825%-1.55% 0.125% - 0.30%
Leverage-Based Pricing
Investment Grade Pricing
The Unsecured Credit Facility has a $500,000 accordion option that allows the Company, at its election, to increase the total
Unsecured Credit Facility up to $1,600,000, 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
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, 2018, management believes the Company was in compliance with
the financial covenants and default provisions under the Unsecured Credit Agreement.
80
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The Company previously had a $1,200,000 unsecured credit facility that consisted of the following: (i) a $750,000 unsecured
revolving line of credit that bore interest at a rate of LIBOR plus a credit spread ranging from 1.35% to 2.25% and was scheduled
to mature on January 5, 2020; (ii) a $250,000 unsecured term loan that bore interest at a rate of LIBOR plus a credit spread ranging
from 1.30% to 2.20% and was scheduled to mature on January 5, 2021; and (iii) a $200,000 unsecured term loan that bore interest
at a rate of LIBOR plus a credit spread ranging from 1.45% to 2.20% and was scheduled to mature on May 11, 2018. During the
year ended December 31, 2017, the Company repaid $100,000 of the unsecured term loan due 2018 and in conjunction with the
execution of the Unsecured Credit Agreement in 2018, the Company repaid the remaining $100,000 balance of the unsecured term
loan due 2018.
Term Loan Due 2023
On January 3, 2017, the Company received funding on a seven-year $200,000 unsecured term loan (Term Loan Due 2023) with
a group of financial institutions, which closed during the year ended December 31, 2016 and was amended on November 20, 2018.
The Term Loan Due 2023 is priced on a leverage grid at a rate of LIBOR plus a credit spread. In accordance with the amended
term loan agreement (Term Loan Agreement), the Company may elect to convert to an investment grade pricing grid. As of
December 31, 2018, 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
1.20% – 1.85%
Investment Grade Pricing
Credit Spread
0.85% – 1.65%
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 and (ii) the Company’s ability to obtain additional lender commitments.
Prior to the November 2018 amendment, the term loan bore interest at a rate of LIBOR plus a credit spread ranging from 1.70%
to 2.55%.
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, 2018, 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, 2018, the Company used five interest rate swaps to hedge the variable cash flows associated with variable
rate debt. Changes in fair value of the derivatives that are designated and that qualify as cash flow hedges are recorded in
“Accumulated other comprehensive (loss) income” and are reclassified into 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 $705 will be reclassified as a
decrease to interest expense. Prior to January 1, 2018, only the effective portion of changes in fair value of the derivatives that
were designated and that qualified as cash flow hedges was recorded in “Accumulated other comprehensive (loss) income” and
the ineffective portion of the change in fair value of the derivatives was recognized directly in earnings.
81
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The following table summarizes the Company’s interest rate swaps as of December 31, 2018, which effectively convert one-month
floating rate LIBOR to a fixed rate:
Effective Date
December 29, 2017
December 29, 2017
December 29, 2017
November 23, 2018
November 23, 2018
Notional
Fixed
Interest Rate
$
$
$
$
$
100,000
100,000
50,000
100,000
100,000
2.00%
2.00%
2.00%
2.85%
2.85%
Maturity Date
January 5, 2021
January 5, 2021
January 5, 2021
November 22, 2023
November 22, 2023
The Company previously had two interest rate swaps with notional amounts totaling $200,000 that matured on November 22,
2018.
The following table summarizes the Company’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
Interest Rate Derivatives
Interest rate swaps
December 31, 2018
5
December 31, 2017
5
December 31, 2018
450,000
$
December 31, 2017
450,000
$
Number of Instruments
Notional
The table below presents the estimated fair value of the Company’s derivative financial instruments as well as their classification
in the accompanying consolidated balance sheets. The valuation techniques used are described in Note 15 to the consolidated
financial statements.
Derivatives
December 31, 2018
December 31, 2017
Balance Sheet
Location
Fair Value
Balance Sheet
Location
Fair Value
Derivatives designated as cash flow hedges:
Interest rate swaps
Interest rate swaps
Other assets, net
Other liabilities
$
$
2,324
3,846
Other assets, net
N/A
$
$
1,086
—
The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated
statements of operations and other comprehensive (loss) income for the year ended December 31, 2018:
Derivatives in
Cash Flow Hedging
Relationships
Amount of Loss
Recognized in Other
Comprehensive
Income on Derivative
2018
Location of Gain
Reclassified from
Accumulated Other
Comprehensive Income
(AOCI) into Income
Amount of Gain
Reclassified from
AOCI into Income
2018
Total Interest Expense
Presented in the Statements
of Operations in which
the Effects of Cash Flow
Hedges are Recorded
2018
Interest rate swaps
$
1,567
Interest expense
$
(1,041)
$
73,746
The following table presents the effect of the Company’s derivative financial instruments on the accompanying consolidated
statements of operations and other comprehensive (loss) income for the year ended December 31, 2017:
Derivatives in
Cash Flow
Hedging
Relationships
Amount of Gain
Recognized in Other
Comprehensive Income
on Derivative
(Effective Portion)
2017
Location of Gain
Reclassified from
AOCI into Income
(Effective Portion)
Amount of Gain
Reclassified from
AOCI into Income
(Effective Portion)
2017
Location of Loss
Recognized In
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
Amount of Loss
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
2017
Interest rate swaps
$
(985)
Interest expense
$
(633)
Other income, net
$
9
82
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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, 2018, the termination value of derivatives in a liability position, which includes accrued interest
but excludes any adjustment for non-performance risk, which the Company has deemed not significant, was $4,050. As of
December 31, 2018, the Company has not posted any collateral related to these agreements. If the Company had breached any of
these provisions as of December 31, 2018, it could have been required to settle its obligations under the agreements at their
termination value of $4,050.
