PHIS EDIS The following discussion and analysis should be read in conjunction with our accompanying consolidated financial statements and notes thereto. See also "Cautionary Note Regarding Forward-Looking Statements" preceding Part I.
Key Performance Indicators and Defined Terms
We use certain key performance indicators ("KPIs"), which include both financial
and nonfinancial metrics, to measure the performance of our operations. We
believe these KPIs, as well as the core concepts and terms defined below, allow
our Board, management, and investors to analyze trends around our business
strategy, financial condition, and results of operations in a manner that is
focused on items unique to the real estate industry.
We do not consider our non-GAAP measures included as KPIs to be alternatives to
measures required in accordance with GAAP. Certain non-GAAP measures should not
be viewed as an alternative measure of our financial performance as they may not
reflect the operations of our entire portfolio, and they may not reflect the
impact of general and administrative expenses, depreciation and amortization,
interest expense, other income (expense), or the level of capital expenditures
and leasing costs necessary to maintain the operating performance of our
properties that could materially impact our results from operations.
Additionally, certain non-GAAP measures should not be considered as an
indication of our liquidity, nor as an indication of funds available to cover
our cash needs, including our ability to fund distributions, and may not be a
useful measure of the impact of long-term operating performance on value if we
do not continue to operate our business in the manner currently contemplated.
Accordingly, non-GAAP measures should be reviewed in connection with other GAAP
measurements, and should not be viewed as more prominent measures of performance
than net income (loss) or cash flows from operations prepared in accordance with
GAAP. Other REITs may use different methodologies for calculating similar
non-GAAP measures, and accordingly, our non-GAAP measures may not be comparable
to other REITs.
Our KPIs and terminology can be grouped into three key areas:
Portfolio-Portfolio metrics help management to gauge the health of our centers
overall and individually.
•Anchor space-We define an anchor space as a space greater than or equal to
10,000 square feet of gross leasable area ("GLA").
•Annualized Base Rent ("ABR")-We use ABR to refer to the monthly contractual
rent as of December 31, 2020 , multiplied by twelve months.
•ABR per Square Foot ("PSF")-This metric is calculated by dividing ABR by leased
GLA. Increases in ABR PSF can be an indication of our ability to create rental
rate growth in our centers, as well as an indication of demand for our spaces,
which generally provides us with greater leverage during lease negotiations.
•Inline space-We define an inline space as a space containing less than 10,000
square feet of GLA.
•GLA-We use GLA to refer to the total occupied and unoccupied square footage of
a building that is available for tenants (whom we refer to as a "Neighbor" or
our "Neighbors") to lease.
•Leased Occupancy-This metric is calculated as the percentage of total GLA for
which a lease has been signed regardless of whether the Neighbor has taken
possession. High occupancy is an indicator of demand for our spaces, which
generally provides us with greater leverage during lease negotiations.
Leasing-Leasing is a key driver of growth for our company.
•Comparable lease-We use this term to refer to a lease that is executed for the
exact same space (location and square feet) in which a Neighbor was previously
located 365 days from the earlier of legal possession or the day the prior
Neighbor physically vacated the space.
•Comparable rent spread-This metric is calculated as being the percentage
increase or decrease in first-year ABR (excluding any free rent or escalations)
on new or renewal leases (excluding options) as compared to the rent on an
expiring lease with the same lease terms and for the same unit, if such unit was
occupied within the past twelve months. This metric provides an indication of
our ability to generate revenue growth through leasing activity.
•Cost of executing new leases-We use this term to refer to certain costs
associated with new leasing, namely, leasing commissions, tenant improvement
costs, landlord work, and tenant concessions. The costs associated with landlord
work are excluded for repositioning and redevelopment projects, if any.
•Portfolio retention rate-This metric is calculated by dividing (a) total square
feet of retained Neighbors with current period lease expirations by (b) the
square feet of leases expiring during the period. The portfolio retention rate
provides insight into our ability to retain Neighbors at our shopping centers as
their leases approach expiration. Generally, the costs to retain an existing
Neighbor are lower than costs to replace with a new neighbor.
•Recovery rate-This metric is calculated by dividing (a) total recovery income
by (b) total recoverable expenses during the period. A high recovery rate is an
indicator of our ability to recover certain property operating expenses and
capital costs from our Neighbors.
Financial Performance-In addition to financial metrics calculated in accordance
with GAAP, such as net income or cash flows from operations, we utilize non-GAAP
metrics to measure our operational and financial performance. See the section
within this Item 7 titled Management's Discussion and Analysis of Financial
Condition and Results of Operations - Non-GAAP Measures for further discussion
on the following metrics.
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•Adjusted Earnings Before Interest, Taxes, Depreciation, and Amortization for
Real Estate ("Adjusted EBITDAre")-To arrive at Adjusted EBITDAre, we adjust
EBITDAre, as defined below, to exclude certain recurring and non-recurring items
including, but not limited to: (i) changes in the fair value of the earn-out
liability; (ii) other impairment charges; (iii) amortization of basis
differences in our investments in our unconsolidated joint ventures; and (iv)
transaction and acquisition expenses. We use EBITDAre and Adjusted EBITDAre as
additional measures of operating performance which allow us to compare earnings
independent of capital structure and evaluate debt leverage and fixed cost
coverage.
•Core FFO-To arrive at Core FFO, we adjust FFO attributable to stockholders and
convertible noncontrolling interests, as defined below, to exclude certain
recurring and non-recurring items including, but not limited to: (i)
depreciation and amortization of corporate assets; (ii) changes in the fair
value of the earn-out liability; (iii) amortization of unconsolidated joint
venture basis differences; (iv) gains or losses on the extinguishment or
modification of debt, (v) other impairment charges; and (vi) transaction and
acquisition expenses. We believe FFO provides insight into our operating
performance as it excludes certain items that are not indicative of such
performance. Core FFO provides further insight into the sustainability of our
operating performance and provides an additional measure to compare our
performance across reporting periods on a consistent basis by excluding items
that may cause short-term fluctuations in net income (loss).
•EBITDAre-The National Association of Real Estate Investment Trusts ("Nareit")
defines EBITDAre as net income (loss) computed in accordance with GAAP before:
(i) interest expense; (ii) income tax expense; (iii) depreciation and
amortization; (iv) gains or losses from disposition of depreciable property; and
(v) impairment write-downs of depreciable property. Adjustments for
unconsolidated partnerships and joint ventures are calculated to reflect
EBITDAre on the same basis.
•FFO-Nareit defines FFO as net income (loss) computed in accordance with GAAP,
excluding: (i) gains (or losses) from sales of property and gains (or losses)
from change in control; (ii) depreciation and amortization; (iii) impairment
losses on real estate and impairments of in-substance real estate investments in
investees that are driven by measurable decreases in the fair value of the
depreciable real estate held by the unconsolidated partnerships and joint
ventures; and (iv) adjustments for unconsolidated partnerships and joint
ventures, calculated to reflect FFO on the same basis.
•Net Debt to Adjusted EBITDAre-This ratio is calculated by dividing net debt by
Adjusted EBITDAre (included on an annualized basis within the calculation). It
provides insight into our leverage rate based on earnings and is not impacted by
fluctuations in our equity price.
•Net Debt to Total Enterprise Value-This ratio is calculated by dividing net
debt by total enterprise value. It provides insight into our capital structure
and usage of debt.
•NOI-We calculate NOI as total operating revenues, adjusted to exclude non-cash
revenue items, less property operating expenses and real estate taxes. NOI
provides insight about our financial and operating performance because it
provides a performance measure of the revenues and expenses directly involved in
owning and operating real estate assets and provides a perspective not
immediately apparent from net income (loss).
•Same-Center-We use this term to refer to a property, or portfolio of
properties, that have been owned and operational for the entirety of each
reporting period (i.e., since January 1, 2019 ).
