FEDERAL REALTY INVESTMENT TRUST This section generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSecurities and Exchange Commission onFebruary 11, 2021 . Forward-Looking Statements Certain statements in this section or elsewhere in this report may be deemed "forward-looking statements". See "Item 1A. Risk Factors" in this report for important information regarding these forward-looking statements and certain risk and uncertainties that may affect us. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto appearing in "Item 8. Financial Statements and Supplementary Data" of this report. Overview We are an equity real estate investment trust ("REIT") specializing in the ownership, management, and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions ofthe United States ,California , andSouth Florida . As ofDecember 31, 2021 , we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 104 predominantly retail real estate projects comprising approximately 25.1 million square feet. In total, the real estate projects were 93.6% leased and 91.1% occupied atDecember 31, 2021 . We have paid quarterly dividends to our shareholders continuously since our founding in 1962 and have increased our dividends per common share for 54 consecutive years. Summary Financial Information The following table includes select financial information that is helpful in understanding the trends in financial condition and the results of operations discussed throughout this Item 7. and "Item 8. Financial Statements and Supplementary Data." 32
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Year Ended December 31,
2021 2020 2019
(In thousands, except per share data and ratios)
Operating Data:
Rental income $ 948,842 $ 832,171 $ 932,738
Property operating income (1) $ 634,607 $ 545,332 $ 637,030
Gain on sale of real estate and change in control of interest,
net of tax $ 89,950 $ 98,117 $ 116,393
Operating income $ 394,725 $ 289,524 $ 470,911
Net income available for common shareholders $ 253,456 $ 123,664 $ 345,824
Net cash provided by operating activities $ 471,352 $ 369,929 $ 461,919
Net cash used in investing activities $ (660,118) $ (368,383) $ (316,532)
Net cash (used in) provided by financing activities $ (452,967) Earnings per common share, diluted:
Net income available to common shareholders$ 3.26
Dividends declared per common share$ 4.26 $ 4.22 $ 4.14 Other Data: Funds from operations available to common shareholders (2)$ 434,743
$ 5.57 $ 4.38 $ 6.17 EBITDAre (3)$ 589,792 $ 501,813 $ 599,567 Ratio of EBITDAre to combined fixed charges and preferred share dividends (3)(4) 3.6x 2.7x 4.2x As of December 31, 2021 2020 2019 (In thousands) Balance Sheet Data: Real estate, at cost$ 9,422,062 $ 8,582,870 $ 8,298,132 Total assets$ 7,622,320 $ 7,607,624 $ 6,794,992 Total debt$ 4,047,547 $ 4,291,375 $ 3,356,594 Total shareholders' equity$ 2,663,148 $ 2,548,747 $ 2,636,132 Number of common shares outstanding 78,603 76,727
75,541
(1)Property operating income is a non-GAAP measure that consists of rental
income and mortgage interest income, less rental expenses and real estate taxes.
This measure is used internally to evaluate the performance of property
operations and we consider it to be a significant measure. Property operating
income should not be considered an alternative measure of operating results or
cash flow from operations as determined in accordance with GAAP. The
reconciliation of operating income to property operating income for 2021, 2020,
and 2019 is as follows:
2021 2020 2019
(in thousands)
Operating income $ 394,725 $ 289,524 $ 470,911
General and administrative 49,856 41,680 42,754
Depreciation and amortization 279,976 255,027 239,758
Impairment charge - 57,218 -
Gain on sale of real estate and change in control of interest, net of tax
(89,950) (98,117) (116,393)
Property operating income $ 634,607
(2)Funds from operations "FFO" is a supplemental non-GAAP measure. See
"Liquidity and Capital Resources" in this Item 7. for further discussion.
(3)EBITDA for Real Estate ("EBITDAre") is a non-GAAP measure that NAREIT defines
as: net income computed in accordance with GAAP plus net interest expense,
income tax expense, depreciation and amortization, gain or loss on sale of real
estate, impairments of real estate, and adjustments to reflect the entity's
share of EBITDAre of unconsolidated
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affiliates. We calculate EBITDAre consistent with the NAREIT definition. As
EBITDA is a widely known and understood measure of performance, management
believes EBITDAre represents an additional non-GAAP performance measure,
independent of a company's capital structure that will provide investors with a
uniform basis to measure the enterprise value of a company. EBITDAre also
approximates a key performance measure in our debt covenants, but it should not
be considered an alternative measure of operating results or cash flow from
operations as determined in accordance with GAAP.
The reconciliation of net income to EBITDAre for the periods presented is as
follows:
2021 2020 2019
(In thousands)
Net income $ 269,081 $ 135,888 $ 360,542
Interest expense 127,698 136,289 109,623
Other interest income (809) (1,894) (1,266)
Early extinguishment of debt - 11,179 -
Provision (benefit) for income tax 118 (194) 772
Depreciation and amortization 279,976 255,027 239,758
Gain on sale of real estate and change in control of interest
(89,950) (98,117) (116,779)
Impairment charge - 57,218 -
Adjustments of EBITDAre of unconsolidated affiliates 3,678
6,417 6,917
EBITDAre $ 589,792 $ 501,813 $ 599,567
(4)Fixed charges consist of interest on borrowed funds (including capitalized
interest), amortization of debt discount/ premiums and debt costs, costs related
to the early extinguishment of debt, and the portion of rent expense
representing an interest factor. Excluding the $11.2 million early
extinguishment of debt charge from fixed charges in 2020, the ratio of EBITDAre
to combined fixed charges and preferred share dividends is 2.9x. Excluding the
$11.9 million charge related to the buyout of the Kmart lease at Assembly Square
Marketplace in 2019, our ratio of EBITDAre to combined fixed charges and
preferred share dividends remained 4.2x.
Impacts of COVID-19 Pandemic
We continue to monitor and address risks related to the COVID-19 pandemic. Since
March 2020 when the World Health Organization characterized COVID-19 as a global
pandemic, we have been and continue to be impacted by COVID-19 and the actions
taken by federal, state, and local government to prevent its spread. These
actions included the closure of nonessential businesses and ordering residents
to generally stay at home at the onset of the pandemic, phased reopenings and
capacity limitations, and now generally lifted restrictions. While the overall
economy is showing signs of recovery from the initial impacts of COVID-19,
workforce shortages, global supply chain bottlenecks and shortages, inflation,
as well as COVID-19 variants are impacting the pace of recovery. Closures and
restrictions, along with general concern over the spread of COVID-19, required a
significant number of tenants to close their operations or to significantly
limit the amount of business they are able to conduct, which impacted their
ability to timely pay rent as required under our leases and also caused many
tenants to close their business permanently. While improving, our cash flow and
results of operations in the year ended December 31, 2021 continued to be
materially adversely impacted, with vacancy levels remaining above historical
levels. Although virtually all of our leases required the tenants to pay rent
even while they were not operating, we entered into numerous agreements to
abate, defer, and/or restructure tenant rent payments for varying periods of
time, all with the objective of collecting as much cash as reasonably possible
and maintaining occupancy to the maximum extent. We believe those actions will
position many of our tenants to be able to return to payment of contractual rent
as soon as possible after the impacts from the pandemic have subsided.
We believe that the actions we have taken to improve our financial position and
maximize our liquidity, as described further in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in our 2020 Annual
Report on Form 10-K, will continue to mitigate the impact to our cash flow
caused by tenants not timely paying contractual rent. Throughout 2021, we
continued to maintain levels of cash significantly in excess of the cash
balances we have historically maintained which has adversely impacted our
financial results; however, we believe that such action was prudent to position
us with what we expect to be sufficient liquidity to allow us to continue fully
operating as our operating revenues begin to return to more typical levels. As
of December 31, 2021 , there is no outstanding balance on our $1.0 billion
revolving credit facility, and we have cash and cash equivalents of
$162.1 million .
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Additional discussion of the impact of COVID-19 on our results and long-term
operations can be found throughout Item 7 and Item 1A . Risk Factors.