(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 had the ability to issue and
sell shares of its Class A common stock, having an aggregate offering price of up to $250,000, from time to time. The Company
did not sell any shares under the ATM equity program during the years ended December 31, 2018, 2017 and 2016. The ATM equity
program expired in November 2018.
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. In December 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 following table presents activity under the Company’s common stock repurchase program during the years ended December 31,
2016, 2017 and 2018:
Year to date December 31, 2016
Year to date December 31, 2017
Year to date December 31, 2018
Number of
Common Shares
Repurchased
Average Price
per Share
Total
Repurchases
591
17,683
6,341
$
$
$
14.93
12.82
11.80
$
$
$
8,841
227,102
74,952
As of December 31, 2018, $189,105 remained available for repurchases under the common stock repurchase program.
83
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(12) EARNINGS PER SHARE
The following table summarizes the components used in the calculation of basic and diluted earnings per share (EPS):
Numerator:
Net income
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,
2017
2018
2016
$
77,640
—
77,640
(339)
$
251,491
(13,867)
237,624
(513)
$
166,817
(9,450)
157,367
(445)
$
77,301
$
237,111
$
156,922
Weighted average number of common shares outstanding
217,830 (a)
230,747 (b)
236,651 (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
— (d)
401 (e)
1 (d)
179 (f)
2 (d)
298 (g)
218,231
230,927
236,951
(a) Excludes 440 shares of unvested restricted common stock as of December 31, 2018, which equate to 535 shares on a weighted average
basis for the year ended December 31, 2018. These shares will continue to be excluded from the computation of basic EPS until contingencies
are resolved and the shares are released.
(b) 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 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 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.
(d) There were outstanding options to purchase 22, 38 and 41 shares of common stock as of December 31, 2018, 2017 and 2016, respectively,
at a weighted average exercise price of $17.34, $18.85 and $19.25, respectively. Of these totals, outstanding options to purchase 18, 32 and
35 shares of common stock as of December 31, 2018, 2017 and 2016, respectively, at a weighted average exercise price of $18.58, $20.19
and $20.55, 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, 2018, there were 649 RSUs eligible for future conversion upon completion of the performance periods (see Note 5 to
the consolidated financial statements), which equate to 658 RSUs on a weighted average basis for the year ended December 31, 2018. These
contingently issuable shares are a component of calculating diluted EPS.
(f) As of December 31, 2017, there were 555 RSUs eligible for future conversion upon completion of the performance periods, 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.
(g) 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.
(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
84
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
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, 2018, 2017 and
2016. 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, 2018 and 2017 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
2018
2017
$
$
2
3,939
6,170
467
10,578
(10,578)
—
—
—
$
$
2
5,751
6,125
469
12,347
(12,347)
—
—
—
The Company’s deferred tax assets and liabilities result from the activities of the TRS. As of December 31, 2018, the TRS had a
capital loss carryforward and a federal net operating loss carryforward of $18,757 and $29,380, respectively, which if not utilized,
will begin to expire in 2020 and 2031, respectively.
Differences between net income from the consolidated statements of operations and other comprehensive (loss) 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.
The following table reconciles the Company’s net income to REIT taxable income before the dividends paid deduction for the
years ended December 31, 2018, 2017 and 2016:
Net income attributable to the Company
Book/tax differences
REIT taxable income subject to 90% dividend requirement
2018
2017
2016
$
$
77,640
588
78,228
$
$
251,491
(59,220)
192,271
$
$
166,817
(50,950)
115,867
85
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
The Company’s dividends paid deduction for the years ended December 31, 2018, 2017 and 2016 is summarized below:
Distributions
Less: non-dividend distributions
Total dividends paid deduction attributable to earnings and profits
2018
2017
2016
$
$
116,725
(38,497)
78,228
$
$
192,271
—
192,271
$
$
166,285
(50,418)
115,867
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, 2018, 2017 and 2016 follows:
Preferred stock
Ordinary dividends
Capital gain distributions
Total distributions per share
Common stock
Ordinary dividends (a)
Non-dividend distributions
Capital gain distributions
Total distributions per share
2018
2017
2016
$
$
$
$
—
—
—
0.36
0.17
—
0.53
$
$
$
$
1.62
0.07
1.69
0.76
—
0.03
0.79
$
$
$
$
1.75
—
1.75
0.45
0.21
—
0.66
(a) The 2018 ordinary dividends are qualified REIT dividends that may be eligible for the 20% qualified business income deduction under
Section 199A of the Code.