Overview
We are an internally-managed REIT and one of the nation's largest owners and operators of grocery-anchored shopping centers. The majority of our revenue is lease revenue derived from our real estate investments. Additionally, we operate an investment management business providing property management and advisory services to over$515 million of third-party assets. This business provides comprehensive real estate and asset management services to two institutional joint ventures, in which we retain an ownership interest, and one private fund (collectively, the "Managed Funds"). OnOctober 1, 2020 ,Grocery Retail Partners I LLC ("GRP I"), a joint venture withNorthwestern Mutual Life Insurance Company ("Northwestern Mutual") in which we own an equity interest, acquiredGrocery Retail Partners II LLC ("GRP II"), an additional joint venture withNorthwestern Mutual in which we owned an equity interest. Our ownership in the combined entity was adjusted upon consummation of the transaction, and we own approximately a 14% interest in GRP I as a result of the acquisition. 34 --------------------------------------------------------------------------------
Below are statistical highlights of our wholly-owned portfolio:
December 31, 2020 December 31, 2019
Number of properties 283 287
Number of states 31 31
Total square feet (in thousands) 31,709 32,130
Leased % of rentable square feet: Total portfolio spaces 94.7 % 95.4 % Anchor spaces 97.6 % 98.0 % Inline spaces 88.9 % 90.2 % Average remaining lease term (in years)(1) 4.5
4.7
% ABR from grocery-anchored properties 97.3 %
97.0 %
(1)The average remaining lease term in years excludes future options to extend the term of the lease. COVID-19 Strategy-During the first quarter of 2020, the COVID-19 pandemic began spreading globally, with the outbreak being classified as a pandemic by theWorld Health Organization onMarch 11, 2020 . As a result of the pandemic, many state governments issued "stay-at-home" mandates that generally limited travel and movement of the general public to essential activities only and required all non-essential businesses to close. In response to the pandemic, we implemented the following initiatives: •We suspended stockholder distributions after theMarch 2020 distribution, and resumed distributions beginning with theDecember 2020 distribution paid inJanuary 2021 (see Note 13 for more detail); •We suspended the SRP for DDI, which was reinstated inJanuary 2021 ; •Our Compensation Committee approved temporary reductions to compensation which remained in place throughDecember 2020 , including: a 25% reduction to the base salary of our chief executive officer; a 10% reduction to the base salaries of our president, chief operating officer, chief financial officer, and general counsel; and a 10% reduction to board members' base compensation for the 2020-2021 term; •We have implemented expense reductions at the property and corporate levels which remained in place throughDecember 2020 , including reductions to our workforce and travel costs; and •Our capital investments were prioritized to support the reopening of our Neighbors and new leasing activity, or deferred if possible. InMay 2020 , many state governments began lifting, in whole or in part, the "stay-at-home" mandates, effectively removing or lessening the limitations on travel and allowing many businesses to reopen in full or limited capacity. The impact these measures and the resulting consumer behavior are having on our portfolio has evolved sinceMay 2020 , and we expect it to continue to do so. Our management team has determined the following are key indicators of recovery for our portfolio and is executing a strategy to guide our Neighbors through these phases (all statistics are approximate and include the prorated portion attributable to properties owned through our joint ventures): •Assisting Neighbors in Reopening-Our wholly-owned properties and those owned through our joint ventures contained approximately 5,500 occupied Neighbor spaces as ofMarch 8, 2021 . At the peak of the pandemic-related closure activity inApril 2020 , temporary closures reached 37% of all Neighbor spaces, totaling 27% of our ABR and 22% of our GLA. As ofMarch 8, 2021 , 98% of our occupied Neighbor spaces, totaling 99% of our ABR and GLA, are open for business. Neighbors who remain temporarily closed generally retain this status as a result of government mandates, either through direct orders which prohibit reopening or because they have determined that operating restrictions as a result of such mandates make reopening unprofitable. In order to facilitate communication with our Neighbors, we launched PECO ConnectTM, a webpage designed to provide resources, information, and tools to assist our Neighbors in reopening as states lifted "stay-at-home" requirements and other restrictions. •Returning to Monthly Payments-We continue to work with our Neighbors to resume normal monthly rent payments. Our efforts have included raising awareness of the benefits available through the Coronavirus Aid, Relief, and Economic Security Act, including the Paycheck Protection Program and Health Care Enhancement Act (collectively, the "CARES Act") and other small business programs. 35 --------------------------------------------------------------------------------
As our Neighbors have reopened, we have seen our collections continue to improve from the second quarter. The following table summarizes our collections by quarter, as they were originally reported as well as updated for payments received subsequent to the month billed:
Originally Reported Current(1)
Q2 2020(2) 86 % 93 %
Q3 2020(3) 94 % 95 %
Q4 2020 N/A 95 %
(1)Including collections received through March 8, 2021 .
(2)As reported in our Current Report on Form 8-K filed with the SEC on August
12, 2020 .
(3)As reported in our Quarterly Report on Form 10-Q filed with the SEC on
November 9, 2020 .
Further, as of March 8, 2021 , our collections for January and February 2021 were
approximately 94% in total. Additionally, 57% of our Neighbors are paying their
rent in full as of March 8, 2021 .
•Recovering Missed Rent Charges-We believe substantially all Neighbors,
including those that were required to temporarily close under governmental
mandates, are contractually obligated to continue with their rent payments as
documented in our lease agreements with them. Since April 2020 , a portion of our
Neighbors have missed making certain rent payments charged, and we are working
with our Neighbors to collect such charges. We believe that it is best to begin
negotiation of relief only once a Neighbor has reopened, and we have continued
to see payments made toward rent and recovery charges owed. We have granted
relief in the form of payment plans, and we may grant rent abatements or
forgiveness to certain Neighbors based on an evaluation of characteristics such
as their merchandising profile, role in the shopping center, and overall
assessment of future financial health. For active Neighbors as of March 8, 2021 ,
these payment plans and rent abatements represented approximately 2% and 1% of
portfolio ABR, respectively. As of March 8, 2021 , approximately 87% of payments
are scheduled to be received through December 31, 2021 for all executed payment
plans. The weighted-average remaining term over which we expect to receive
payment on executed payment plans is approximately twelve months. As of March 8,
2021 , 70% of our Neighbors with executed payment plans are current or have fully
paid on their rent obligations.
COVID-19 Operational Update-While our management team has guided many of our
Neighbors through the phases of reopening and resuming monthly payments, the
COVID-19 pandemic has impacted our financial position and results from
operations primarily as a result of reduced revenue, most notably from Neighbors
that have been determined to be a credit risk, and from lower rent collections.
During the COVID-19 pandemic, we have been closely monitoring the status of our
Neighbors to identify those who potentially pose a credit risk in order to
appropriately account for the impact to revenue and in order to quickly take
action when a Neighbor was ultimately unable to remain in a space.
The current economic environment has increased the uncertainty of collecting
rents from a number of our Neighbors. For Neighbors with a higher degree of
uncertainty, we may not record revenue for amounts billed until the cash is
received. Based on our analysis, no individual Neighbor category was deemed to
be entirely non-creditworthy as of December 31, 2020 ; however, we continue to
evaluate each Neighbor's creditworthiness on an individual basis. For the year
ended December 31, 2020 , inclusive of the prorated portion attributable to
properties owned through our joint ventures, we had $28.5 million in monthly
revenue that will not be recognized until cash is collected or the Neighbor
resumes payment and is considered creditworthy. As of December 31, 2020 , our
Neighbors deemed to be non-creditworthy represented approximately 12.8% of our
total active Neighbors.
Additionally, certain of our Neighbors have entered into bankruptcy proceedings.
While some of these cases have already been resolved, with the assumption or
rejection of the lease already reflected in our results, other claims have yet
to be resolved, and as such, the potential fallout is not yet reflected in our
occupancy rate or ABR metrics. Neighbors in bankruptcy who continue to occupy
space in our shopping centers represent an exposure of less than 1% of our total
portfolio ABR as of December 31, 2020 . We have included our assessment of the
impact of these bankruptcies in our estimate of rent collectibility, which
impacted recorded revenue, as noted previously.
We are in negotiations with additional Neighbors, which we believe will lead to
more Neighbors repaying their past due charges. We will continue to work with
Neighbors on establishing plans to repay past due amounts, and will monitor the
impact of such payment plans on our results of operations in future quarters. We
cannot guarantee that we will ultimately be able to collect past due amounts.
For our entire portfolio, inclusive of our prorated share of properties owned
through joint ventures, 56% of missed monthly charges in 2020 have been
collected subsequent to the month billed and 9% have been waived, as of March 8,
2021 .
Distributions and Equity Activity-On November 4, 2020 , our Board reinstated
monthly stockholder distributions beginning December 2020 to stockholders of
record as of December 31, 2020 , which was paid on January 12, 2021 .
Distributions were paid for January and February 2021 . Additionally, our Board
has approved distributions of $0.02833333 per share for March 2021 .
Additionally, we executed the Tender Offer for 13.5 million shares of common
stock at a price of $5.75 per share which resulted in a total value of
$77.6 million . This included the issuance of 2.8 million common shares in
redemption of 2.8 million OP units converted at the time of repurchase. This
price was lower than the EVPS of $8.75 , reflecting the Board's acknowledgment
that the share prices of our publicly-traded peers in the shopping center REIT
sector had declined significantly below their respective estimated net asset
values, primarily as a result of the ongoing market uncertainty caused by the
COVID-19 pandemic. Accordingly, the Board believed that if our shares were
listed on a national securities exchange, the price of our shares of common
stock might similarly trade at a discount to our EVPS.
On January 8, 2021 , the Board adopted the Fourth Amended SRP. Under the Fourth
Amended SRP, share repurchases for DDI have been reinstated at $5.75 per share,
and as of March 1, 2021 , we have repurchased 0.1 million shares for a total
value of $0.4 million (see Note 13 for more detail). The SRP with respect to
standard repurchases remains suspended.
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The previously announced one-for-four reverse stock split has been delayed
subject to market conditions.
Financial Highlights-Investing in grocery-anchored real estate is a core part of
our business strategy, and as of December 31, 2020 , 97.3% of our ABR was derived
from grocery-anchored shopping centers. As of December 31, 2020 , total occupancy
only declined 0.7% to 94.7%, and inline occupancy decreased 1.3% to 88.9% when
compared to December 31, 2019 . We believe that our investment focus on
grocery-anchored shopping centers that provide daily necessities, coupled with
the execution of our capital recycling program in recent years, left our
portfolio well-positioned to weather the economic downturn in 2020 resulting
from the COVID-19 pandemic. In turn, this allowed us to mitigate the negative
impact on our financial results. Despite the impact of COVID-19, financial
performance highlights during 2020 are as follows:
•Net income of $5.5 million as compared to a net loss of $72.8 million a year
ago, largely owing to lower impairments in 2020 due to the successful execution
of our capital recycling program in recent years.
•Core FFO decreased by $10.5 million to $220.4 million , and declined by $0.04 to
$0.66 per diluted share.
•Same-Center NOI decreased 4.1% to $328.0 million .
•Our Board reinstated monthly stockholder distributions beginning December 2020 .
•Completed the Tender Offer which resulted in the repurchase of 13.5 million
shares of common stock.
•Net debt to Adjusted EBITDAre - annualized was 7.3x as compared to 7.2x during
the same period a year ago.
Executing on our Strategy-Our performance for the year is linked to our key
initiatives: focus on core operations, strategic growth and portfolio
management, and responsible balance sheet management. We believe these
initiatives will improve our position for a full-cycle liquidity event.
Focus on Core Operations-The COVID-19 pandemic had a significant impact on our
operational focus during 2020 which required our operations team to make a shift
towards the recovery of our portfolio, including assisting our Neighbors in
reopening and returning to monthly rent payments. Our leasing activity slowed
compared to 2019, which was a record-setting leasing year for us. Despite this
decline, our diversity of Neighbors and concentration of necessity-based and
internet-resistant retail has allowed us to maintain our high level of occupancy
in 2020 as compared to 2019. Our wholly-owned property leasing highlights are as
follows:
•As of March 8, 2021 , 98% of our occupied Neighbor spaces, totaling 99% of our
ABR and GLA, are open for business.