Corporate Responsibility
We actively endeavor to operate and develop our properties in a sustainable,
responsible, and effective manner with the objective being to drive long-term
growth and aid in value creation for our shareholders, tenants, employees, and
local communities. We have aligned our program and efforts with the United
Nations Sustainable Development Goals, as described in our ESG Policy and our
2020 Corporate Responsibility Report, which are provided only for informational
purposes on our website and not incorporated herein.
Our development activities have been heavily focused on owning, developing and
operating properties that are certified under the U.S. Green Building Council's ®
("USGBC") Leadership in Energy and Environmental Design™ (LEED®) rating system
which serves as a third-party verification that a building or community was
designed and built to mitigate its environmental footprint. We currently have 18
LEED certified buildings and our Pike & Rose project has achieved LEED for
Neighborhood Development Stage 3 Gold certification. The COVID-19 pandemic has
also increased our focus on owning, developing and operating healthier
buildings. To that end, our new corporate headquarters space at our 909 Rose
Avenue building has earned a Fitwel certification developed by the U.S. Centers
for Disease Control and Prevention (CDC ) together with the General Services
Administration (GSA). This certification assesses a building's impact on seven
distinct categories related to overall health and well-being.
We are also committed to implementing sustainable business practices at our
operating properties that focus on energy efficiency, water conservation and
waste minimization and have established energy and greenhouse gas (GHG)
emissions reduction targets. To achieve these targets, we are actively
addressing energy efficiency projects on site such as upgrading to LED lighting;
and to address emissions we are procuring green energy, reducing electric
consumption, and increasing our onsite solar generation capacity. We have
installed on-site solar systems at 25 of our properties with a capacity of over
13 MW with more projects actively in progress. Our current capacity placed us in
the top 5 among real estate companies for onsite capacity in the most recent
Solar Energy Industry Association's annual Solar Means Business Report. We are
also actively installing electric vehicle car charging stations in numerous
properties throughout our portfolio. We currently have over 300 charging
stations in operation with more under construction.
We also understand that we face risks presented by climate change and are
working to evaluate our risk exposure. In our 2020 Corporate Responsibility
Report, we provided a disclosure pursuant to the Task Force on Climate Related
Financial Disclosure and we intend to provide that disclosure annually.
We are also highly committed to our employees and fostering a work environment
that promotes growth, development and personal well-being. Our four core values
are accountability, excellence, innovation and integrity and we seek to attract
and retain talented professionals who embrace those values. All of our efforts
with respect to corporate responsibility are overseen by our Board of Trustees .
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America , referred to as "GAAP",
requires management to make estimates and assumptions that in certain
circumstances affect the reported amounts of assets and liabilities, disclosure
of contingent assets and liabilities, and revenues and expenses. These estimates
are prepared using management's best judgment, after considering past and
current events and economic conditions. In addition, information relied upon by
management in preparing such estimates includes internally generated financial
and operating information, external market information, when available, and when
necessary, information obtained from consultations with third party experts.
Actual results could differ from these estimates. A discussion of possible risks
which may affect these estimates is included in "Item 1A. Risk Factors" of this
report. Management considers an accounting estimate to be critical if changes in
the estimate could have a material impact on our consolidated results of
operations or financial condition.
Our significant accounting policies are more fully described in Note 2 to the
consolidated financial statements; however, the most critical accounting
policies, which are most important to the portrayal of our financial condition
and results of operations, and involve the use of complex estimates and
significant assumptions as to future uncertainties and, therefore, may result in
actual amounts that differ from estimates, are as follows:
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Collectibility of Lease Income
Our leases with our tenants are classified as operating leases. When collection
of substantially all lease payments during the lease term is considered
probable, the lease qualifies for accrual accounting. When collection of
substantially all lease payments during the lease term is not considered
probable, total lease revenue is limited to the lesser of revenue recognized
under accrual accounting or cash received. Determining the probability of
collection of substantially all lease payments during a lease term requires
significant judgment. This determination is impacted by numerous factors
including our assessment of the tenant's credit worthiness, economic conditions,
tenant sales productivity in that location, historical experience with the
tenant and tenants operating in the same industry, future prospects for the
tenant and the industry in which it operates, and the length of the lease term.
If leases currently classified as probable are subsequently reclassified as not
probable, any outstanding lease receivables (including straight-line rent
receivables) would be written-off with a corresponding decrease in rental
income. For example, in the event that our collectibility determinations were
not accurate and we were required to write off additional receivables equaling
1% of rental income, our rental income and net income would decrease by $9.5
million . If leases currently classified as not probable are subsequently changed
to probable, any lease receivables (including straight-line rent receivables)
are re-instated with a corresponding increase to rental income.
Since March 2020 , federal, state, and local governments have taken various
actions to mitigate the spread of COVID-19. These actions included the closure
of nonessential businesses and ordering residents to generally stay at home at
the onset of the pandemic, phased re-openings and capacity limitations, and now
generally lifted restrictions. While the overall economy is showing signs of
recovery from the initial impacts of COVID-19, workforce shortages, global
supply chain bottlenecks and shortages, inflation, as well as COVID-19 variants
are impacting the recovery. Closures and restrictions, along with the general
concern over the spread of COVID-19, required a significant number of tenants to
close their operations or to significantly limit the amount of business they
were able to conduct, which impacted their ability to timely pay rent as
required under our leases and also caused many tenants to close their business
permanently. As a result, we revised our collectibility assumptions for many of
our tenants most significantly impacted by COVID-19. Accordingly, during the
years ended December 31, 2021 and 2020, we recognized collectibility related
adjustments of $24.0 million and $106.6 million , respectively. This includes
changes in our collectibility assessments from probable to not probable,
disputed rents, and any rent abatements directly related to COVID-19, as well as
the write-off of $0.7 million and $12.7 million , respectively of straight-line
rent receivables related to tenants changed to a cash basis of revenue
recognition during the years ended December 31, 2021 and 2020. As of
December 31, 2021 and 2020, the revenue from approximately 34% and 35% of our
tenants (based on total commercial leases), respectively, is being recognized on
a cash basis. As of December 31, 2021 and 2020, our straight-line rent
receivables balance was $110.7 million and $103.3 million , respectively, and is
included in "accounts and notes receivable, net" on our consolidated balance
sheet.
Other revenue recognition policies
When we enter into a transaction to sell a property or a portion of a property,
we evaluate the recognition of the sale under ASC 610-20, "Other Income - Gains
and Losses from the Derecognition of Nonfinancial Assets." In accordance with
ASC 610-20, we apply the guidance in ASC 606, "Revenue from Contracts with
Customers," to determine whether and when control transfers and how to measure
the associated gain or loss. We determine the transaction price based on the
consideration we expect to receive. Variable consideration is included in the
transaction price to the extent it is probable that a significant reversal of a
gain recognized will not occur. We analyze the risk of a significant gain
reversal and if necessary limit the amount of variable consideration recognized
in order to mitigate this risk. The estimation of variable consideration
requires us to make assumptions and apply significant judgment. The existence
and amount of variable consideration can vary significantly among transactions.
Historically, our property sales have had variable consideration of less than 1%
of total expected consideration; however, we had one transaction in 2019 where
the variable consideration was approximately $45.5 million .
Real Estate Acquisitions
Upon acquisition of operating real estate properties, we estimate the fair value
of assets and liabilities acquired including land, building, improvements,
leasing costs, intangibles such as acquired leases, assumed debt, and current
assets and liabilities, if any. Based on these estimates, we allocate the
purchase price to the applicable assets and liabilities. We utilize methods
similar to those used by independent appraisers in estimating the fair value of
acquired assets and liabilities. The value allocated to acquired leases is
amortized over the related lease term and reflected as rental income in the
statement of operations. We consider qualitative and quantitative factors in
evaluating the likelihood of a tenant exercising a below market renewal option
and include such renewal options in the calculation of in-place lease value when
we consider these to be bargain renewal options. If the value of below market
lease intangibles includes renewal option periods, we include such renewal
periods in the amortization period utilized. If a tenant vacates its space prior
to contractual termination of its lease, the unamortized balance of any acquired
lease value is written off to rental income.