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, 2018 or 2017 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, 2018. Returns for the calendar years 2015 through 2018 remain subject to examination by federal and various state
tax jurisdictions.
(14) PROVISION FOR IMPAIRMENT OF INVESTMENT PROPERTIES
As of December 31, 2018, the Company did not identify indicators of impairment at any of its properties. As of December 31,
2017 and 2016, 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 and 2016:
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
December 31,
2017
2016
(a)
6
1
1
4
(b)
7
2
2
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%
(a) Includes five properties which have subsequently been sold as of December 31, 2018.
(b) Includes five properties which have subsequently been sold as of December 31, 2018.
(c) Based upon the estimated holding period for each asset where an undiscounted cash flow analysis was performed.
86
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, 2018:
Property Name
Schaumburg Towers (a)
CVS Pharmacy – Lawton, OK (b)
Orange Plaza (Golfland Plaza) (c)
Property Type
Office
Single-user retail
Multi-tenant retail
Impairment Date
Various
March 31, 2018
December 28, 2018
Square
Footage
895,400
10,900
58,200
Provision for
Impairment of
Investment
Properties
$
$
1,116
200
763
2,079
Estimated fair value of impaired properties as of impairment date $
85,321
(a) The Company recorded an impairment charge on March 31, 2018 based upon the terms and conditions of an executed sales contract. This
property was classified as held for sale as of March 31, 2018 and was sold on May 31, 2018, at which time 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. The property was sold on
April 19, 2018.
(c) The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. The property was sold on
December 28, 2018.
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. The property was sold on
May 31, 2018.
(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. The property was sold on
March 20, 2018.
87
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. The property was sold
on October 27, 2017.
(d) The Company recorded an impairment charge upon re-evaluating the strategic alternatives for the property. The property was sold on January
19, 2018.
(e) The Company recorded an impairment charge based upon the terms and conditions of a bona fide purchase offer. The property was sold on
January 27, 2017.
The Company provides no assurance that material impairment charges with respect to its investment properties will not occur in
future periods.
(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
Derivative liability
December 31, 2018
December 31, 2017
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$
$
$
$
$
$
2,324
205,320
696,362
447,367
273,000
3,846
$
$
$
$
$
$
2,324
208,173
671,492
449,266
272,553
3,846
$
$
$
$
$
$
1,086
287,068
695,748
547,270
216,000
—
$
$
$
$
$
$
1,086
298,635
693,823
552,555
216,222
—
The carrying value of the derivative asset is included in “Other assets, net” and the carrying value of the derivative liability is
included in “Other liabilities” 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.
88
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
• 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, 2018
Derivative asset
Derivative liability
December 31, 2017
Derivative asset
Level 1
Level 2
Level 3
Total
Fair Value
$
$
$
—
—
—
$
$
$
2,324
3,846
1,086
$
$
$
—
—
—
$
$
$
2,324
3,846
1,086
Derivatives: The fair value of the derivative asset and derivative liability are determined using a discounted cash flow analysis
on the expected future cash flows of each derivative. This analysis uses 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 use Level 3 inputs, such as
estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of December 31,
2018 and 2017, 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 Company did not remeasure any assets to fair value on a nonrecurring basis as of December 31, 2018. The following table
presents the Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2017, 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 as a result of impairment charges recorded during the year ended December 31, 2017, except for those properties sold
prior to December 31, 2017. Methods and assumptions used to estimate the fair value of these assets as of December 31, 2017 are
described after the table.
Fair Value
Level 1
Level 2
Level 3
Total
Provision for
Impairment (a)
December 31, 2017
Investment properties
$
—
$
74,250 (b) $
—
$
74,250
$
50,077
(a) Excludes impairment charges recorded on investment properties sold prior to December 31, 2017.
89
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(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.
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.
December 31, 2018
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
December 31, 2017
Mortgages payable, net
Unsecured notes payable, net
Unsecured term loans, net
Unsecured revolving line of credit
Level 1
Level 2
Level 3
Total
Fair Value
$
$
$
$
$
$
$
$
—
235,788
—
—
—
243,183
—
—
$
$
$
$
$
$
$
$
—
—
—
—
—
—
—
—
$
$
$
$
$
$
$
$
208,173
435,704
449,266
272,553
298,635
450,640
552,555
216,222
$
$
$
$
$
$
$
$
208,173
671,492
449,266
272,553
298,635
693,823
552,555
216,222
The Company used the following discount rates in valuing its Level 3 financial liabilities:
Mortgages payable, net range
Unsecured notes payable, net weighted average
Unsecured term loans, net weighted average
Unsecured revolving line of credit
December 31, 2018
4.2% to 4.4%
4.91%
1.25%
1.10%
December 31, 2017
3.5% to 4.2%
4.28%
1.33%
1.30%
There were no transfers between the levels of the fair value hierarchy during the years ended December 31, 2018 and 2017.