•As of March 8, 2021 , we have collected 94% of our rent and recovery billings
originally charged from April to December 2020 , with 56% of the missed charges
being collected subsequent to the month in which they were billed.
•We executed 861 leases (new, renewal, and options) totaling 4.7 million square
feet during the year ended December 31, 2020 , which was a decline from a record
1,026 leases totaling 4.6 million square feet executed during the year ended
December 31, 2019 . Demand for our well-located grocery-anchored retail space
increased during the third and fourth quarters in 2020, approaching the 2019
leasing levels.
•Total ABR per leased square foot for new leases executed improved 8.0% to
$16.14 and inline ABR per leased square foot for new leases executed improved
5.7% to $18.11 during the year ended December 31, 2020 .
Strategic Growth and Portfolio Management-Our current development and
redevelopment projects focus on outparcel development, anchor repositioning, and
other initiatives to increase growth and NOI at our centers, while our
investment management business is identifying opportunities for joint ventures
with third parties, both of which will create additional revenue opportunities.
As a result of the COVID-19 pandemic, our capital investments during 2020 were
prioritized to support the reopening of our Neighbors and new leasing activity,
or deferred if possible. Expansion of our investment management business has
been delayed and disrupted as investors were cautious of new retail investments
during a pandemic. Highlights of our development and redevelopment projects, as
well as our investment management business as of and for the year ended December
31, 2020 are as follows:
•As of and for the year ended December 31, 2020 , we had 35 development and
redevelopment projects completed or in process, which we estimate will comprise
a total investment of $87.0 million .
•Created an additional $2.9 million of ABR in 2020 as a result of development
and redevelopment projects completed in 2019.
•Recognized $5.7 million in fee and management income from GRP I and GRP II
(prior to its acquisition by GRP I) and $1.6 million from NRP for the year ended
December 31, 2020 .
Responsible Balance Sheet Management-Our management team has executed strategies
to create funds that will be used to reinvest into acquisitions, for development
and redevelopment projects, and to repay outstanding debt. This includes
identifying mature properties where our growth potential has been maximized and
properties at risk of future deterioration, and we are engaging in targeted
dispositions of those properties. Additionally, we have reinstated our
distributions at a lower rate as compared to previous years to preserve and
retain cash flow. Due to the impact of COVID-19, our disposition activity was
lower than anticipated during 2020 as the transaction market was sparse as a
result of the COVID-19 pandemic. Our balance sheet management highlights as of
and for the year ended December 31, 2020 are as follows:
•We realized $57.9 million of cash proceeds from the sale of seven properties
and one outparcel.
•Our management team borrowed $200 million on our revolving line of credit in
April 2020 to maximize our financial flexibility amid uncertainty related to the
impact of the COVID-19 pandemic. We were able to repay the full amount of this
borrowing in June 2020 , and did not borrow on our revolving line of credit for
the remainder of 2020.
•We utilized cash accumulated throughout the year to repurchase 13.5 million
shares under the Tender Offer, benefiting shareholders seeking liquidity while
providing value accretion to our existing shareholders.
•Our ratio of debt to Adjusted EBITDAre was 7.3x as of December 31, 2020 , as
compared to 7.2x as of December 31, 2019 (see "Liquidity and Capital Resources -
Debt" below for a discussion and calculation).
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•We paid down $30.0 million in term loan debt maturing in 2021 as well as
executed early repayments of $24.5 million in mortgage debt, reducing our net
outstanding debt obligations by 2.6% from a year ago.
•Following our activity this year, our debt maturity profile as of December 31,
2020 is as follows (including the impact of derivatives on weighted-average
interest rates):
[[Image Removed: cik0001476204-20201231_g7.jpg]]
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Leasing Activity-Our decline in leasing activity as compared to 2019, a record
leasing year, was primarily a result of the COVID-19 pandemic. While we saw
leasing activity slow in the second quarter of 2020, it has since recovered to
activity levels comparable to those in prior periods. The average rent per
square foot and cost of executing leases fluctuates based on the Neighbor mix,
size of the leased space, and lease term. Leases with national and regional
Neighbors generally require a higher cost per square foot to execute than those
with local Neighbors. However, generally such national and regional Neighbors
will also pay higher rates for a longer term.
Below is a summary of leasing activity for our wholly-owned properties for the
years ended December 31, 2020 and 2019:
Total Deals (1) Inline Deals(1)
2020 2019 2020 2019
New leases:
Number of leases 383 429 363 411
Square footage (in thousands) 1,290 1,475 957 1,050
ABR (in thousands) $ 20,823 $ 22,050 $ 17,325 $ 17,998
ABR per square foot $ 16.14 $ 14.95 $ 18.11 $ 17.14
Cost per square foot of executing new
leases $ 26.14 $ 24.00 $ 28.58 $ 26.63
Number of comparable leases 127 140 125 135
Comparable rent spread 8.2 % 13.3 % 10.9 % 11.2 %
Weighted average lease term (in years) 7.6 7.5 6.7 6.8
Renewals and options:
Number of leases 478 597 422 542
Square footage (in thousands) 3,420 3,171 986 1,186
ABR (in thousands) $ 41,290 $ 38,969 $ 20,976 $ 24,675
ABR per square foot $ 12.07 $ 12.29 $ 21.27 $ 20.80
ABR per square foot prior to renewals $ 11.49 $ 11.49 $ 19.77 $ 18.87
Percentage increase in ABR per square foot 5.1 % 7.0 % 7.6 % 10.2 %
Cost per square foot of executing renewals
and options $ 2.65 $ 2.53 $ 4.18 $ 4.33
Number of comparable leases 365 460 349 441
Comparable rent spread 6.7 % 8.5 % 8.0 % 11.4 %
Weighted average lease term (in years) 5.1 4.7 3.9 4.4
Portfolio retention rate 85.2 % 85.7 % 72.8 % 77.7 %
(1)Per square foot amounts may not recalculate exactly based on other amounts presented within the table due to rounding.
Results of Operations Known Trends and Uncertainties of the COVID-19 Pandemic The COVID-19 pandemic has impacted our results beginning with the second quarter largely in the form of reduced revenue, where our estimates around collectibility have created volatility in our earnings. We anticipate these trends will continue into 2021, and the total impact on revenue in the future cannot be determined at this time. The duration of the pandemic and mitigating measures, and the resulting economic impact, has caused some of our Neighbors to permanently vacate their spaces and/or not renew their leases. Under such circumstances, we may have difficulty leasing these spaces on the same or better terms or at all, and/or incur additional costs to lease vacant spaces, which may reduce our occupancy rates in the future and ultimately reduce our revenue. Extended periods of vacancy or reduced revenues may trigger impairments of our real estate assets. Additionally, these factors may impact disposition activity by decreasing demand and negatively impacting capitalization rates. Our disposition and acquisition activity has been reduced as a result of the pandemic during 2020. The ongoing impact of the COVID-19 pandemic and the resulting economic downturn will likely continue to be significant to our results of operations into 2021 and potentially beyond as a result of a number of factors outside of our control. These factors include, but are not limited to: overall economic conditions on both a macro and micro level, including consumer demand as well as retailer demand for space within our shopping centers; the impact of social distancing guidelines, recommendations from governmental authorities, and consumer shopping preferences; the nature and effectiveness of any economic stimulus or relief measures; the timing of availability and distribution of vaccines to the general public; and the impact of all of the factors above, including other potentially unknown factors, on our Neighbors' ability to continue paying rent and related charges on time or at all and Neighbors' willingness to renew their leases on the same terms or at all. These factors have impacted our results from operations, and may continue to do so into the future. The primary impact to our results has been reduced revenue from Neighbor concessions, increased collectibility reserves, and decreased recovery rates on expenses. Other unforeseen impacts may also arise in the course of operating during these circumstances. See "Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview" of this filing on Form 10-K for our observation of Neighbor impacts throughMarch 8, 2021 . 39 -------------------------------------------------------------------------------- InDecember 2020 , theUnited States Food and Drug Administration issued emergency use authorizations for two vaccines for the prevention of COVID-19. The timeline for distribution of the vaccines to the public is determined at the state level, and consequently, the timeline for the removal of governmental mandates implemented to combat the spread of the virus may vary by state or locality. At this time, we are unable to ascertain the timing of any such events, and thus are unable to predict with certainty the impact that the vaccines and their effect in mitigating the spread of COVID-19 may have on our financial results. Overall, we believe that our investment focus on grocery-anchored shopping centers that provide daily necessities has helped, and will continue to help, lessen the negative effect of the COVID-19 pandemic on our business compared to non-grocery anchored shopping centers. We are closely monitoring the occupancy, operating performance, and Neighbor sales results at our centers, including those Neighbors operating with reduced hours or under government-imposed restrictions. Further, we have taken action to maximize our financial flexibility by implementing expense reductions at the property and corporate level; prioritizing capital projects to support the reopening of our Neighbors and new leasing activity, or deferring if possible; temporarily suspending monthly distributions; and temporarily suspending share repurchases for DDI.