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During 2021, we acquired properties with a total purchase price of $440.9
million . $4.6 million , or 1% of the total purchase price was allocated to above
market lease assets and $57.3 million , or 13% was allocated to below market
lease liabilities. If the amounts allocated in 2021 to below market lease
liabilities and building assets were each reduced by 5% of the total purchase
price, annual below market lease liability amortization increasing rental income
would decrease by approximately $2.5 million (using the weighted average life of
below market liabilities at each respective acquired property) and annual
depreciation expense would decrease by approximately $0.6 million (using a
depreciable life of 35 years).
Long-Lived Assets and Impairment
There are estimates and assumptions made by management in preparing the
consolidated financial statements for which the actual results will be
determined over long periods of time. This includes the recoverability of
long-lived assets, including our properties that have been acquired or
redeveloped and our investment in certain joint ventures. Management's
evaluation of impairment includes review for possible indicators of impairment
as well as, in certain circumstances, undiscounted and discounted cash flow
analysis. Since most of our investments in real estate are wholly-owned or
controlled assets which are held for use, a property with impairment indicators
is first tested for impairment by comparing the undiscounted cash flows, taking
into account the anticipated hold period, including residual value, to the
current net book value of the property. If the undiscounted cash flows are less
than the net book value, the property is written down to expected fair value.
The calculation of both discounted and undiscounted cash flows requires
management to make estimates of future cash flows including revenues, operating
expenses, required maintenance and development expenditures, market conditions,
demand for space by tenants and rental rates over long periods. Because our
properties typically have a long life, the assumptions used to estimate the
future recoverability of book value requires significant management judgment. We
are also required to estimate the anticipated hold period. A change in the
expected holding period from a long term hold to a short term would cause a
significant change in the undiscounted cash flows and could result in an
impairment charge. Actual results could be significantly different from the
estimates. These estimates have a direct impact on net income, because recording
an impairment charge results in a negative adjustment to net income.
Recently Adopted and Recently Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements.
2021 Acquisitions and Dispositions
On January 4, 2021 , we acquired our partner's 20% interest in our joint venture
arrangement related to the Pike & Rose hotel for $2.3 million , and repaid the
$31.5 million mortgage loan encumbering the hotel. As a result of the
transaction, we gained control of the hotel, and effective January 4, 2021 , we
have consolidated this asset. We also recognized a gain on acquisition of the
controlling interest of $2.1 million related to the difference between the
carrying value and fair value of the previously held equity interest.
On February 22, 2021 , we acquired the fee interest at our Mount Vernon Plaza
property in Alexandria, Virginia for $5.6 million . As a result of this
transaction, the "operating lease right of use assets" and "operating lease
liabilities" on our consolidated balance sheet decreased by $9.8 million . We now
own the entire fee interest on this property.
During the year ended December 31, 2021 , we acquired the following properties:
Gross Leasable
Date Acquired Property City/State Area (GLA) Ownership % Gross Value
(in square feet) (in millions)
April 30, 2021 Chesterbrook (1) McLean, Virginia 90,000 80 % $ 32.1 (2)
June 1, 2021 Grossmont Center (1) La Mesa, California 933,000 60 % $ 175.0 (3)
June 14, 2021 Camelback Colonnade (1) Phoenix, Arizona 642,000 98 % $ 162.5 (4)
June 14, 2021 Hilton Village (1) Scottsdale, Arizona 93,000 98 % $ 37.5 (5)
September 2, 2021 Twinbrooke Shopping Centre Fairfax, Virginia 106,000 100 % $ 33.8 (6)
(1)These acquisitions were completed through newly formed joint ventures, for
which we own the controlling interest listed above, and therefore, these
properties are consolidated in our financial statements.
(2)Approximately $1.9 million and $0.6 million of net assets acquired were
allocated to other assets for "acquired lease costs" and "above market leases,"
respectively, and $8.0 million of net assets acquired were allocated to other
liabilities for "below market leases."
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(3)Approximately $12.3 million and $2.6 million of net assets acquired were
allocated to other assets for "acquired lease costs" and "above market leases,"
respectively, and $14.7 million of net assets acquired were allocated to other
liabilities for "below market leases."
(4)Approximately $11.6 million of net assets acquired were allocated to other
assets for "acquired lease costs" and $28.3 million were allocated to other
liabilities for "below market leases."
(5)The land is controlled under a long-term ground lease that expires on
December 31, 2076 , for which we have recorded a $10.4 million "operating lease
right of use asset" (net of a $1.3 million above market liability) and an $11.6
million "operating lease liability." Approximately $2.7 million and $1.1 million
of net assets acquired were allocated to other assets for "acquired lease costs"
and "above market leases," respectively, and $3.6 million were allocated to
other liabilities for "below market leases."
(6)Approximately $1.2 million and $0.3 million of net assets acquired were
allocated to other assets for "acquired lease costs" and "above market leases,"
respectively, and $2.7 million of net assets acquired were allocated to other
liabilities for "below market leases."
During the year ended December 31, 2021 , we sold two properties and a portion of
three properties for a total sales price of $141.6 million , which resulted in a
net gain of $88.3 million .
2021 Significant Debt and Equity Transactions
On February 24, 2021 , we replaced our existing at-the-market ("ATM") equity
program with a new ATM equity program in which we may from time to time offer
and sell common shares having an aggregate offering price of up to $500.0
million . On May 7, 2021 , we amended this ATM equity program, which reset the
limit to $500.0 million . The new ATM equity program also allows shares to be
sold through forward sales contracts. We intend to use the net proceeds to fund
potential acquisition opportunities, fund our development and redevelopment
pipeline, repay indebtedness and/or for general corporate purposes.
For the year ended December 31, 2021 , we issued 847,471 common shares at a
weighted average price per share of $104.19 for net cash proceeds of $87.0
million including paying $0.9 million in commissions and $0.4 million in
additional offering expenses related to the sales of these common shares.
We also entered into forward sales contracts for the year ended December 31,
2021 for 2,999,955 common shares under our ATM equity program at a weighted
average offering price of $120.22 . During 2021, we settled a portion of the
forward sales agreements entered into during the year by issuing 796,300 common
shares for net proceeds of $85.7 million .
The forward price that we will receive upon physical settlement of the remaining
forward sale agreements is subject to the adjustment for (i) commissions, (ii) a
floating interest rate factor equal to a specified daily rate less a spread,
(iii) the forward purchasers' stock borrowing costs and (iv) scheduled dividends
during the term of the forward sale agreements. The remaining open forward
shares may be settled at any time on or before multiple required settlement
dates ranging from June 2022 to December 2022 . As of December 31, 2021 , we had
the capacity to issue up to $175.0 million in common shares under our ATM equity
program.
On April 16, 2021 , we repaid $100.0 million of our existing $400.0 million term
loan, amended the agreement on the remaining $300.0 million to lower the current
spread over LIBOR from 135 basis points to 80 basis points based on our current
credit rating, and extended the initial maturity date to April 16, 2024 , along
with two one-year extensions, at our option.
In 2021, we repaid the following mortgage loans, at par, prior to their original
maturity date:
Property Repayment Date Principal
(in millions)
Sylmar Towne Center February 5, 2021 $ 16.2
Plaza Del Sol September 1, 2021 $ 7.9
Montrose Crossing October 12, 2021 $ 64.1
The AVENUE at White Marsh November 2, 2021 $ 52.7
Capitalized Costs
Certain external and internal costs directly related to the development,
redevelopment and leasing of real estate, including pre-construction costs, real
estate taxes, insurance, and construction costs and salaries and related costs
of personnel directly involved, are capitalized. We capitalized external and
internal costs related to both development and redevelopment activities of $356
million and $10 million , respectively, for 2021 and $404 million and $9 million ,
respectively, for 2020. We capitalized external and internal costs related to
other property improvements of $64 million and $4 million , respectively, for
2021 and $64 million and $3 million , respectively, for 2020. We capitalized
external and internal costs related to leasing activities of $19 million and $3
million , respectively, for 2021 and $11 million and $2 million , respectively,
for 2020. The amount of capitalized
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internal costs for salaries and related benefits for development and
redevelopment activities, other property improvements, and leasing activities
were $10 million , $3 million , and $3 million , respectively, for 2021 and $9
million , $3 million , and $2 million , respectively, for 2020. Total capitalized
costs were $456 million for 2021 and $494 million for 2020, respectively.