(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, 2018, the Company had letters of credit outstanding totaling $433 that serve as collateral for certain capital
improvements at two of its properties and reduce the available borrowings on its unsecured revolving line of credit.
As of December 31, 2018, the Company had active redevelopment projects at Circle East located in Towson, Maryland and Plaza
del Lago located in Wilmette, Illinois. The Company estimates that it will incur net costs of approximately $34,000 to $36,000
related to the Circle East redevelopment and approximately $900 to $1,000 related to the redevelopment of the multi-family rental
units at Plaza del Lago. As of December 31, 2018, the Company has incurred $10,473, net of proceeds of $11,820 from the sale
of air rights, related to the redevelopment portion of Circle East and $536 related to the multi-family rental units at Plaza del Lago.
90
RETAIL PROPERTIES OF AMERICA, INC.
Notes to Consolidated Financial Statements
(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, 2018, the Company:
•
•
•
granted 128 restricted shares at a grant date fair value of $10.92 per share and 382 RSUs at a grant date fair value of
$10.98 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 82 shares of common stock and 125 restricted shares with a one year vesting term for the RSUs with a performance
period that concluded on December 31, 2018. An additional 29 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 2019 of $0.165625 per share on its outstanding Class A common stock,
which will be paid on April 10, 2019 to Class A common shareholders of record at the close of business on March 27,
2019.
91
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
Net income attributable to common shareholders
Net income 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 (loss)
Net income (loss) attributable to common shareholders
Net income (loss) per common share attributable to common
shareholders – basic and diluted
Dec 31
119,354
12,144
12,144
0.06
2018
Sep 30
119,137
12,834
12,834
0.06
$
$
$
$
Jun 30
119,164
10,882
10,882
0.05
$
$
$
$
Mar 31
124,842
41,780
41,780
0.19
$
$
$
$
214,684
218,808
218,982
218,849
215,093
219,021
219,410
219,403
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)
$
$
$
$
$
$
$
$
$
$
$
$
Weighted average number of common shares outstanding – basic
222,942
229,508
234,243
236,294
Weighted average number of common shares outstanding – diluted
223,095
230,104
234,818
236,294
92
RETAIL PROPERTIES OF AMERICA, INC.
Schedule II
Valuation and Qualifying Accounts
For the Years Ended December 31, 2018, 2017 and 2016
(in thousands)
Year ended December 31, 2018
Allowance for doubtful accounts
Tax valuation allowance
Year ended December 31, 2017
Allowance for doubtful accounts
Tax valuation allowance
Year ended December 31, 2016
Allowance for doubtful accounts
Tax valuation allowance
Balance at
beginning
of year
Charged to
costs and
expenses
Write-offs
Balance at
end of year
$
$
$
$
$
$
6,567
12,347
6,886
21,175
7,910
23,618
3,155
(1,769)
2,143
(8,828)
2,466
(2,443)
(1,746)
—
(2,462)
—
(3,490)
—
$
$
$
$
$
$
7,976
10,578
6,567
12,347
6,886
21,175
93
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(in thousands)
Property Name
Ashland & Roosevelt
Chicago, IL
Avondale Plaza
Redmond, WA
Bed Bath & Beyond Plaza
Westbury, NY
The Brickyard
Chicago, IL
Carillon (a) (b)
Largo, MD
Cedar Park Town Center
Cedar Park, TX
Central Texas Marketplace
Waco, TX
Centre at Laurel
Laurel, MD
Chantilly Crossing
Chantilly, VA
Circle East (c) (d)
Towson, MD
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
Cypress Mill Plaza
Cypress, TX
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
$
642
$
13,850
$
21,052
$
1,204
$
13,850
$
22,256
$
36,106
$
10,767
2002
Date
Acquired
05/05
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
4,573
4,530
9,497
11,901
71
375
4,573
4,530
9,568
14,141
1,519
2005
11/14
12,276
16,806
5,891
2000-2002
07/05
45,300
26,657
8,860
45,300
35,517
80,817
16,604
1977/2004
04/05
15,261
114,703
(48,796)
15,261
65,907
81,168
28,015
2004
23,923
13,000
19,000
13,829
248
47,559
10,060
8,406
17,273
23,923
13,000
18,700
14,077
38,000
2,630
2013
57,619