Summary of Operating Activities for the Years Ended
Favorable (Unfavorable) Change
(dollars in thousands, except per share
amounts) 2020 2019 $ %(1)
Revenues:
Rental income $ 485,483 $ 522,270 $ (36,787) (7.0) %
Fee and management income 9,820 11,680 (1,860) (15.9) %
Other property income 2,714 2,756 (42) (1.5) %
Total revenues 498,017 536,706 (38,689) (7.2) %
Operating Expenses:
Property operating expenses 87,490 90,900 3,410 3.8 %
Real estate tax expenses 67,016 70,164 3,148 4.5 %
General and administrative expenses 41,383 48,525 7,142 14.7 %
Depreciation and amortization 224,679 236,870 12,191 5.1 %
Impairment of real estate assets 2,423 87,393 84,970 97.2 %
Total operating expenses 422,991 533,852 110,861 20.8 %
Other:
Interest expense, net (85,303) (103,174) 17,871 17.3 % Gain on disposal of property, net 6,494 28,170 (21,676) (76.9) % Other income (expense), net 9,245 (676) 9,921 NM Net income (loss) 5,462 (72,826) 78,288 107.5 % Net (income) loss attributable to noncontrolling interests (690) 9,294 (9,984) (107.4) % Net income (loss) attributable to stockholders$ 4,772 $ (63,532) $ 68,304 107.5 % (1)Line items that result in a percent change that exceed certain limitations are considered not meaningful ("NM") and indicated as such. Our basis for analyzing significant fluctuations in our results of operations generally includes review of the results of our same-center portfolio, non-same-center portfolio, and revenues and expenses from our management activities. Our non-same-center portfolio includes 28 properties disposed of and seven properties acquired afterDecember 31, 2018 . Below are explanations of the significant fluctuations in the results of operations for the years endedDecember 31, 2020 and 2019: Rental Income decreased$36.8 million as follows: •$20.7 million decrease related to our same-center portfolio primarily as follows: ?$26.8 million decrease largely due to the COVID-19 pandemic and its economic impact. This includes an increased number of Neighbors we have identified as a credit risk which resulted in a decrease to rental income of$24.4 million , including a$3.1 million reduction in revenues due to reserves on straight-line rent adjustments for the related leases. Additionally, we saw a$2.4 million decrease due to rent abatement; ?$2.8 million decrease primarily due to non-cash straight-line rent amortization; ?$7.1 million increase primarily due to a$0.23 increase in average minimum rent per square foot and a 0.8% improvement in average occupancy; and ?$2.0 million increase in recovery income primarily due to a$3.1 million increase owing largely to higher recoverable insurance expenses and higher same-center occupancy, partially offset by a$1.1 million decrease in recoverable utilities. •$16.1 million decrease related to our net disposition of 21 properties. 40 -------------------------------------------------------------------------------- Fee and Management Income: •The$1.9 million decrease in fee and management income is primarily due to fees no longer received from REIT III following its acquisition by us inOctober 2019 ; a decrease in fees received from NRP, primarily due to property dispositions; and lower rent and recovery collections for our unconsolidated joint ventures as a result of the COVID-19 pandemic, which resulted in lower management fees paid to us. This offsets improvements in fees received from GRP I andGRP II (prior its acquisition by GRP I). Property Operating Expenses decreased$3.4 million as follows: •$0.3 million decrease related to our same-center portfolio and corporate operating activities: ?$1.4 million decrease primarily due to reduced performance compensation; ?$1.2 million decrease primarily in connection with our expense reduction initiatives, including$0.8 million largely owing to lower maintenance and utility costs, and$0.4 million largely owing to lower travel expenses; and ?$2.3 million increase in insurance expenses owing to a higher volume of claims and higher market rates. •$3.1 million decrease related to our net disposition of 21 properties. Real Estate Taxes decreased$3.1 million as follows: •$1.1 million decrease related to our same-center portfolio primarily as a result of successful real estate tax appeals; and •$2.0 million decrease related to our net disposition of 21 properties. General and Administrative Expenses: •The$7.1 million decrease in general and administrative expenses was primarily related to expense reductions taken to reduce the impact of the COVID-19 pandemic, with the majority of these decreases related to compensation. Depreciation and Amortization decreased$12.2 million as follows: •$7.6 million decrease related to our net disposition of 21 properties; and •$4.6 million decrease related to our same-center portfolio and corporate operating activities, primarily due to intangible assets becoming fully amortized byDecember 31, 2019 . Impairment of Real Estate Assets: •Our decrease in impairment of real estate assets of$85.0 million was due to a lower volume of assets under contract or actively marketed for sale at a disposition price that was less than the carrying value in 2020 as compared to 2019, the proceeds from which were used to fund tax-efficient acquisitions, to fund redevelopment opportunities in owned centers, and for general corporate purposes. We continue to sell non-core assets and may potentially recognize impairments in future quarters, but our anticipated disposition activity was reduced due to market conditions as a result of the COVID-19 pandemic. Interest Expense, Net: •The$17.9 million decrease during the year endedDecember 31, 2020 as compared to the same period in 2019 was largely due to the decrease in LIBOR and expiring interest rate swaps in 2020 as well as repricing activities that occurred in 2019. Interest Expense, Net was comprised of the following (dollars in thousands): Year Ended December 31, 2020 2019 Interest on revolving credit facility, net $ 1,668 $ 1,827 Interest on term loans, net 46,798 62,745 Interest on secured debt 29,001 23,048 Loss on extinguishment or modification of debt, net 4 2,238 Non-cash amortization and other 7,832 13,316 Interest expense, net $
85,303
Weighted-average interest rate as of end of year 3.1 % 3.4 % Weighted-average term (in years) as of end of year 4.1 5.0 Gain on Disposal of Property, Net: •The$21.7 million decrease was primarily related to the sale of seven properties (plus other miscellaneous disposals and write-offs) with a net gain of$6.5 million during the year endedDecember 31, 2020 , as compared to the sale of 21 properties with net gain of$28.2 million during the year endedDecember 31, 2019 (see Note 5). Other Income (Expense), Net: •The$9.9 million change was largely due to other impairment charges of$9.7 million in connection with the REIT III public offering during the year endedDecember 31, 2019 , which included$7.8 million of impairment charges related 41 -------------------------------------------------------------------------------- to our corporate intangible asset and$1.9 million of impairment charges related to organization and offering costs. Other Income (Expense), Net was comprised of the following (dollars in thousands): Year
Ended
2020 2019
Change in fair value of earn-out liability $ 10,000 $ 7,500
Equity in (loss) income of unconsolidated joint ventures (31) 1,069
Transaction and acquisition expenses (539) (598)
Federal, state, and local income tax expense (491) (785)
Other impairment charges (359) (9,661)
Settlement of property acquisition-related liabilities 510 1,360
Other 155 439
Other income (expense), net $ 9,245 $ (676)
Summary of Operating Activities for the Years Ended December 31, 2019 and 2018
For a discussion of the year-to-year comparisons in the results of operations
for the years ended December 31, 2019 and 2018, see " Part II, Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations " of our 2019 Annual Report on Form 10-K, filed with the SEC on
March 12, 2020 .
Non-GAAP Measures
Same-Center Net Operating Income-We present Same-Center NOI as a supplemental
measure of our performance. We define NOI as total operating revenues, adjusted
to exclude non-cash revenue items, less property operating expenses and real
estate taxes. For the three months and years ended December 31, 2020 and 2019,
Same-Center NOI represents the NOI for the 275 properties that were wholly-owned
and operational for the entire portion of both comparable reporting periods. We
believe Same-Center NOI provides useful information to our investors about our
financial and operating performance because it provides a performance measure of
the revenues and expenses directly involved in owning and operating real estate
assets and provides a perspective not immediately apparent from net income
(loss). Because Same-Center NOI excludes the change in NOI from properties
acquired or disposed of after December 31, 2018 , it highlights operating trends
such as occupancy levels, rental rates, and operating costs on properties that
were operational for both comparable periods. Other REITs may use different
methodologies for calculating Same-Center NOI, and accordingly, our Same-Center
NOI may not be comparable to other REITs.
Same-Center NOI should not be viewed as an alternative measure of our financial
performance as it does not reflect the operations of our entire portfolio, nor
does it reflect the impact of general and administrative expenses, depreciation
and amortization, interest expense, other income (expense), or the level of
capital expenditures and leasing costs necessary to maintain the operating
performance of our properties that could materially impact our results from
operations.
The table below compares Same-Center NOI for the years ended December 31, 2020
and 2019 (dollars in thousands):
Favorable (Unfavorable)
2020 2019 $ Change % Change
Revenues:
Rental income(1) $ 364,998 $ 360,548 $ 4,450
Tenant recovery income 122,835 120,870 1,965
Reserves for uncollectibility(2) (26,458) (5,179) (21,279)
Other property income 2,609 2,552 57
Total revenues 463,984 478,791 (14,807) (3.1) %
Operating expenses:
Property operating expenses 70,270 70,208 (62)
Real estate taxes 65,727 66,461 734
Total operating expenses 135,997 136,669 672 0.5 %
Total Same-Center NOI $ 327,987 $ 342,122 $ (14,135) (4.1) %
(1)Excludes straight-line rental income, net amortization of above- and below-market leases, and lease buyout income. (2)Includes billings that will not be recognized as revenue until cash is collected or the Neighbor resumes regular payments and/or is considered creditworthy.
42
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Same-Center Net Operating Income Reconciliation-Below is a reconciliation of Net
Income (Loss) for the years ended December 31, 2020 and 2019 (in thousands):
2020 2019
Net income (loss) $ 5,462 $ (72,826)
Adjusted to exclude:
Fees and management income (9,820) (11,680)
Straight-line rental income(1) (3,356) (9,079)
Net amortization of above- and below-
market leases (3,173) (4,185) Lease buyout income (1,237) (1,166) General and administrative expenses 41,383 48,525 Depreciation and amortization 224,679 236,870 Impairment of real estate assets 2,423 87,393 Interest expense, net 85,303 103,174 Gain on disposal of property, net (6,494) (28,170) Other (income) expense, net (9,245) 676
Property operating expenses related to fees and management income
6,098 6,264
NOI for real estate investments 332,023 355,796
Less: Non-same-center NOI(2) (4,036) (13,674)
Total Same-Center NOI $ 327,987 $ 342,122 (1)Includes straight-line rent adjustments for Neighbors deemed to be non-creditworthy. (2)Includes operating revenues and expenses from non-same-center properties which includes properties acquired or sold and corporate activities.