Corporate Reorganization
In January of 2022, we completed the UPREIT reorganization described in the
Explanatory Note at the beginning of this Annual Report. Prior to the UPREIT
Reorganization, our business was conducted through the Predecessor. This Annual
Report pertains to the business and results of operations of the Predecessor for
its fiscal year ended December 31, 2021 . As a result of the UPREIT
reorganization, the Parent Company became the successor issuer to the
Predecessor under the Exchange Act. The Parent Company and the Partnership have
elected to co-file this Annual Report of the Predecessor to ensure continuity of
information to investors. For additional information on our UPREIT
reorganization, please see our Current Reports on Form 8-K filed with the SEC on
January 3, 2022 and January 5, 2022 .
Outlook
Our long-term growth strategy is focused on growth in earnings, funds from
operations, and cash flows primarily through a combination of the following:
•growth in our comparable property portfolio,
•growth in our portfolio from property development and redevelopments, and
•expansion of our portfolio through property acquisitions.
While the ongoing COVID-19 pandemic is impacting us in the short-term, our
long-term focus has not changed. Our comparable property growth is primarily
driven by increases in rental rates on new leases and lease renewals, changes in
portfolio occupancy, and the redevelopment of those assets. Over the long-term,
the infill nature and strong demographics of our properties provide a strategic
advantage allowing us to maintain relatively high occupancy and generally
increase rental rates. However, our occupancy levels and ability to increase
rental rates will be adversely impacted in the short-term as a result of
COVID-19. We believe the locations and nature of our centers and diverse tenant
base partially mitigates any potential negative changes in the economic
environment. However, any significant reduction in our tenants' abilities to pay
base rent, percentage rent or other charges, will adversely affect our financial
condition and results of operations. We seek to maintain a mix of strong
national, regional, and local retailers. At December 31, 2021 , no single tenant
accounted for more than 2.7% of annualized base rent.
Federal, state, and local governments have taken various actions to mitigate the
spread of COVID-19, including initially ordering closures of non-essential
businesses and ordering residents to generally stay at home. While many of these
restrictions have since been lifted, they required a significant number of
tenants to close their operations or to significantly limit the amount of
business they were able to conduct in their stores. These closures and
restrictions, along with general concerns over the spread of COVID-19 have
impacted the tenants' ability to timely pay rent as required under our leases
and also caused many tenants to close their business permanently. While we are
seeing signs of considerable improvement, these economic hardships have
adversely impacted our business, and continue to have a negative effect on our
financial results during 2021. With very few exceptions, our leases require
tenants to continue to pay rent even while closed as a result of the pandemic,
and while many tenants did not pay rents and other charges during a portion of
2020, the majority of our tenants have resumed paying all or a portion of their
rent and/or other charges as their businesses were able to reopen. Our
percentage of contractual rent actually collected has continued to increase
since the low point in April 2020 , including some tenants paying past due
amounts. As of December 31, 2021 , we have entered into agreements with
approximately 32% of our tenants (based on total commercial leases) to defer
rent payments to later periods, largely through 2022, although some extend
beyond. While increasing monthly cash collection rates is a positive trend
driven by government mandated restrictions gradually being lifted and improved
outlook by some tenants, we expect that our rent collections will continue to be
below our tenants' contractual rent obligations and historical levels into 2022,
which will continue to adversely impact our results of operations. We are also
experiencing a lower level of occupancy than in our past, largely due to the
pandemic, which will adversely impact our results until we can release the space
and the tenant commences paying rent as well as limit future vacancies caused by
the pandemic. We are, however, experiencing strong demand for our commercial
space as evidenced by the 2.1 million square feet of comparable space retail
leasing we've completed in 2021, as well as our overall leased percentage at
93.6%, compared to our occupied percentage of only 91.1%. We have begun to see
impacts of overall supply chain disruptions affecting the broader economy,
including significantly longer lead times, limited availability, and increased
costs for certain construction and other materials that support our leasing,
development, and redevelopment activities. If disruptions continue to worsen,
they could result in extended timeframes and/or increased costs for completion
of our projects and tenant build-outs, which could delay the commencement of
rent payments under new leases. Similarly, if our tenants experience significant
disruptions in supply chains supporting their own products, or staffing issues
due to labor shortages, their ability to pay rent may be adversely affected. We
continue to
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monitor these macroeconomic developments and are working with our tenants and
our vendors to limit the overall impact to our business.
The extent of such impact from COVID-19 will depend on future developments,
which are highly uncertain and cannot be predicted. Depending upon the duration
of tenant closures, future operating restrictions, and the overall economic
downturn resulting from COVID-19, we may find that even deferred rents are
difficult to collect, and we may experience higher vacancy levels. While the
duration and severity of the economic impact resulting from COVID-19 is unknown,
we seek to position the Trust to continue to participate in the resulting
economic recovery.
We continue to have several development projects in process being delivered as
follows:
•Phase III of Assembly Row includes 277,000 square feet of office space, 56,000
square feet of retail space, and 500 residential units. The expected costs for
Phase III are between $465 million and $485 million with spaces being delivered
beginning in the second quarter of 2021. At December 31, 2021 , 162,000 square
feet of office space has been delivered, all of the units in the residential
building have been delivered, and 23,000 square feet of retail space has opened.
•Phase III at Pike & Rose includes a 212,000 square foot office building (which
includes 7,000 square feet of ground floor retail space). The building is
expected to cost between $128 million and $135 million . At December 31, 2021 ,
approximately 162,000 square feet of office and retail space has been delivered,
of which approximately 45,000 square feet is our new corporate headquarters.
•Phase IV at Pike & Rose is a 276,000 square foot office building (which
includes 10,000 square feet of ground floor retail space). Approximately 105,000
square feet of the office space is pre-leased to a single tenant. The building
is expected to cost between $185 million and $200 million , and begin delivering
in late 2023.
•The first phase of construction on Santana West includes an eight story 376,000
square foot office building, which is expected to cost between $250 million and
$270 million .
•Throughout the portfolio, we currently have redevelopment projects underway
with a projected total cost of approximately $313 million that we expect to
stabilize over the next several years.
The above includes our best estimates based on information currently known,
however, the completion of construction, final costs, and the timing of leasing
and openings may be further impacted by the current environment including the
duration and severity of the economic impacts of COVID-19 and supply chain
disruptions affecting the broader economy.
The development of future phases of Assembly Row , Pike & Rose and Santana Row
will be pursued opportunistically based on, among other things, market
conditions, tenant demand, and our evaluation of whether those phases will
generate an appropriate financial return.
We continue to review acquisition opportunities that complement our portfolio
and provide long-term growth opportunities. Initially, some of our acquisitions
do not contribute significantly to earnings growth; however, we believe they
provide long-term re-leasing growth, redevelopment opportunities, and other
strategic opportunities. Any growth from acquisitions is contingent on our
ability to find properties that meet our qualitative standards at prices that
meet our financial hurdles. Changes in interest rates may affect our success in
achieving earnings growth through acquisitions by affecting both the price that
must be paid to acquire a property, as well as our ability to economically
finance the property acquisition. Generally, our acquisitions are initially
financed by available cash and/or borrowings under our revolving credit facility
which may be repaid later with funds raised through the issuance of new equity
or new long-term debt. We may also finance our acquisitions through the issuance
of common shares, preferred shares, or units in our operating partnership (see
"Corporate Reorganization" discussion in this Item 7), as well as through
assumed mortgages and property sales.
At December 31, 2021 , the leasable square feet in our properties was 93.6%
leased and 91.1% occupied. The leased rate is higher than the occupied rate due
to leased spaces that are being redeveloped or improved or that are awaiting
permits and, therefore, are not yet ready to be occupied. Our occupancy and
leased rates are subject to variability over time due to factors including
acquisitions, the timing of the start and stabilization of our redevelopment
projects, lease expirations and tenant closings and bankruptcies.