70,619
24,414
2004
25,979
44,679
11,808
2005
8,500
16,060
2,557
8,500
18,617
27,117
9,009
2004
22,808
39,798
(26,526)
13,758
22,322
36,080
2,593
1998 & 2014
1,775
5,023
16,700
12,000
2,919
10,200
4,962
7,026
12,382
22,775
35,887
13,281
26,178
9,976
1,207
240
7,632
7,162
143
3,858
271
94
1,775
5,023
16,700
12,000
8,233
10,008
4,071
2003-2004
12,622
17,645
1,638
1991
30,407
47,107
12,035
1997
43,049
55,049
20,083
1999
2,919
13,424
16,343
2,799
1999
10,200
30,036
40,236
15,189
2004
4,962
10,247
15,209
2,326
2004
09/04
02/15
12/06
02/06
05/05
7/04 &
11/15
04/05
08/15
05/06
04/05
10/13
12/04
10/13
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(in thousands)
Property Name
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
Initial Cost (A)
Gross amount carried at end of period
$
— $
1,850
$
5,681
$
1,191
$
1,671
$
7,051
$
8,722
$
3,644
2003-2004
06/04
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
Gateway Station
College Station, TX
—
—
—
—
—
—
—
—
—
—
—
—
17,209
16,118
—
1,250
34,087
12,348
—
—
—
9,880
—
1,050
6,000
43,434
16,529
6,000
59,963
65,963
28,827
2003-2004
10/04
43,367
110,785
4,047
43,367
114,832
158,199
17,143
2014
2,900
4,055
28,714
17,620
241
228
2,826
4,055
29,029
31,855
13,125
2005
17,848
21,903
1,942
2008
12,000
65,067
8,281
12,000
73,348
85,348
37,011
2002
—
11,800
35,421
33,098
—
—
—
35,421
35,421
17,749
1988
11,800
33,098
44,898
16,584
1997
01/15
06/06
06/16
05/04
05/05
05/05
4,800
13,490
4,835
5,431
17,694
23,125
8,647
2002-2004
01/05
17,209
16,118
97,072
114,281
18,086
Redev: 2009
11/13
45,207
61,325
7,443
2008
—
50,982
50,982
26,826
1988
1,250
5,343
6,593
2,640
2004
12,348
57,921
70,269
9,753
2000
01/15
06/04
06/05
06/14
9,880
58,799
68,679
29,278
2003-2004
12/04
—
32,018
32,018
16,073
2000
07/04
1,050
5,144
6,194
2,559
2003-2004
12/04
96,547
44,880
47,403
4,947
56,199
55,195
26,371
3,911
525
327
3,579
396
1,722
3,604
5,647
1,233
95
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(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
Date
Acquired
$
— $
3,280
$
11,557
$
202
$
3,280
$
11,759
$
15,039
$
4,789
2006-2007
05/07
8,550
5,370
4,100
3,200
7,000
10,650
6,377
3,065
—
5,200
18,087
2,200
23,097
14,446
3,710
39,298
12,968
16,938
8,663
35,147
46,814
11,385
10,729
16,758
10,010
64,731
12,823
52,762
23,932
19,144
33,341
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
6,221
9,499
454
1,409
6,638
6,325
2,363
1,680
—
4,317
2,328
1,198
2,980
1,063
8,550
5,370
3,894
3,200
7,000
45,519
54,069
23,235
1996
22,467
27,837
9,251
2006
17,598
21,492
8,706
2001
10,072
13,272
4,752
1997
41,785
48,785
20,202
2000
10,650
53,139
63,789
25,969
2002
6,377
3,065
13,748
20,125
2,431
1985
12,409
15,474
6,675
2002
—
16,758
16,758
8,294
1996
07/04
06/07
04/05
12/04
10/04
12/04
02/14
03/04
06/05
5,200
14,327
19,527
7,139
Redev: 2004
12/05
18,087
67,059
85,146
11,018
1996
06/14
2,200
14,021
16,221
6,449
Renov: 2005
11/05
23,097
14,295
55,742
78,839
22,014
2005
25,146
39,441
4,577
2004
02/08
06/14
11/05
(136)
3,710
19,008
22,718
9,229
2005
16,005
37,744
5,559
16,005
43,303
59,308
22,677
1996/1999
01/04
96
Property Name
Gateway Station II & III
College Station, TX
Gateway Village
Annapolis, MD
Gerry Centennial Plaza
Oswego, IL
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
HQ Building
San Antonio, TX
Huebner Oaks Center
San Antonio, TX
Humblewood Shopping Center
Humble, TX
Jefferson Commons
Newport News, VA
John's Creek Village
John's Creek, GA
King Philip's Crossing
Seekonk, MA
La Plaza Del Norte
San Antonio, TX
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(in thousands)
Property Name
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
Lake Worth Towne Crossing
$
— $
6,600
$
30,910
$
9,313
$
6,600
$
40,223
$
46,823
$
17,228
2005
Date
Acquired
06/06
Initial Cost (A)
Gross amount carried at end of period
74,612
(10,258)
12,555
64,354
76,909
32,239
18,427
56,756
3,253
1998/2002-
2003
1997
06/04
06/14
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
Newton Crossroads
Covington, GA
North Rivers Towne Center
Charleston, SC
Northgate North
Seattle, WA
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
25,202
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
3,350
3,350
7,540
17,772
655