Funds from Operations and Core Funds from Operations-FFO is a non-GAAP performance financial measure that is widely recognized as a measure of REIT operating performance.The National Association of Real Estate Investment Trusts ("Nareit") defines FFO as net income (loss) computed in accordance with GAAP, excluding gains (or losses) from sales of property and gains (or losses) from change in control, plus depreciation and amortization, and after adjustments for impairment losses on real estate and impairments of in-substance real estate investments in investees that are driven by measurable decreases in the fair value of the depreciable real estate held by the unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect FFO on the same basis. We calculate FFO Attributable to Stockholders and Convertible Noncontrolling Interests in a manner consistent with the Nareit definition, with an additional adjustment made for noncontrolling interests that are not convertible into common stock. Core FFO is an additional performance financial measure used by us as FFO includes certain non-comparable items that affect our performance over time. We believe that Core FFO is helpful in assisting management and investors with the assessment of the sustainability of operating performance in future periods. We believe it is more reflective of our core operating performance and provides an additional measure to compare our performance across reporting periods on a consistent basis by excluding items that may cause short-term fluctuations in net income (loss). To arrive at Core FFO, we adjust FFO attributable to stockholders and convertible noncontrolling interests to exclude certain recurring and non-recurring items including, but not limited to, depreciation and amortization of corporate assets, changes in the fair value of the earn-out liability, amortization of unconsolidated joint venture basis differences, gains or losses on the extinguishment or modification of debt, other impairment charges, and transaction and acquisition expenses. FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and Core FFO should not be considered alternatives to net income (loss) under GAAP, as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Core FFO may not be a useful measure of the impact of long-term operating performance on value if we do not continue to operate our business plan in the manner currently contemplated. Accordingly, FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and Core FFO should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net income (loss) or cash flows from operations prepared in accordance with GAAP. Our FFO, FFO Attributable to Stockholders and Convertible Noncontrolling Interests, and Core FFO, as presented, may not be comparable to amounts calculated by other REITs. 43 --------------------------------------------------------------------------------
The following table presents our calculation of FFO, FFO Attributable to
Stockholders and Convertible Noncontrolling Interests, and Core FFO and provides
additional information related to our operations for the years ended
2020 2019 2018
Calculation of FFO Attributable to Stockholders and Convertible Noncontrolling Interests Net income (loss)
$ 5,462 $ (72,826) $ 46,975 Adjustments: Depreciation and amortization of real estate assets 218,738 231,023 177,504 Impairment of real estate assets 2,423 87,393 40,782 Gain on the disposal of property, net (6,494) (28,170) (109,300) Adjustments related to unconsolidated joint ventures 1,552 (128) 560 FFO attributable to the Company 221,681 217,292 156,521
Adjustments attributable to noncontrolling interests not convertible into common stock
- (282) (299)
FFO attributable to stockholders and convertible
noncontrolling interests $ 221,681 $ 217,010 $ 156,222
Calculation of Core FFO
FFO attributable to stockholders and convertible
noncontrolling interests $ 221,681 $ 217,010 $ 156,222
Adjustments:
Depreciation and amortization of corporate assets 5,941 5,847 13,779
Change in fair value of earn-out liability and
derivatives (10,000) (7,500) 2,393
Other impairment charges 359 9,661 -
Amortization of unconsolidated joint venture
basis differences 1,883 2,854 167
Loss (gain) on extinguishment or modification of debt, net
4 2,238 (93)
Transaction and acquisition expenses 539 598 3,426
Other - 158 232
Core FFO $ 220,407 $ 230,866 $ 176,126
FFO Attributable to Stockholders and Convertible
Noncontrolling Interests/Core FFO per share
Weighted-average common shares outstanding - diluted(1) 333,466 327,510 241,367
FFO attributable to stockholders and convertible
noncontrolling interests per share - diluted $ 0.66 $ 0.66 $ 0.65
Core FFO per share - diluted $ 0.66 (1)Restricted stock awards were dilutive to FFO Attributable to Stockholders and Convertible Noncontrolling Interests per share and Core FFO per share for the years endedDecember 31, 2020 , 2019, and 2018, and, accordingly, their impact was included in the weighted-average common shares used in their respective per share calculations. For the year endedDecember 31, 2019 , restricted stock units had an anti-dilutive effect upon the calculation of earnings per share and thus were excluded. For details related to the calculation of earnings per share, see Note 15. Earnings Before Interest, Taxes, Depreciation, and Amortization for Real Estate ("EBITDAre") and Adjusted EBITDAre-Nareit defines EBITDAre as net income (loss) computed in accordance with GAAP before (i) interest expense, (ii) income tax expense, (iii) depreciation and amortization, (iv) gains or losses from disposition of depreciable property, and (v) impairment write-downs of depreciable property. Adjustments for unconsolidated partnerships and joint ventures are calculated to reflect EBITDAre on the same basis. Adjusted EBITDAre is an additional performance measure used by us as EBITDAre includes certain non-comparable items that affect our performance over time. To arrive at Adjusted EBITDAre, we exclude certain recurring and non-recurring items from EBITDAre, including, but not limited to: (i) changes in the fair value of the earn-out liability; (ii) other impairment charges; (iii) amortization of basis differences in our investments in our unconsolidated joint ventures; and (iv) transaction and acquisition expenses. We have included the calculation of EBITDAre to better align with publicly traded REITs. We use EBITDAre and Adjusted EBITDAre as additional measures of operating performance which allow us to compare earnings independent of capital structure, determine debt service and fixed cost coverage, and measure enterprise value. Additionally, we believe they are a useful indicator of our ability to support our debt obligations. EBITDAre and Adjusted EBITDAre should not be considered as alternatives to net income (loss), as an indication of our liquidity, nor as an indication of funds available to cover our cash needs, including our ability to fund distributions. Accordingly, EBITDAre and Adjusted EBITDAre should be reviewed in connection with other GAAP measurements, and should not be viewed as more prominent measures of performance than net 44 -------------------------------------------------------------------------------- income (loss) or cash flows from operations prepared in accordance with GAAP. Our EBITDAre and Adjusted EBITDAre, as presented, may not be comparable to amounts calculated by other REITs. The following table presents our calculation of EBITDAre and Adjusted EBITDAre for the years endedDecember 31, 2020 , 2019, and 2018 (in thousands): 2020 2019 2018 Calculation of EBITDAre Net income (loss)$ 5,462 $ (72,826) $ 46,975 Adjustments: Depreciation and amortization 224,679 236,870 191,283 Interest expense, net 85,303 103,174 72,642 Gain on disposal of property, net (6,494) (28,170) (109,300) Impairment of real estate assets 2,423 87,393 40,782 Federal, state, and local tax expense 491 785 232 Adjustments related to unconsolidated joint ventures 3,355 2,571 446 EBITDAre$ 315,219 $ 329,797 $ 243,060 Calculation of Adjusted EBITDAre EBITDAre$ 315,219 $ 329,797 $ 243,060 Adjustments: Change in fair value of earn-out liability and derivatives (10,000) (7,500) 2,393 Other impairment charges 359 9,661 - Amortization of unconsolidated joint venture basis differences 1,883 2,854 167 Transaction and acquisition expenses 539 598 3,426 Adjusted EBITDAre$ 308,000 $ 335,410 $ 249,046 Liquidity and Capital Resources General-Aside from standard operating expenses, we expect our principal cash demands to be for: •cash distributions to stockholders; •investments in real estate; •capital expenditures and leasing costs; •redevelopment and repositioning projects; •repurchases of common stock; and •principal and interest payments on our outstanding indebtedness. We expect our primary sources of liquidity to be: •operating cash flows; •proceeds received from the disposition of properties; •reinvested distributions; •proceeds from debt financings, including borrowings under our unsecured revolving credit facility; •distributions received from joint ventures; and •available, unrestricted cash and cash equivalents. Our cash from operations has been reduced, and we anticipate that it may continue to be negatively impacted, at least in the near term, as a result of the COVID-19 pandemic as we temporarily experience reduced or delayed cash payments and/or revenue from Neighbors. Additionally, our cash from financing activities has been impacted by actions taken to preserve liquidity, such as the suspension of our distributions and the DRIP beginning inApril 2020 and continuing throughNovember 2020 , and the suspension of the SRP for DDI beginning inMarch 2020 and continuing throughDecember 2020 . The cash on hand resulting from these actions allowed us to execute the Tender Offer as well as reinstate distributions, including the DRIP, beginning inDecember 2020 . Further, the SRP for DDI was reinstated effectiveJanuary 2021 . We are monitoring events closely and managing our cash usage, which also includes prioritizing our capital spending and redevelopment to support the reopening of our Neighbors and new leasing activity, or deferring if possible, as well as reducing other property and corporate expenses. At this time, we believe our current sources of liquidity, most significantly our operating cash flows and borrowing availability on our revolving credit facility, are sufficient to meet our short- and long-term cash demands. 45 --------------------------------------------------------------------------------
Debt-The following table summarizes information about our debt as of
2020 2019
Total debt obligations, gross $ 2,307,686 $ 2,372,521
Weighted-average interest rate 3.1 % 3.4 % Weighted-average term (in years) 4.1
5.0
Revolving credit facility capacity$ 500,000 $
500,000
Revolving credit facility availability(1) 490,404
489,805
Revolving credit facility maturity(2)