Comparable Properties
Throughout this section, we have provided certain information on a "comparable
property" basis. Information provided on a comparable property basis includes
the results of properties that we owned and operated for the entirety of both
periods being compared except for properties that are currently under
development or are being repositioned for significant redevelopment and
investment. For the year ended December 31, 2021 and the comparison of 2021 and
2020, all or a portion of 95 properties were considered comparable properties
and seven were considered non-comparable properties. For the year ended
December 31, 2021 , two portions of properties were moved from non-comparable
properties to comparable properties, one
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property and two portions of properties were moved from acquisitions to
comparable properties, one property was moved from comparable properties to
non-comparable properties, two properties and one portion of a property were
removed from comparable properties as they were sold, and two portions of
properties were removed from non-comparable properties, as they were sold,
compared to the designations as of December 31, 2020 . While there is judgment
surrounding changes in designations, we typically move non-comparable properties
to comparable properties once they have stabilized, which is typically
considered 90% physical occupancy or when the growth expected from the
redevelopment has been included in the comparable periods. We typically remove
properties from comparable properties when the repositioning of the asset has
commenced and has or is expected to have a significant impact to property
operating income within the calendar year. Acquisitions are moved to comparable
properties once we have owned the property for the entirety of comparable
periods and the property is not under development or being repositioned for
significant redevelopment and investment. Comparable property information
replaces our previous same center designations.
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YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Change
2021 2020 Dollars %
(Dollar amounts in thousands)
Rental income $ 948,842 $ 832,171 $ 116,671 14.0 %
Mortgage interest income 2,382 3,323 (941) (28.3) %
Total property revenue 951,224 835,494 115,730 13.9 %
Rental expenses 198,121 170,920 27,201 15.9 %
Real estate taxes 118,496 119,242 (746) (0.6) %
Total property expenses 316,617 290,162 26,455 9.1 %
Property operating income (1) 634,607 545,332 89,275 16.4 %
General and administrative expense (49,856) (41,680) (8,176) 19.6 %
Depreciation and amortization (279,976) (255,027) (24,949) 9.8 %
Impairment charge - (57,218) 57,218 100.0 %
Gain on sale of real estate and change in control of
interest 89,950 98,117 (8,167) (8.3) %
Operating income 394,725 289,524 105,201 36.3 %
Other interest income 809 1,894 (1,085) (57.3) %
Interest expense (127,698) (136,289) 8,591 (6.3) %
Early extinguishment of debt - (11,179) 11,179 100.0 %
Income (loss) from partnerships 1,245 (8,062) 9,307 115.4 %
Total other, net (125,644) (153,636) 27,992 (18.2) %
Net income 269,081 135,888 133,193 98.0 %Net income attributable to noncontrolling interests (7,583)
(4,182) (3,401) 81.3 % Net income attributable to the Trust$ 261,498 $ 131,706 $ 129,792 98.5 %
(1) Property operating income is a non-GAAP measure. See "Summary Financial Information" in this Item 7 for further discussion.
Property Revenues Total property revenue increased$115.7 million , or 13.9%, to$951.2 million in 2021 compared to$835.5 million in 2020. The percentage occupied at our shopping centers was 91.1% atDecember 31, 2021 compared to 90.2% atDecember 31, 2020 . The most significant driver of the increase in property revenues is the generally lifted COVID-19 restrictions during 2021, as compared to 2020 when COVID-19 government imposed closures and restrictions were generally still in effect. Changes in the components of property revenue are discussed below. Rental Income Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent, and is net of collectibility related adjustments. Rental income increased$116.7 million , or 14.0%, to$948.8 million in 2021 compared to$832.2 million in 2020 due primarily to the following: •an$82.6 million decrease in collectibility related impacts including rent abatements across all properties, primarily due to higher collection rates in 2021 as tenants begin to recover from the initial impacts of COVID-19, and moving a large number of tenants from accrual basis to cash basis in 2020, •an increase of$32.2 million primarily from 2021 acquisitions (see Note 3 to the consolidated financial statements for additional information), and •an increase of$25.4 million from non-comparable properties driven by the opening of Phase III atAssembly Row in 2021 and our Phase III office building at Pike & Rose in 2020, redevelopment related occupancy increases at CocoWalk, the opening of our new office building atSantana Row in early 2020, higher net termination fees, and the opening ofFreedom Plaza in 2020, partially offset by 42 -------------------------------------------------------------------------------- Table of Contents •a decrease of$17.1 million from property sales, and •a decrease of$6.1 million at comparable properties due primarily to lower average occupancy of approximately$14.1 million , lower net termination fees and legal fee income of$5.1 million , and a$2.1 million decrease in recoveries primarily related to real estate tax recoveries, partially offset by higher percentage rent, specialty leasing, and parking income of$7.2 million , primarily due to the impact of COVID-19 related closures and restrictions in 2020, and higher rental rates of$6.7 million . Mortgage Interest Income Mortgage interest income decreased$0.9 million , or 28.3%, to$2.4 million in 2021 compared to$3.3 million in 2020 primarily due to the payoff of two mortgage notes receivable inMay 2021 (see Note 2 to the consolidated financial statements for additional information). Property Expenses Total property expenses increased$26.5 million , or 9.1%, to$316.6 million in 2021 compared to$290.2 million in 2020. Changes in the components of property expenses are discussed below. Rental Expenses Rental expenses increased$27.2 million , or 15.9%, to$198.1 million in 2021 compared to$170.9 million in 2020. This increase is primarily due to the following: •an increase of$19.3 million from comparable properties due to higher repairs and maintenance costs, demolition costs, and utilities, as 2020 had lower costs as a result of COVID-19 impacts, higher snow removal costs, and higher insurance costs, •an increase of$8.8 million primarily from 2021 acquisitions, and •an increase of$6.1 million from non-comparable properties driven by the opening of Phase III atAssembly Row in 2021, the Phase III office building at Pike & Rose in 2020, the CocoWalk redevelopment in late 2020, and the opening of our new office building atSantana Row in early 2020, partially offset by •a decrease of$5.0 million from our property sales. As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income increased to 20.9% for the year endedDecember 31, 2021 from 20.5% for the year endedDecember 31, 2020 . Real Estate Taxes Real estate tax expense decreased$0.7 million , or 0.6% to$118.5 million in 2021 compared to$119.2 million in 2020 due primarily to the following: •a decrease of$3.5 million from our property sales, and •a decrease of$3.3 million from comparable properties primarily due to a true-up of supplemental taxes at several of ourCalifornia properties billed in 2020 and prior year tax refunds recorded in 2021, partially offset by •an increase of$3.1 million from 2021 acquisitions, and •an increase of$2.9 million from non-comparable properties due primarily to the opening of Phase III atAssembly Row in 2021, the opening of our new office building atSantana Row in early 2020, increases in assessments as a result of our redevelopment activities, and the Phase III office building at Pike & Rose in 2020. Property Operating Income Property operating income increased$89.3 million , or 16.4%, to$634.6 million in 2021 compared to$545.3 million in 2020. This increase is primarily due to the lifting of COVID-19 restrictions during 2021, which resulted in lower collectibility related adjustments and higher specialty leasing, percentage rent, and parking income. Also contributing to the increases were property acquisitions, placing redevelopment properties into service, the opening of Phase III atAssembly Row in 2021, and the opening of our new office building atSantana Row in early 2020, partially offset by lower average occupancy, property dispositions, higher repairs and maintenance and utilities expense, and higher snow removal expense. 