46,482
23,124
799
(8)
16,265
2,563
83,276
39,738
12,195
36,496
14,698
11,313
5,562
33,987
6,927
15,720
38
9,218
3,677
1,159
119
820
36
7,669
646
1,050
49,078
(13,055)
97
38,329
13,110
7,415
4,710
4,317
18,678
28,797
14,568
15,100
3,350
3,350
7,540
69,496
82,606
32,572
2001-2004
09/05
799
8,214
710
2005
08/05
18,828
23,538
10,078
1995-1996
02/04
83,314
87,631
6,117
2003 & 2014
01/17
14,700
48,956
63,656
23,365
1994-1995
08/04
3,300
15,872
19,172
8,214
2003-2004
11/04
37,655
56,333
5,581
2008
14,817
43,614
4,390
12,133
16,523
5,598
20,166
1,603
2,485
382
1972 Renov:
2006-2007
2003
1964 Renov:
2011
1999 &
2004
1997
01/15
01/16
10/13
07/17
12/03 &
02/04
12/04
41,656
56,756
21,237
7,573
10,923
3,723
16,770
20,120
8,730
2003-2004
04/04
36,023
43,563
19,532
1999-2003
06/04
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(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
Date
Acquired
$
— $
13,800
$
37,707
$
9,316
$
13,800
$
47,023
$
60,823
$
22,677
1991-1993
05/04
—
—
—
—
—
—
—
24,101
—
—
—
—
—
—
10,343
50,057
1,323
10,343
51,380
61,723
5,713
2006
03/16
26,799
122,224
11,308
26,457
133,874
160,331
10,016
2013-2017
6,454
6,590
6,142
16,004
20,425
20,423
1,254
949
9,625
6,454
6,590
6,142
17,258
23,712
3,443
2002-2004
21,374
27,964
11,618
2002
30,048
36,190
14,400
2010
10,274
12,392
16,890
10,105
29,451
39,556
11,606
—
6,995
6,600
12,042
4,200
67,870
32,816
13,728
33,382
29,085
838
4,331
1,043
2,083
7,408
—
68,708
68,708
14,049
8,495
6,600
35,647
44,142
18,889
14,771
21,371
12,042
35,465
47,507
4,200
36,493
40,693
17,355
2002-2003
& 2005
2008
2002-2003
& 2005
1995
1928 Renov:
1996
2004
7,674
1,379
11/16, 2/17,
4/17, 5/17,
8/17 &
11/18
06/14
04/04
08/06
12/03 &
06/06
11/13
03/04 &
05/05
07/04
12/17
12/04
15,800
70,372
21,582
15,790
91,964
107,754
41,265
1986/2004
08/04
2,900
3,450
18,769
24,214
—
4,034
6,814
17,000
15,797
21,937
455
660
850
258
98
2,900
3,450
7,269
10,169
3,335
2005
10/06
17,660
21,110
6,344
2004-2005
11/05
24,214
16,647
40,861
3,522
2007
4,034
22,195
26,229
2,861
2008
10/13
01/16
Property Name
Northpointe Plaza
Spokane, WA
Oak Brook Promenade
Oak Brook, IL
One Loudoun (e)
Ashburn, VA
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 (c)
Wilmette, IL
Pleasant Run
Cedar Hill, TX
Reisterstown Road Plaza
Baltimore, MD
Rivery Town Crossing
Georgetown, TX
Royal Oaks Village II
Houston, TX
Sawyer Heights Village
Houston, TX
Shoppes at Hagerstown
Hagerstown, MD
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(in thousands)
Property Name
Encumbrance
Land
Buildings and
Improvements
Adjustments
to Basis (C)
Land and
Improvements
Buildings and
Improvements
(D)
Total (B),
(D)
Accumulated
Depreciation
(E)
Date
Constructed
The Shoppes at Quarterfield
$
— $
2,190
$
8,840
$
314
$
2,190
$
9,154
$
11,344
$
4,915
1999
Initial Cost (A)
Gross amount carried at end of period
Severn, MD
The Shoppes at Union Hill
13,185
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
Southlake, TX
Stilesboro Oaks
Acworth, GA
Stonebridge Plaza
McKinney, TX
Streets of Yorktown
Houston, TX
Tacoma South
Tacoma, WA
Target South Center
Austin, TX
Tollgate Marketplace
Bel Air, MD
Tysons Corner
Vienna, VA
Village Shoppes at Simonton
Lawrenceville, GA
—
—
—
—
—
21,035
—
—
—
—
—
—
34,958
—
—
Date
Acquired
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
08/05
12/05
45,227
11,045
12,652
6,133
546
233
642
417
108,940
17,280
13,175
23,605
4,703
117
12,666
45,773
58,439
5,149
2003
1,350
3,650
1,050
8,800
9,096
6,612
11,278
12,628
5,925
2004
13,294
16,944
6,795
2004 & 2005
6,550
7,600
3,344
2002
126,220
135,020
53,578
2002
17,878
26,974
8,263
2001
23,722
30,334
4,680
2004
1,350
3,650
1,050
8,800
9,096
6,612
43,790
207,354
27,762
41,604
237,302
278,906
102,336
1998-2007
2,200
1,000
3,440
9,426
5,783
754
788
22,111
2,951
2,200
1,000
3,440
10,180
12,380
5,019
1997
6,571
7,571
3,100
1997
25,062
28,502
11,856
2005
10,976
22,898
2,300
8,700
22,525
8,760
61,247
7,184
189
727
8,491
2,493
10,976
23,087
34,063
2,470
1984-2015
05/16
2,300
8,700
9,487
11,787
4,663
1999
11/05
69,738
78,438
34,367
1979/1994
07/04
22,525
9,677
32,202
985
1980
Renov:2004,
2012/2013
2004
05/15
08/04
2,200
10,874
126
2,200
11,000
13,200
5,711
99
RETAIL PROPERTIES OF AMERICA, INC.