(1)Net of any outstanding balance and letters of credit. (2)The revolving credit facility matures inOctober 2021 and includes an option to extend the maturity toOctober 2022 , with its execution being subject to compliance with certain terms included in the loan agreement, including the absence of any defaults and the payment of relevant fees. We intend to either exercise our option to extend the maturity or to negotiate under new terms. During the years endedDecember 31, 2020 and 2019, we took steps to reduce our leverage, lower our cost of debt, and appropriately ladder our debt maturities. Our debt activity during the year endedDecember 31, 2020 was as follows: •InJanuary 2020 , we paid down$30 million of term loan debt maturing in 2021 using proceeds from property dispositions in 2019. Following this repayment, our next term loan maturity is inApril 2022 and includes an option to extend the maturity toOctober 2022 , with its execution being subject to compliance with certain terms included in the loan agreement, including the absence of any defaults and the payment of relevant fees. We intend to either exercise our option to extend the maturity or to negotiate under new terms. •InApril 2020 , we borrowed$200 million on our revolving credit facility to meet our operating needs for a sustained period due to the COVID-19 pandemic. •InJune 2020 , we fully repaid the outstanding balance on our revolving credit facility as our rent and recovery collections during the second quarter, combined with our COVID-19 expense reduction initiatives, sufficiently funded our operating needs and provided enough stability to allow for this repayment. Further, we did not borrow on our revolving credit facility during the remainder of 2020. •In the fourth quarter, we executed early repayments of$24.5 million in mortgage debt. Our debt activity during the year endedDecember 31, 2019 , which we expect will save approximately$1.9 million in interest annually, was as follows: •InSeptember 2019 , we repriced a$200 million term loan, lowering the interest rate spread from 1.75% over LIBOR to 1.25% over LIBOR, while maintaining the current maturity ofSeptember 2024 . •InOctober 2019 , we repriced a$175 million term loan from a spread of 1.75% over LIBOR to 1.25% over LIBOR, while maintaining the current maturity ofOctober 2024 . •InDecember 2019 , we executed a$200 million fixed-rate secured loan maturing inJanuary 2030 . The proceeds from this loan, along with proceeds from property dispositions, were used to pay down$265.9 million of term loan debt maturing in 2020 and 2021. Our debt is subject to certain covenants, and as ofDecember 31, 2020 , we were in compliance with the restrictive covenants of our outstanding debt obligations. We expect to continue to meet the requirements of our debt covenants over the next twelve months. 46 -------------------------------------------------------------------------------- Financial Leverage Ratios-We believe our debt to Adjusted EBITDAre, debt to total enterprise value, and debt covenant compliance as ofDecember 31, 2020 allow us access to future borrowings as needed in the near term. The following table presents our calculation of net debt and total enterprise value, inclusive of our prorated portion of net debt and cash and cash equivalents owned through our joint ventures, as ofDecember 31, 2020 and 2019 (dollars in thousands): 2020 2019
Net debt: Total debt, excluding market adjustments and deferred financing expenses
$ 2,345,620 $ 2,421,520 Less: Cash and cash equivalents 104,952 18,376 Total net debt$ 2,240,668 $ 2,403,144 Enterprise value: Total Net debt$ 2,240,668 $ 2,403,144 Total equity value(1) 2,797,234 3,682,161 Total enterprise value$ 5,037,902 $ 6,085,305 (1)Total equity value is calculated as the number of common shares and OP units outstanding multiplied by the EVPS at the end of the period. There were 319.7 million diluted shares outstanding with an EVPS of$8.75 as ofDecember 31, 2020 and 331.7 million diluted shares outstanding with an EVPS of$11.10 as ofDecember 31, 2019 . The following table presents our calculation of net debt to Adjusted EBITDAre and net debt to total enterprise value as ofDecember 31, 2020 and 2019 (dollars in thousands): December 31, 2020 December 31, 2019 Net debt to Adjusted EBITDAre - annualized: Net debt $ 2,240,668 $ 2,403,144 Adjusted EBITDAre - annualized(1) 308,000 335,410 Net debt to Adjusted EBITDAre - annualized 7.3x 7.2x Net debt to total enterprise value Net debt $ 2,240,668 $ 2,403,144 Total enterprise value 5,037,902 6,085,305 Net debt to total enterprise value 44.5% 39.5% (1)Adjusted EBITDAre is based on a trailing twelve months. See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - EBITDAre and Adjusted EBITDAre" of this filing on Form 10-K for a reconciliation to Net Income (Loss). Capital Expenditures and Redevelopment Activity-We make capital expenditures during the course of normal operations, including maintenance capital expenditures and tenant improvements as well as value-enhancing anchor space repositioning and redevelopment, ground-up outparcel development, and other accretive projects. In response to the COVID-19 pandemic, our capital investments have been prioritized to support the reopening of our Neighbors and new leasing activity, or deferred if possible. During the years endedDecember 31, 2020 and 2019, we had capital expenditures of$64.0 million and$75.5 million , respectively. We expect our capital expenditures to reach$85 million -$95 million in 2021, which includes$54.5 million related to development and redevelopment projects. As ofDecember 31, 2020 , our redevelopment projects in process include a demolition and rebuild of aPublix anchor at one of our centers for a total investment of approximately$7.6 million , with the remaining spend of$6.1 million expected to be completed in 2021. We expect our development and redevelopment projects to stabilize within 24 months. We anticipate that obligations related to capital improvements as well as redevelopment and development in 2020 can be met with cash flows from operations, cash flows from dispositions, or borrowings on our 47 --------------------------------------------------------------------------------
unsecured revolving line of credit. Below is a summary of our capital spending
activity for the years ended
2020 2019
Capital expenditures for real estate:
Maintenance capital and tenant improvements
30,521 37,488
Total capital expenditures for real estate 58,268 71,330 Corporate asset capital expenditures
3,972 1,988
Capitalized indirect costs(1) 1,725 2,174
Total capital spending activity $ 63,965 $ 75,492
(1)Amount includes internal salaries and related benefits of personnel who work
directly on capital projects as well as capitalized interest expense.
We target an average incremental yield of 8% to 11% for development and
redevelopment projects. Incremental yield reflects the incremental NOI generated
by each project upon expected stabilization and is calculated as incremental NOI
divided by net project investment. Incremental NOI is the difference between the
NOI expected to be generated by the stabilized project and the forecasted NOI
without the planned improvements. Incremental yield does not include peripheral
impacts, such as lease rollover risk or the impact on the long term value of the
property upon sale or disposition.
Merger and Acquisition Activity-We continually monitor the commercial real
estate market for properties that have future growth potential, are located in
attractive demographic markets, and support our business objectives. Due to the
COVID-19 pandemic, as well as the resulting market conditions, our acquisition
activity was lower than anticipated during 2020, and we anticipate that
acquisition activity may remain low throughout 2021. Below is a summary of our
merger and acquisition activity for the years ended December 31, 2020 and 2019
(dollars and square feet in thousands):
2020 2019
Third-Party REIT III Third-Party
Acquisitions Merger(1) Acquisitions
Number of properties purchased 2 3 2
Number of outparcels purchased(2) 2 - 2
Total square footage acquired 216 251 213
Total price of acquisitions $ 41,482 $ 16,996 $ 71,722
(1)Number of properties and outparcels excludes those owned through our
investment in GRP II , which we acquired through the merger with REIT III in
2019. GRP II was subsequently acquired by GRP I in October 2020 .
(2)Outparcels purchased in 2020 and 2019 are parcels of land adjacent to
shopping centers that we own.
Disposition Activity-We are actively evaluating our portfolio of assets for
opportunities to make strategic dispositions of assets that no longer meet our
growth and investment objectives or assets that have stabilized in order to
capture their value. Seeding joint venture portfolios is another desirable
growth strategy as we retain ownership interests in the seeded properties while
simultaneously increasing our high-margin fee revenue earned through the
provision of management services to those properties. We expect to continue to
make strategic dispositions during 2021. The following table highlights our
property dispositions during the years ended December 31, 2020 and 2019 (dollars
and square feet in thousands):
2020 2019
Number of properties sold(1) 7 21
Number of outparcels sold 1 1
Total square footage sold 678 2,564
Proceeds from sale of real estate
(1)We retained certain outparcels of land associated with one of our property dispositions during the year endedDecember 31, 2020 , and as a result, this property is still included in our total property count. (2)The gain on sale of property, net does not include miscellaneous write-off activity, which is also recorded in Gain on Sale or Contribution of Property, Net on the consolidated statements of operations and comprehensive income (loss). 48 --------------------------------------------------------------------------------
Distributions-Distributions to our common stockholders and OP unit holders,
including key financial metrics for comparison purposes, for the years ended
[[Image Removed: cik0001476204-20201231_g8.jpg]]
Cash distributions to OP unit holders Net cash provided by operating activities
Cash distributions to common stockholders Core FFO(1) Distributions reinvested through the DRIP (1)See "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Non-GAAP Measures - Funds from Operations and Core Funds from Operations" of this filing on Form 10-K for the definition of Core FFO, or information regarding why we present Core FFO, and for a reconciliation of this non-GAAP financial measure to Net Income (Loss). During 2020, we paid distributions of$0.05583344 per share, or$0.67 annualized, for the months ofDecember 2019 and January, February, andMarch 2020 until the suspension of stockholder distributions by the Board. During the year endedDecember 31, 2019 , we paid monthly distributions of$0.05583344 per share. The timing and amount of distributions is determined by our Board and is influenced in part by our intention to comply with REIT requirements of the Internal Revenue Code. OnMarch 27, 2020 , as a result of the uncertainty surrounding the COVID-19 pandemic, our Board suspended stockholder distributions, effective after the payment of theMarch 2020 distribution onApril 1, 2020 . The DRIP was also suspended, and theMarch 2020 distribution was paid in all cash onApril 1, 2020 . The suspension of stockholder distributions and the DRIP did not impact our qualification as a REIT. OnNovember 4, 2020 , our Board reinstated monthly stockholder distributions beginningDecember 2020 equal to$0.02833333 per share, or$0.34 annualized. Additionally, the DRIP was reinstated with this distribution. OP unit holders received distributions at the same rate as common stockholders. The distribution and DRIP forDecember 2020 became effective for stockholders of record at the close of business onDecember 31, 2020 , and this distribution was paid onJanuary 12, 2021 . Distributions were paid for January andFebruary 2021 . Additionally, our Board has approved distributions of$0.02833333 per share forMarch 2021 . 