43 -------------------------------------------------------------------------------- Table of Contents Other Operating General and Administrative Expense General and administrative expense increased$8.2 million , or 19.6%, to$49.9 million in 2021 from$41.7 million in 2020. This increase is due primarily to higher personnel related costs. Depreciation and Amortization Depreciation and amortization expense increased$24.9 million , or 9.8%, to$280.0 million in 2021 from$255.0 million in 2020. This increase is due primarily to 2021 property acquisitions, accelerated depreciation related to the demolition of one of our buildings in the early stages of redevelopment, the opening of Phase III ofAssembly Row and the Pike & Rose, placing redevelopment properties into service, and the acquisition of the previously unconsolidated Pike & Rose hotel joint venture inJanuary 2021 , partially offset by 2020 property sales and the lower write-off of lease related assets for vacating tenants. Impairment Charge The$57.2 million impairment charge for the year endedDecember 31, 2020 relates to The Shops atSunset Place . See Note 3 to the consolidated financial statements for further discussion. Gain on Sale of Real Estate and Change in Control of Interest The$90.0 million gain on sale of real estate for the year endedDecember 31, 2021 is due to the sale of two properties and portions of three properties, as well as the$2.1 million gain relating to the acquisition of the previously unconsolidated Pike & Rose hotel join venture (see Note 3 to the consolidated financial statements for additional information). The$98.1 million gain on sale of real estate, net of tax for the year endedDecember 31, 2020 is due to the sale of three properties and one building. Operating Income Operating income increased$105.2 million , or 36.3%, to$394.7 million in 2021 compared to$289.5 million in 2020. This increase is primarily due to the lifting of COVID-19 restrictions, which resulted in lower collectibility related adjustments and higher specialty leasing, percentage rent, and parking income compared to 2020. Also contributing to the increases were the prior year impairment charge related to The Shops atSunset Place , property acquisitions, placing redevelopment properties into service, the opening of Phase III atAssembly Row in 2021, and the opening of our new office building atSantana Row in early 2020, partially offset by lower average occupancy, higher personnel related costs, property dispositions, higher repairs and maintenance and utilities expense, a lower gain on sales of real estate, and higher snow removal expense. Other Interest Expense Interest expense decreased$8.6 million , or 6.3%, to$127.7 million in 2021 compared to$136.3 million in 2020. This decrease is due primarily to the following: •a decrease of$6.2 million due to a lower overall weighted average borrowing rate, and •a decrease of$3.2 million due to lower weighted average borrowings, partially offset by •a decrease of$0.8 million in capitalized interest. Gross interest costs were$150.3 million and$159.7 million in 2021 and 2020, respectively. Capitalized interest was$22.6 million and$23.4 million in 2021 and 2020, respectively. Early Extinguishment of Debt The$11.2 million early extinguishment of debt charge for the year endedDecember 31, 2020 relates to the make-whole premium paid as part of the early redemption of our$250 million 3.00% senior notes onDecember 31, 2020 and the related write-off of the unamortized discount and debt fees. 44 -------------------------------------------------------------------------------- Table of Contents Income (loss) from Partnerships Income (loss) from partnerships increased$9.3 million or 115.4% to$1.2 million of income in 2021 compared to a loss of$8.1 million in 2020. This increase is due primarily to the acquisition of the previously unconsolidated Pike & Rose hotel joint venture inJanuary 2021 and improved operating results at our restaurant joint ventures and at ourAssembly Row hotel joint venture, largely the result of the easing of COVID-19 closures and restrictions. Net income attributable to noncontrolling interests Net income attributable to noncontrolling interests increased$3.4 million , or 81.3%, to$7.6 million in 2021 compared to$4.2 million in 2020. The increase is primarily due to The Shops atSunset Place prior year impairment charge and 2021 acquisitions. Discussions of year-to-year comparisons between 2020 and 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 filed with theSecurities and Exchange Commission onFebruary 11, 2021 . Liquidity and Capital Resources Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations which is largely paid to our common and preferred shareholders in the form of dividends because as a REIT, we are generally required to make annual distributions to shareholders of at least 90% of our taxable income (cash dividends paid in 2021 were approximately$337.4 million ). Remaining cash flow from operations after dividend payments is used to fund recurring and non-recurring capital projects (such as tenant improvements and redevelopments), and regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities). We maintain a$1.0 billion revolving credit facility to fund short term cash flow needs and also look to the public and private debt and equity markets, joint venture relationships, and property dispositions to fund capital expenditures on a long-term basis. During 2021, we have continued to see improvements in overall cash collections from tenants as compared to 2020, although not yet at pre-COVID-19 levels (see further discussion under the "Outlook" section of this Item 2). While the overall economic impacts of the pandemic are unknown, we have taken multiple steps to strengthen our financial position, maximize liquidity, and to provide maximum flexibility during these uncertain times, including maintaining levels of cash in excess of the cash balances we have historically maintained. As ofDecember 31, 2021 , there is no balance outstanding on our$1.0 billion unsecured revolving credit facility and we had cash and cash equivalents of$162.1 million . We also had outstanding forward sales agreements for net proceeds of$264.0 million as ofDecember 31, 2021 , and the capacity to issue up to$175.0 million in common shares under the ATM program. We have no debt maturing untilJune 2023 . For the year ended 2021, the weighted average amount of borrowings outstanding on our revolving credit facility was$19.6 million , and the weighted average interest rate, before amortization of debt fees, was 0.9%. Our overall capital requirements during 2022 will be impacted by the extent and duration of COVID-19 related closures and restrictions, impacts on our cash collections, and overall economic impacts that might occur including supply chain issues. Cash requirements will also be impacted by acquisition opportunities and the level and general timing of our redevelopment and development activities. While the amount of future expenditures will depend on numerous factors, we expect to continue to see elevated levels of investment as we continue to invest in our overall portfolio to better position our properties for a post-COVID environment, costs to prepare vacant space for new tenants, and investments to complete the current phase and start on the next phase of our larger mixed-use development projects although at a slightly reduced level from 2021, largely due to deliveries in 2021 of our third phase ofAssembly Row . We believe that the cash on our balance sheet together with rents we collect, as well as our$1.0 billion revolving credit facility will allow us to continue to operate our business through the remainder of the COVID-19 pandemic. Given our ability to access the capital markets, we also expect debt or equity to be available to us. We also have the ability to delay the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy. While we have seen improvements from the initial negative impacts of the COVID-19 pandemic, it has continued to affect our overall business during the year endedDecember 31, 2021 , and we expect it will continue to negatively impact our business in the short term, we intend to operate with and to maintain our long term commitment to a conservative capital structure that will 45
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allow us to maintain strong debt service coverage and fixed-charge coverage
ratios as part of our commitment to investment-grade debt ratings.
Summary of Cash Flows
Year Ended December 31,
2021 2020
(In thousands)
Net cash provided by operating activities $ 471,352 $ 369,929
Net cash used in investing activities (660,118) (368,383)
Net cash (used in) provided by financing activities (452,967) 661,736
(Decrease) increase in cash and cash equivalents (641,733) 663,282
Cash, cash equivalents, and restricted cash, beginning of year 816,896 153,614
Cash, cash equivalents, and restricted cash, end of year $ 175,163 $ 816,896
Net cash provided by operating activities increased $101.4 million to $471.4
million during 2021 from $369.9 million during 2020. The increase was primarily
attributable to higher net income before non-cash items and the timing of cash
receipts including higher accounts receivable and lower prepaid rent balances in
2020 as a result of the COVID-19 pandemic.
Net cash used in investing activities increased $291.7 million to $660.1 million
during 2021 from $368.4 million during 2020. The increase was primarily
attributable to:
•a $356.9 million increase in acquisition of real estate primarily due to 2021
property acquisitions (see Note 3 to the consolidated financial statements for
additional information), and
•a $45.6 million decrease in proceeds from sales of real estate, resulting from
the sale of two properties and a portion of three properties in 2021, as
compared to the sale of three properties, one building, and the two remaining
condominium units at our Pike & Rose property in 2020,
partially offset by
•a $54.5 million decrease in net capital expenditures and leasing costs,
•a $41.4 million increase in net repayments and acquisitions of mortgages and
other notes receivable primarily due to the $31.1 million payoff of two mortgage
notes receivable in May 2021 , as compared to the $9.6 million acquisition of two
mortgage notes receivable in September 2020 , and
•$12.9 million paid in 2020 relating to the partial sale under threat of
condemnation at San Antonio Center in 2019.