Schedule III
Real Estate and Accumulated Depreciation
December 31, 2018
(in thousands)
Property Name
Walter's Crossing
Tampa, FL
Watauga Pavilion
Watauga, TX
Winchester Commons
Memphis, TN
Woodinville Plaza
Woodinville, WA
Total
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
$
— $
14,500
$
16,914
$
546
$
14,500
$
17,460
$
31,960
$
8,157
2005
Date
Acquired
07/06
—
—
—
5,185
4,400
27,504
7,471
16,073
25,433
1,634
629
4,873
5,185
4,400
29,138
34,323
15,188
2003-2004
05/04
8,100
12,500
4,059
1999
11/04
16,073
30,306
46,379
3,719
1981
06/15 &
8/16
205,320
1,047,335
3,303,572
293,478
1,036,901
3,607,484
4,644,385
1,313,602
Developments in Progress
—
25,450
—
22,919
41,141
7,228
48,369
—
Total Investment Properties
$
205,320
$ 1,072,785
$
3,303,572
$
316,397
$
1,078,042
$
3,614,712
$ 4,692,754
$
1,313,602
(a) The Company has begun activities in anticipation of future redevelopment at this property.
(b) Carillon is the rebranded property formerly known as Boulevard at the Capital Centre.
(c) The cost basis associated with this property or a portion of this property is included in “Developments in progress” as the property or a portion of the property is an active redevelopment.
(d) Circle East is the rebranded property combining the properties formerly known as Towson Circle and Towson Square.
(e) The Company acquired One Loudoun Uptown in 2018. The acquired land parcel is classified as land held for development and is included in “Development in progress” in the accompanying
consolidated balance sheets.
100
Notes:
RETAIL PROPERTIES OF AMERICA, INC.
(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, 2018 for U.S. federal income tax purposes was approximately $4,600,815.
(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,
2018
4,785,927
114,050
(203,766)
—
(3,457)
—
—
4,692,754
2018
1,215,990
149,302
(48,795)
—
(2,895)
—
1,313,602
$
$
$
$
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
$
$
$
$
Depreciation is computed based upon the following estimated useful lives in the accompanying consolidated statements of operations and other comprehensive (loss)
income:
Building and improvements
Site improvements
Tenant improvements
Years
30
15
Life of related lease
101
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, 2018, our 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 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, 2018 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, 2018. The effectiveness of our internal control over financial reporting as of December 31, 2018 has been
audited by Deloitte & Touche LLP, an Independent Registered Public Accounting Firm, as stated in their report which is included
herein.
102
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, 2018, 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, 2018, 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, 2018, of the Company and our report
dated February 13, 2019, expressed an unqualified opinion on those consolidated financial statements.
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 13, 2019
103
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 2019 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 2019 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 2019 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 2019 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 2019 Annual Meeting of Stockholders
and is incorporated herein by reference.
104
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, 2018 are submitted herewith:
Valuation and Qualifying Accounts (Schedule II)
Real Estate and Accumulated Depreciation (Schedule III)
Page
93
94
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
10.3
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).
Retail Properties of America, Inc. Amended and Restated 2014 Long-Term Equity Compensation Plan (incorporated herein
by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Schedule 14A filed on April 6, 2018).
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).
Retail Properties of America, Inc. Senior Executive Cash Incentive Bonus Plan (incorporated herein by reference to Exhibit
10.1 to the Registrant’s Current Report on Form 8-K filed on July 24, 2018).
105
Exhibit No.
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
21.1
23.1
31.1
Description
Indemnification Agreements by and between the Registrant and its directors and officers (incorporated herein by reference to
Exhibits 10.6B, 10.6D and 10.6E to the Registrant’s Annual Report/Amended on Form 10-K/A for the year ended December
31, 2006 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 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 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 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 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 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 filed on November 2, 2016, Exhibit 10.28 to the Registrant’s Annual Report on
Form 10-K for the year ended December 31, 2016 filed on February 15, 2017, and Exhibit 10.17 to the Registrant’s Annual
Report on Form 10-K for the year ended December 31, 2017 filed on February 14, 2018).
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).
Fifth Amended and Restated Credit Agreement dated as of April 23, 2018, by and among the Registrant as Borrower and
KeyBank National Association as Administrative Agent, Wells Fargo Securities, LLC and KeyBanc Capital Markets Inc. as
Joint Book Managers, Wells Fargo Bank, National Association as Syndication Agent, Wells Fargo Securities, LLC, KeyBanc
Capital Markets Inc., U.S. Bank National Association, PNC Capital Markets LLC, Capital One, National Association and
Regions Capital Markets as Co-Lead Arrangers, each of U.S. Bank National Association, PNC Capital Markets LLC, Regions
Bank, Capital One, National Association, Bank of America, N.A., Citibank, N.A., The Bank of Nova Scotia, TD Bank, N.A.