49 -------------------------------------------------------------------------------- Our Board intends to evaluate distributions on a monthly basis throughout 2021. To maintain our qualification as a REIT, we must make aggregate annual distributions to our stockholders of at least 90% of our REIT taxable income (which is computed without regard to the dividends paid deduction or net capital gain, and which does not equal net income (loss) as calculated in accordance with GAAP). We generally will not be subject toU.S. federal income tax on the income that we distribute to our stockholders each year due to meeting the REIT qualification requirements. However, we may be subject to certain state and local taxes on any income, property, or net worth and to federal income and excise taxes on our undistributed income. We have not established a minimum distribution level, and our charter does not require that we make distributions to our stockholders. Cash Flow Activities-As ofDecember 31, 2020 , we had cash and cash equivalents and restricted cash of$131.9 million , a net cash increase of$36.8 million during the year endedDecember 31, 2020 . Below is a summary of our cash flow activity for the years endedDecember 31, 2020 and 2019 (dollars in thousands): 2020 2019 $ Change % Change Net cash provided by operating activities$ 210,576 $ 226,875 $ (16,299) (7.2) % Net cash (used in) provided by investing activities (44,092) 64,183 (108,275) NM Net cash used in financing activities (129,655) (280,254) 150,599 53.7 % Operating Activities-Our net cash provided by operating activities was primarily impacted by the following: •Property operations and working capital-Most of our operating cash comes from rental and tenant recovery income and is offset by property operating expenses, real estate taxes, and general and administrative costs. Our change in cash flows from property operations is primarily due to reduced revenue and collections as a result of the COVID-19 pandemic, partially mitigated by expense reduction measures at the property and corporate levels. •Fee and management income-We also generate operating cash from our third-party investment management business, pursuant to various management and advisory agreements between us and the Managed Funds. Our fee and management income was$9.8 million for the year endedDecember 31, 2020 , a decrease of$1.9 million as compared to the same period in 2019, primarily due to fee and management income no longer received from REIT III following its acquisition by us inOctober 2019 ; a decrease in fees received from NRP largely due to property dispositions; and lower rent and recovery collections for our unconsolidated joint ventures, which resulted in lower management fees paid to us, as a result of the COVID-19 pandemic. This offsets improvements in fees received from GRP I andGRP II (prior its acquisition by GRP I). •Cash paid for interest-During the year endedDecember 31, 2020 , we paid$78.5 million for interest, a decrease of$10.9 million over the same period in 2019, largely due to a decrease in LIBOR and expiring interest rate swaps in 2020, as well as repricing activities occurring in 2019. Investing Activities-Our net cash (used in) provided by investing activities was primarily impacted by the following: •Real estate acquisitions-During the year endedDecember 31, 2020 , our third party acquisitions resulted in a total cash outlay of$41.5 million , as compared to a total cash outlay of$71.7 million during the same period in 2019. Additionally, our Merger with REIT III, which included a 10% equity interest inGRP II (prior to its acquisition by GRP I inOctober 2020 ), resulted in a total cash outlay of$17.0 million during the year endedDecember 31, 2019 . •Real estate dispositions-During the year endedDecember 31, 2020 , our dispositions resulted in a net cash inflow of$57.9 million , as compared to a net cash inflow of$223.1 million during the same period in 2019. •Capital expenditures-We invest capital into leasing our properties and maintaining or improving the condition of our properties. During the year endedDecember 31, 2020 , we paid$64.0 million for capital expenditures, a decrease of$11.5 million over the same period in 2019. This decrease was primarily driven by reduced capital expenditures since the first quarter of 2020, as our capital investments were prioritized to support the reopening of our Neighbors and new leasing activity, or deferred if possible. Financing Activities-Our net cash used in financing activities was primarily impacted by the following: •Debt borrowings and payments-Cash from financing activities is primarily affected by inflows from borrowings and outflows from payments on debt. During the year endedDecember 31, 2020 , we had$64.8 million in net repayment of debt primarily as a result of early repayments of debt utilizing cash from the disposition of properties and cash on hand. During the year endedDecember 31, 2019 , we had$89.1 million in net repayment of debt, primarily using cash received from the disposition of properties. •Distributions to stockholders and OP unit holders-Cash used for distributions to common stockholders and OP unit holders decreased by$94.0 million during the year endedDecember 31, 2020 as compared to the same period in 2019, primarily due to the temporary suspension of stockholder distributions. •Share repurchases-Cash outflows for share repurchases decreased by$29.4 million for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 , primarily due to the suspension of the SRP. In connection with the Tender Offer,$77.6 million due to shareholders who tendered their shares was not yet paid as ofDecember 31, 2020 , and is recorded as Accounts Payable and Other Liabilities on our consolidated balance sheets. The amount was subsequently paid onJanuary 5, 2021 (see Note 13 for more detail). Off-Balance Sheet Arrangements We are the limited guarantor for up to$190 million , capped at$50 million in most instances, of NRP's debt. Our guarantee is limited to being the non-recourse carveout guarantor and the environmental indemnitor. Additionally, we are the limited 50 --------------------------------------------------------------------------------
guarantor of a
Contractual Commitments and Contingencies We have debt obligations related to both our secured and unsecured debt. In addition, we have operating leases pertaining to office equipment for our business as well as ground leases at certain of our shopping centers. The table below excludes obligations related to tenant allowances and improvements because such amounts are not fixed or determinable. However, we believe we currently have sufficient financing in place to fund any such amounts as they arise through cash from operations or borrowings. The following table details our contractual obligations as ofDecember 31, 2020 (in thousands):
Payments Due by Period
Total 2021 2022 2023 2024 2025 Thereafter
Debt obligations - principal payments(1)$ 2,307,522 $ 62,589 $
436,898
424,923
Debt obligations - interest payments(2) 285,788 68,710 58,768 50,785 38,767 25,457
43,301
Operating lease obligations 8,896 831 805 654 528 297
5,781
Finance lease obligations 171 102 29 24 16 - - Total$ 2,602,377 $ 132,232 $ 496,500 $ 431,032 $ 542,473 $ 526,135 $ 474,005 (1)The revolving credit facility matures inOctober 2021 and includes an option to extend the maturity toOctober 2022 , with its execution being subject to compliance with certain terms included in the loan agreement, including the absence of any defaults and the payment of relevant fees. We intend to either exercise our option to extend the maturity or to negotiate under new terms. As ofDecember 31, 2020 , we have no outstanding balance on our revolving credit facility. (2)Future variable-rate interest payments are based on interest rates as ofDecember 31, 2020 , including the impact of our swap agreements. Our portfolio debt instruments and the unsecured revolving credit facility contain certain covenants and restrictions. The following is a list of certain restrictive covenants specific to the unsecured revolving credit facility and unsecured term loans that were deemed significant: •limits the ratio of total debt to total asset value, as defined, to 60% or less with a surge to 65% following a material acquisition; •limits the ratio of secured debt to total asset value, as defined, to 40% or less with a surge to 45% following a material acquisition; •requires the fixed-charge ratio, as defined, to be 1.5:1 or greater, or 1.4:1 following a material acquisition; •limits the ratio of cash dividend payments to FFO, as defined, to 95%; •requires the current tangible net worth to exceed the minimum tangible net worth, as defined; •limits the ratio of unsecured debt to unencumbered total asset value, as defined, to 60% or less with a surge to 65% following a material acquisition; and •requires the unencumbered NOI to interest expense ratio, as defined, to 1.75:1 or greater, or 1.7:1 following a material acquisition.
Inflation
Inflation has been low historically and has had minimal impact on the operating
performance of our shopping centers; however, inflation can increase in the
future. Certain of our leases contain provisions designed to mitigate the
adverse effect of inflation, including rent escalations and requirements for
Neighbors to pay their allocable share of operating expenses, including common
area maintenance, utilities, real estate taxes, insurance, and certain capital
expenditures. Additionally, many of our leases are for terms of less than ten
years, which allows us to target increased rents to current market rates upon
renewal.
Critical Accounting Policies and Estimates
Below is a discussion of our critical accounting policies and estimates. Our
accounting policies have been established to conform with GAAP. We consider
these policies critical because they involve significant management judgments
and assumptions, require estimates about matters that are inherently uncertain,
and are important for understanding and evaluating our reported financial
results. These judgments affect the reported amounts of assets and liabilities
and our disclosure of contingent assets and liabilities at the dates of the
consolidated financial statements, as well as the reported amounts of revenue
and expenses during the reporting periods. With different estimates or
assumptions, materially different amounts could be reported in our consolidated
financial statements. Additionally, other companies may utilize different
estimates that may impact the comparability of our results of operations to
those of companies in similar businesses.
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Because of the adverse economic conditions and uncertainty regarding the impacts
of the COVID-19 pandemic, it is possible that the estimates and assumptions that
have been utilized in the preparation of the consolidated financial statements
could change or vary significantly from actual results. Please refer to Notes 2
and 17 for additional discussion on the potential impact that the COVID-19
pandemic could have on significant accounting estimates as employed per our
critical accounting policies.
Real Estate Acquisition Accounting-Most of our real estate acquisition activity
does not meet the definition of a business combination and is instead classified
as an asset acquisition. As a result, most acquisition-related costs are
capitalized and amortized over the life of the related assets, and there is no
recognition of goodwill. Costs incurred related to properties that were not
ultimately acquired were expensed and recorded in Other (Expense) Income on the
consolidated statements of operations. Regardless of whether an acquisition is
considered a business combination or an asset acquisition, we record the costs
of the business or assets acquired as tangible and intangible assets and
liabilities based upon their estimated fair values as of the acquisition date.
We assess the acquisition-date fair values of all tangible assets, identifiable
intangibles, and assumed liabilities using methods similar to those used by
independent appraisers (e.g., discounted cash flow analysis and replacement
cost) and that utilize appropriate discount and/or capitalization rates and
available market information. Estimates of future cash flows are based on a
number of factors including historical operating results, known and anticipated
trends, and market and economic conditions. The fair value of tangible assets of
an acquired property considers the value of the property as if it were vacant.