Net cash provided by financing activities decreased $1.1 billion to $453.0
million used during 2021 from $661.7 million provided during 2020. The decrease
was primarily attributable to:
•a $1.1 billion decrease due to net proceeds of $700.1 million from the issuance
of $400.0 million of 3.50% unsecured senior notes and the $300.0 million
reopening of our 3.95% unsecured senior notes in May 2020 , and $394.2 million in
net proceeds from our $400.0 million of 1.25% unsecured senior notes in October
2020 ,
•$398.7 million in net proceeds from our unsecured term loan in May 2020 ,
•a $207.4 million increase in repayment of mortgages, finance leases, and notes
payable primarily due to the $140.9 million net repayments of four mortgage
loans in 2021 (see Note 5 to the consolidated financial statements for more
information), the $100.0 million repayment of our $400.0 million term loan which
was amended in April 2021 , and the $31.5 million repayment of the mortgage loan
encumbering the Pike & Rose hotel in January 2021 , partially offset by the $60.6
million payoff of the mortgage loan on The Shops at Sunset Place in December
2020 and the $3.6 million payoff of the mortgage loan on 29th Place, both in
December 2020 , and
•an $11.1 million increase in dividends paid to shareholders due to an increase
in the common share dividend rate and an increase in the number of common shares
outstanding,
partially offset by,
•$510.4 million from the December 2020 redemptions of our $250.0 million 2.55%
unsecured senior notes and our $250.0 million 3.00% unsecured senior notes, with
a make-whole premium of $10.4 million ,
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•$73.8 million increase in net proceeds from the issuance of 1.6 million common
shares under our ATM program for net proceeds of $172.7 million (see Note 8 to
our consolidated financial statements for additional details on these
transactions), as compared to 1.1 million common shares for net proceeds of
$98.8 million in 2020, and
•a $10.8 million decrease in distributions to and redemptions of noncontrolling
interests primarily due to the 2020 acquisition of one of our partner's
interests in the partnership that owns our Plaza El Segundo property for $7.3
million .
Cash Requirements
The following table provides a summary of material cash requirements comprising
our fixed, noncancelable obligations as of December 31, 2021 :
Cash Requirements by Period
Next Twelve Greater than
Total Months Twelve Months
(In thousands)
Fixed and variable rate debt (principal only) (1) $ 4,063,414 $ 4,095 4,059,319
Fixed and variable rate debt - our share of unconsolidated real estate partnerships (principal only)(2)
28,560 418 28,142
Lease obligations (minimum rental payments) (3) 352,162 11,001 341,161
Redevelopments/capital expenditure contracts 319,171 267,490 51,681
Real estate commitments (4) 98,691 - 98,691
Total estimated cash requirements $
4,861,998
_____________________
(1)The weighted average interest rate on our fixed and variable rate debt is 3.3% as ofDecember 31, 2021 . (2)The weighted average interest rate on the fixed and variable rate debt related to our unconsolidated real estate partnerships is 4.24% as ofDecember 31, 2021 . (3)This includes minimum rental payments related to both finance and operating leases. (4)This includes the liability related to the sale under threat of condemnation at San Antonio Center as further discussed in Note 7 to the consolidated financial statements. In addition to the amounts set forth in the table above and other liquidity requirements previously discussed, the following potential commitments exist: (a)Under the terms of theCongressional Plaza partnership agreement, a minority partner has the right to require us and the other minority partner to purchase its 26.63% interest inCongressional Plaza at the interest's then-current fair market value. If the other minority partner defaults in their obligation, we must purchase the full interest. Based on management's current estimate of fair market value as ofDecember 31, 2021 , our estimated liability upon exercise of the put option would range from approximately$67 million to$71 million . (b)Under the terms of various other partnership agreements, the partners have the right to exchange their operating partnership units for cash or the same number of our common shares, at our option. As ofDecember 31, 2021 , a total of 666,831 downREIT operating partnership units are outstanding. (c)Two of the members inPlaza El Segundo have the right to require us to purchase their 10.0% and 11.8% ownership interests at the interests' then-current fair market value. If the members fail to exercise their put options, we have the right to purchase each of their interests on or afterDecember 30, 2026 at fair market value. Based on management's current estimate of fair market value as ofDecember 31, 2021 , our estimated maximum liability upon exercise of the put option would range from approximately$25 million to$28 million . (d)The other member in The Grove at Shrewsbury and Brook 35 has the right to require us to purchase all of its approximately 4.1% interest in The Grove at Shrewsbury and approximately 6.5% interest in Brook 35 at the interests' then-current fair market value. Based on management's current estimate of fair market value as ofDecember 31, 2021 , our estimated maximum liability upon exercise of the put option would range from$6 million to$7 million . (e)EffectiveSeptember 18, 2023 , the other member in Hoboken has the right to require us to purchase all of its 10% ownership interest at the interest's then-current fair market value. Based on management's current estimate of fair market value as ofDecember 31, 2021 , our estimated maximum liability upon exercise of the put option would range from$9 million to$10 million . 47 -------------------------------------------------------------------------------- Table of Contents (f)EffectiveJune 14, 2026 , the other member inCambelback Colonnade andHilton Village has the right to require us to purchase all of its 2.0% ownership interest at the interest's then-current fair market value. Based on management's current estimate of fair value as ofDecember 31, 2021 , our estimated maximum liability upon exercise of the put option would range from$4 million to$5 million . (g)EffectiveJune 1, 2029 , the other member in Grossmont Center has the right to require us to purchase all of its 40.0% ownership interest at the interest's then-current fair market value. Based on management's current estimate of fair value as ofDecember 31, 2021 , our estimated maximum liability upon exercise of the put option would range from$68 million to$73 million . (h)AtDecember 31, 2021 , we had letters of credit outstanding of approximately$4.8 million . Off-Balance Sheet Arrangements AtDecember 31, 2021 , we have two real estate related equity method investments with total debt outstanding of$79.8 million , of which our share is$28.6 million . Our investment in these ventures atDecember 31, 2021 was$8.9 million . Other than the items disclosed in the Cash Requirements table, we have no off-balance sheet arrangements as ofDecember 31, 2021 that are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, cash requirements, or capital resources. 48 -------------------------------------------------------------------------------- Table of Contents Debt Financing Arrangements The following is a summary of our total debt outstanding as ofDecember 31, 2021 : Original
Principal Balance Stated Interest
Debt as of December Rate as of December
Description of Debt Issued 31, 2021 31, 2021 Maturity Date
(Dollars in thousands)
Mortgages payable
Secured fixed rate
Azalea Acquired $ 40,000 3.73 % November 1, 2025
Bell Gardens Acquired 12,127 4.06 % August 1, 2026
Plaza El Segundo 125,000 125,000 3.83 % June 5, 2027
The Grove at Shrewsbury (East) 43,600 43,600 3.77 % September 1, 2027
Brook 35 11,500 11,500 4.65 % July 1, 2029
Hoboken (24 Buildings) (1) 56,450 56,450 LIBOR + 1.95% December 15, 2029
Various Hoboken (14 Buildings) Acquired 31,817 Various (2) Various through 2029
Chelsea Acquired 4,851 5.36 % January 15, 2031
Hoboken (1 Building) (3) Acquired 16,234 3.75 % July 1, 2042
Subtotal 341,579
Net unamortized debt issuance costs
and premium (1,586)
Total mortgages payable, net
339,993
Notes payable Revolving credit facility (4) 1,000,000 - LIBOR + 0.775% January 19, 2024 Term Loan 400,000 300,000 LIBOR + 0.80% April 16, 2024 Various 7,239 2,635 11.31 % Various through 2028 Subtotal 302,635 Net unamortized debt issuance costs
(1,169)
Total notes payable, net
301,466
Senior notes and debentures Unsecured fixed rate 2.75% notes 275,000 275,000 2.75 % June 1, 2023 3.95% notes 600,000 600,000 3.95 % January 15, 2024 1.25% notes 400,000 400,000 1.25 % February 15, 2026 7.48% debentures 50,000 29,200 7.48 % August 15, 2026 3.25% notes 475,000 475,000 3.25 % July 15, 2027 6.82% medium term notes 40,000 40,000 6.82 % August 1, 2027 3.20% notes 400,000 400,000 3.20 % June 15, 2029 3.50% notes 400,000 400,000 3.50 % June 1, 2030 4.50% notes 550,000 550,000 4.50 % December 1, 2044 3.625% notes 250,000 250,000 3.625 % August 1, 2046 Subtotal 3,419,200 Net unamortized debt issuance costs and premium
(13,112)