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 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter
ended March 31, 2018 and filed on May 2, 2018).
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).
First Amendment to Term Loan Agreement, dated as of May 17, 2018, by and among the Registrant as Borrower and Capital
One, National Association as Administrative Agent and certain lenders from time to time parties hereto, as Lenders (incorporated
herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018
filed on August 1, 2018).
Second Amendment to Term Loan Agreement, dated as of November 20, 2018, by and among the Registrant as Borrower and
Capital One, National Association as Administrative Agent and certain lenders from time to time parties hereto, as Lenders
(filed herewith).
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).
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 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).
Separation Agreement and General Release, dated March 14, 2018, by and between the Registrant and Paula C. Maggio
(incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
March 31, 2018 filed on May 2, 2018).
Retention Agreement dated July 30, 2018 by and between the Registrant and Julie M. Swinehart (incorporated herein by
reference to Exhibit 10.5 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 filed on
August 1, 2018).
List of Subsidiaries of Registrant (filed herewith).
Consent of Deloitte & Touche LLP (filed herewith).
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
106
Exhibit No.
Description
31.2
32.1
101
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 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, 2018 and 2017, (ii) Consolidated Statements of Operations and Other
Comprehensive (Loss) Income for the Years Ended December 31, 2018, 2017 and 2016, (iii) Consolidated Statements of
Equity for the Years Ended December 31, 2018, 2017 and 2016, (iv) Consolidated Statements of Cash Flows for the Years
Ended December 31, 2018, 2017 and 2016, (v) Notes to Consolidated Financial Statements and (vi) Financial Statement
Schedules.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
107
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
Chief Executive Officer
February 13, 2019
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/ BONNIE S. BIUMI
/s/ RICHARD P. IMPERIALE
By:
Steven P. Grimes
Director and Chief Executive Officer
(Principal Executive Officer)
By:
Bonnie S. Biumi
Director
By:
Richard P. Imperiale
Director
Date: February 13, 2019
Date:
February 13, 2019
Date:
February 13, 2019
/s/ JULIE M. SWINEHART
/s/ FRANK A. CATALANO, JR.
/s/ PETER L. LYNCH
By:
Julie M. Swinehart
Executive Vice President,
Chief Financial Officer and Treasurer
(Principal Financial Officer and
Principal Accounting Officer)
By:
Frank A. Catalano, Jr.
Director
By:
Peter L. Lynch
Director
Date: February 13, 2019
Date:
February 13, 2019
Date:
February 13, 2019
/s/ GERALD M. GORSKI
/s/ ROBERT G. GIFFORD
/s/ THOMAS J. SARGEANT
By:
Gerald M. Gorski
Chairman of the Board and Director
Date: February 13, 2019
By:
Date:
Robert G. Gifford
Director
February 13, 2019
By:
Date:
Thomas J. Sargeant
Director
February 13, 2019
108
Reconciliation of Non-GAAP Financial Measures
(amounts in thousands, except ratio and per share amounts)
Reconciliation of Mortgages Payable, Net, Unsecured Notes Payable, Net,
Unsecured Term Loans, Net and Unsecured Revolving Line of Credit to Total Net Debt
December 31, 2018
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
Total net debt
Net Debt to Adjusted EBITDAre (a)
$
205,320
696,362
447,367
273,000
1,622,049
(775)
536
734
5,906
1,628,450
(14,722)
1,613,728
5.5x
$
Reconciliation of Net Income to Adjusted EBITDAre
Three Months Ended
December 31, 2018
Net income
Interest expense
Depreciation and amortization
Provision for impairment of depreciable investment properties
EBITDAre
Adjustments to EBITDAre
Adjusted EBITDAre
Annualized Adjusted EBITDAre
$
12,144
16,828
43,870
763
73,605
-
73,605
294,420
$
$
$
(a) For purposes of this ratio calculation, annualized three months ended figures were used.
FFO Attributable to Common Shareholders and
Operating FFO Attributable to Common Shareholders Guidance
Per Share Guidance Range
Full Year 2019
Low
High
Net income attributable to common shareholders
Depreciation and amortization of depreciable real estate
Gain on sales of depreciable investment properties
FFO attributable to common shareholders
Gain on sale of non-depreciable investment property
Other
Operating FFO attributable to common shareholders
$
$
0.33
0.76
(0.04)
1.05
0.37
0.76
(0.04)
1.09
$
$
(0.02)
-
1.03
$
(0.02)
-
1.07
$
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.
Steven P. Grimes
Chief Executive Officer
Shane C. Garrison
President and Chief Operating
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, IL 60523
855.247.RPAI
www.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
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
Robert G. Gifford
Former President and Chief
Executive Officer of AIG Global
Real Estate
Steven P. Grimes
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 60523855.247.RPAI | www.RPAI.com | NYSE: RPAI