We generally determine the value of construction in progress based upon the
replacement cost. However, for certain acquired properties that are part of a
new development, we determine fair value by using the same valuation approach as
for all other properties and deducting the estimated cost to complete the
development. During the remaining construction period, we capitalize interest
expense until the development has reached substantial completion. Construction
in progress, including capitalized interest, is not depreciated until the
development has reached substantial completion.
We record above-market and below-market lease values for acquired properties
based on the present value (using a discount rate that reflects the risks
associated with the leases acquired) of the difference between (i) the
contractual amounts to be paid pursuant to the in-place leases and
(ii) management's estimate of market lease rates for the corresponding in-place
leases, measured over a period equal to the remaining non-cancelable term of the
lease. We amortize any recorded above-market or below-market lease values as a
reduction or increase, respectively, to rental income over the remaining
non-cancelable terms of the respective lease. We also consider fixed-rate
renewal options in our calculation of the fair value of below-market leases and
the periods over which such leases are amortized. If a tenant has a unilateral
option to renew a below-market lease, we include such an option in the
calculation of the fair value of such lease and the period over which the lease
is amortized if we determine that the Neighbor has a financial incentive and
wherewithal to exercise such option.
Intangible assets also include the value of in-place leases, which represents
the estimated value of the net cash flows of the in-place leases to be realized,
as compared to the net cash flows that would have occurred had the property been
vacant at the time of acquisition and subject to lease-up. Acquired in-place
lease value is amortized to depreciation and amortization expense over the
average remaining non-cancelable terms of the respective in-place leases.
We estimate the value of Neighbor origination and absorption costs by
considering the estimated carrying costs during hypothetical expected lease-up
periods, considering current market conditions. In estimating carrying costs,
management includes real estate taxes, insurance and other operating expenses,
and estimates of lost rentals at market rates during the expected lease-up
periods.
Estimates of the fair values of the tangible assets, identifiable intangibles,
and assumed liabilities require us to estimate market lease rates, property
operating expenses, carrying costs during lease-up periods, discount rates,
market absorption periods, and the number of years the property will be held for
investment. The use of inappropriate estimates would result in an incorrect
valuation of our acquired tangible assets, identifiable intangibles and assumed
liabilities, which would impact the amount of our net income.
We calculate the fair value of assumed long-term debt by discounting the
remaining contractual cash flows on each instrument at the current market rate
for those borrowings, which we approximate based on the rate at which we would
expect to incur a replacement instrument on the date of acquisition, and
recognize any fair value adjustments related to long-term debt as effective
yield adjustments over the remaining term of the instrument.
Valuation of Real Estate Assets-We review our owned real estate properties for
evidence of impairment quarterly. Particular examples of events and changes in
circumstances that could indicate potential impairments are significant
decreases in occupancy, operating income, and market values or planned
dispositions in which a published or contract price is less than the current
carrying value of the assets being targeted for disposition. When indicators of
potential impairment suggest that the carrying value of our real estate may be
greater than fair value, we will assess the recoverability, considering recent
operating results, expected net operating cash flow, estimated sales price, and
plans for future operations. If, based on this analysis of undiscounted cash
flows, we do not believe that we will be able to recover the carrying value of
these assets, we would record an impairment loss to the extent that the carrying
value exceeds the estimated fair value of the real estate assets as defined by
Accounting Standards Codification ("ASC") Topic 360, Property, Plant, and
Equipment. During the year ended December 31, 2020 , we recorded $2.4 million in
impairment of real estate assets.
Properties classified as real estate held for sale represent properties that are
under contract for sale and where the applicable pre-sale due diligence period
has expired prior to the end of the reporting period. When a property is
identified as held-for-sale, we compare the contract sales price of the
property, net of estimated selling costs, to the net book value of the property.
If the estimated net sales price of the property is less than the net book
value, an adjustment to the carrying value would be recorded to reflect the
estimated fair value of the property.
In accounting for our investment in real estate assets, we have to employ a
significant amount of judgment in the inputs that we select for impairment
testing and other analyses. We select these inputs based on all available
evidence and using techniques that are commonly employed by other real estate
companies. Some examples of these inputs are projected
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revenue and expense growth rates, estimates of future cash flows, capitalization
rates, general economic conditions and trends, or other available market data.
Our ability to accurately predict future operating results and cash flows, as
well as to estimate and determine fair values, impacts the timing and
recognition of impairments. While we believe our assumptions are reasonable,
changes in these assumptions may have a material impact on our financial
results.
Rental Income-A majority of our revenue is lease revenue derived from our real
estate assets, for which we are the lessor. On January, 1 2019, we adopted ASC
Topic 842, Leases ("ASC 842") using a modified-retrospective approach. As such,
beginning January 1, 2019 , we evaluate whether a lease is an operating,
sales-type, or direct financing lease using the criteria established in ASC 842.
Leases will be considered either sales-type or direct financing leases if any of
the following criteria are met:
•if the lease transfers ownership of the underlying asset to the lessee by the
end of the term;
•if the lease grants the lessee an option to purchase the underlying asset that
is reasonably certain to be exercised;
•if the lease term is for the major part of the remaining economic life of the
underlying asset; or
•if the present value of the sum of the lease payments and any residual value
guaranteed by the lessee equals or exceeds substantially all of the fair value
of the underlying asset.
We utilize substantial judgment in determining the fair value of the leased
asset, the economic life of the leased asset, and the relevant borrowing rate in
performing our lease classification analysis. If none of the criteria listed
above are met, the lease is classified as an operating lease. Currently, all of
our leases are classified as operating leases, and we expect that the majority,
if not all, of our leases will continue to be classified as operating leases
based upon our typical lease terms.
We record property operating expense reimbursements due from Neighbors for
common area maintenance, real estate taxes, and other recoverable costs in the
period the related expenses are incurred. A portion of our Neighbors reimburse
operating costs on a fixed-rate basis, and in those circumstances, operating
expense reimbursements due to us are recorded on a straight-line basis. We make
certain assumptions and judgments in estimating the reimbursements at the end of
each reporting period. We do not expect the actual results to differ materially
from the estimated reimbursement.
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. The
determination of when revenue recognition under a lease begins, as well as the
nature of the leased asset, is dependent upon our assessment of who is the
owner, for accounting purposes, of any related tenant improvements. 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 we are not the owner, for accounting purposes, of the tenant
improvements (i.e., the lessee is the owner), then the leased asset is the
unimproved space and any tenant allowances funded under the lease are treated as
lease incentives, which reduce revenue recognized over the term of the lease. In
these circumstances, we begin revenue recognition when the lessee takes
possession of the unimproved space to construct their own improvements. We
consider a number of different factors in evaluating whether the lessee or we
are the owner of the tenant improvements for accounting purposes. These factors
include:
•whether the lease stipulates how and on what a tenant improvement allowance may
be spent;
•whether the tenant or landlord retains legal title to the improvements;
•the uniqueness of the improvements;
•the expected economic life of the tenant improvements relative to the length of
the lease; and
•who constructs or directs the construction of the improvements.
Historically, we periodically reviewed the collectibility of outstanding
receivables. Following the adoption of ASC 842, lease receivables are reviewed
continually to determine whether or not it is probable that we will realize
substantially all remaining lease payments for each of our Neighbors (i.e.,
whether a Neighbor is deemed to be a credit risk). Additionally, we record a
general reserve based on our review of operating lease receivables at a company
level to ensure they are properly valued based on analysis of historical bad
debt, outstanding balances, and the current economic climate. If we determine it
is not probable that we will collect substantially all of the remaining lease
payments from a Neighbor, revenue for that Neighbor is recorded on a cash basis
("cash-basis Neighbor"), including any amounts relating to straight-line rent
receivables and/or receivables for recoverable expenses. We will resume
recording lease income on an accrual basis for cash-basis Neighbors once we
believe the collection of rent for the remaining lease term is probable, which
will generally be after a period of regular payments. The aforementioned
adjustments as well as any reserve for disputed charges are recorded as a
reduction of Rental Income rather than in Property Operating, where our reserves
were previously recorded, on the consolidated statements of operations.
Impact of Recently Issued Accounting Pronouncements-In response to the COVID-19
pandemic, the Financial Accounting Standards Board ("FASB") issued interpretive
guidance addressing the accounting treatment for lease concessions attributable
to the pandemic. Under this guidance, entities may elect to account for such
lease concessions consistent with how they would be accounted for under ASC 842
if the enforceable rights and obligations for the lease concessions already
existed within the lease agreement, regardless of whether such enforceable
rights and obligations are explicitly outlined within the lease. This accounting
treatment may only be applied if (1) the lease concessions were granted as a
direct result of the pandemic, and (2) the total cash flows under the modified
lease are less than or substantially the same as the cash flows under the
original lease agreement. As a result, entities that make this election will not
have to analyze each lease to determine whether enforceable rights and
obligations for concessions exist within the contract, and may elect not to
account for these concessions as lease modifications within the scope of ASC
842.
Some concessions will provide a deferral of payments, which may affect the
timing of cash receipts without substantively impacting the total consideration
per the original lease agreement. The FASB has stated that there are multiple
acceptable methods to account for deferrals under the interpretive guidance:
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•Account for the concession as if no changes to the lease contract were made, increasing the lease receivable as payments accrue and continuing to recognize income; or •Account for deferred lease payments as variable lease payments. We have elected not to account for any qualifying lease concessions granted as a result of the COVID-19 pandemic as lease modifications and will account for any qualifying concessions granted as if no changes to the lease contract were made. This will result in an increase to the related lease receivable as payments accrue while we continue to recognize rental income. We will, however, assess the impact of any such concessions on estimated collectibility of the related lease payments and will reflect any adjustments as necessary as an offset to Rental Income on the consolidated statements of operations. Refer to Note 2 for discussion of the impact of other recently issued accounting pronouncements.
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