Total senior notes and debentures, net 3,406,088 Total debt, net$ 4,047,547 _____________________ 1)OnNovember 26, 2019 , we entered into two interest rate swap agreements that fix the interest rate on the mortgage loan at 3.67%. 2)The interest rates on these mortgages range from 3.91% to 5.00%. 3)This mortgage loan has a fixed interest rate, however, the rate resets every five years until maturity. The current interest rate is fixed untilJuly 1, 2022 , and the loan is prepayable at par anytime after this date. 4)The maximum amount drawn under our revolving credit facility during 2021 was$150.0 million and the weighted average effective interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 0.9%. Our revolving credit facility, unsecured term loan, and other debt agreements include financial and other covenants that may limit our operating activities in the future. As ofDecember 31, 2021 , we were in compliance with all of the financial and other covenants related to our revolving credit facility, term loan, and senior notes. Additionally, we were in compliance with all of the financial and other covenants that could trigger a loan default on our mortgage loans. If we were to breach any of these financial and other covenants and did not cure the breach within an applicable cure period, our lenders could require us to repay 49 -------------------------------------------------------------------------------- Table of Contents the debt immediately and, if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes and our revolving credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can put us in default and require immediate repayment of their debt if we breach and fail to cure a default under certain of our other debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of operations, our ability to meet our obligations and the market value of our shares. Our organizational documents do not limit the level or amount of debt that we may incur. The following is a summary of our scheduled principal repayments as ofDecember 31, 2021 : Unsecured Secured Total (In thousands) 2022$ 744 $ 3,351 $ 4,095 2023 275,758 3,549 279,307 2024 900,659 (1) (2) 3,688 904,347 2025 383 48,033 48,416 2026 429,254 26,657 455,911 Thereafter 2,115,037 256,301 2,371,338$ 3,721,835 $ 341,579 $ 4,063,414 (3)
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1)Our$300.0 million term loan matures onApril 16, 2024 , plus two one-year extensions, at our option. 2)Our$1.0 billion revolving credit facility matures onJanuary 19, 2024 , plus two six-month extensions at our option. As ofDecember 31, 2021 , there was no outstanding balance under this credit facility. 3)The total debt maturities differ from the total reported on the consolidated balance sheet due to the unamortized net debt issuance costs and premium/discount on mortgage loans, notes payable, and senior notes as ofDecember 31, 2021 . Interest Rate Hedging We may use derivative instruments to manage exposure to variable interest rate risk. We generally enter into interest rate swaps to manage our exposure to variable interest rate risk and treasury locks to manage the risk of interest rates rising prior to the issuance of debt. We enter into derivative instruments that qualify as cash flow hedges and do not enter into derivative instruments for speculative purposes. Interest rate swaps associated with cash flow hedges are recorded at fair value on a recurring basis. Effectiveness of cash flow hedges is assessed both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with cash flow hedges is recorded in other comprehensive income (loss) which is included in "accumulated other comprehensive loss" on the balance sheet and statement of shareholders' equity. Cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, the default risk of the counterparty is evaluated by monitoring the credit worthiness of the counterparty which includes reviewing debt ratings and financial performance. If a cash flow hedge is deemed ineffective, the ineffective portion of changes in fair value of the interest rate swaps associated with cash flow hedges is recognized in earnings in the period affected. As ofDecember 31, 2021 , we have two interest rate swap agreements that effectively fix the interest rate on a mortgage payable associated with our Hoboken portfolio at 3.67%. OurAssembly Row hotel joint venture is also a party to two interest rate swap agreements that effectively fix their debt at 5.206%. All swaps were designated and qualify as cash flow hedges. Hedge ineffectiveness has not impacted our earnings in 2021, 2020 and 2019. REIT Qualification We intend to maintain our qualification as a REIT under Section 856(c) of the Code. As a REIT, we generally will not be subject to corporate federal income taxes on income we distribute to our shareholders as long as we satisfy certain technical requirements of the Code, including the requirement to distribute at least 90% of our taxable income to our shareholders. 50 -------------------------------------------------------------------------------- Table of Contents Funds From Operations Funds from operations ("FFO") is a supplemental non-GAAP financial measure of real estate companies' operating performance.The National Association of Real Estate Investment Trusts ("NAREIT") defines FFO as follows: net income, computed in accordance withU.S. GAAP, plus real estate related depreciation and amortization, and excluding gains and losses on the sale of real estate or changes in control, net of tax, and impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. We compute FFO in accordance with the NAREIT definition, and we have historically reported our FFO available for common shareholders in addition to our net income and net cash provided by operating activities. It should be noted that FFO: •does not represent cash flows from operating activities in accordance with GAAP (which, unlike FFO, generally reflects all cash effects of transactions and other events in the determination of net income); •should not be considered an alternative to net income as an indication of our performance; and •is not necessarily indicative of cash flow as a measure of liquidity or ability to fund cash needs, including the payment of dividends. We consider FFO available for common shareholders a meaningful, additional measure of operating performance primarily because it excludes the assumption that the value of the real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation. We use FFO primarily as one of several means of assessing our operating performance in comparison with other REITs. Comparison of our presentation of FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in the application of the NAREIT definition used by such REITs. An increase or decrease in FFO available for common shareholders does not necessarily result in an increase or decrease in aggregate distributions because ourBoard of Trustees is not required to increase distributions on a quarterly basis. However, we must distribute at least 90% of our annual taxable income to remain qualified as a REIT. Therefore, a significant increase in FFO will generally require an increase in distributions to shareholders although not necessarily on a proportionate basis. The reconciliation of net income to FFO available for common shareholders is as follows: Year Ended December 31, 2021 2020 2019 (In thousands, except per share data) Net income$ 269,081 $ 135,888 $ 360,542 Net income attributable to noncontrolling interests (7,583) (4,182) (6,676)
Gain on sale of real estate and change in control of interests, net
(89,892) (91,922) (116,393)
Impairment charge, net - 50,728 -
Depreciation and amortization of real estate assets 243,711 228,850 215,139
Amortization of initial direct costs of leases 26,051 20,415 19,359
Funds from operations 441,368 339,777 471,971
Dividends on preferred shares (1) (8,042) (8,042) (7,500)
Income attributable to operating partnership units 2,998 3,151 2,703
Income attributable to unvested shares (1,581) (1,037) (1,355)
Funds from operations available for common shareholders (2)
Weighted average number of common shares, diluted (1)(2)(3) 78,072 76,261 75,514 Funds from operations available for common shareholders, per diluted share (2)$ 5.57 $ 4.38 $ 6.17 _____________________ (1)For the year endedDecember 31, 2019 , dividends on our Series 1 preferred stock were not deducted in the calculation of FFO available to common shareholders, as the related shares were dilutive and included in "weighted average common shares, diluted." (2)For the year endedDecember 31, 2020 , FFO available for common shareholders includes a$11.2 million charge related to early extinguishment of debt. If this charge was excluded, our FFO available for common shareholders for 2020 would have been$345.0 million , and FFO available for common shareholders, per diluted share would have been$4.52 . For the year endedDecember 31, 2019 , FFO available for common shareholders includes an$11.9 million charge relating to the buyout of a lease atAssembly Square Marketplace . If this charge was excluded, our FFO 51
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Table of Contents available for common shareholders for 2019 would have been$477.7 million , and FFO available for common shareholders, per diluted share would have been$6.33 . (3)The weighted average common shares used to compute FFO per diluted common share includes operating partnership units that were excluded from the computation of diluted EPS. Conversion of these operating partnership units is dilutive in the computation of FFO per diluted common share but is anti-dilutive for the computation of diluted EPS for the periods presented.
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