XNYS:EXL Excel Trust Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

Commission File No. 001-34698

 

 

EXCEL TRUST, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   27-1493212

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Excel Centre

17140 Bernardo Center Drive, Suite 300

San Diego, California 92128

(Address of principal executive office, including zip code)

(858) 613-1800

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨      Accelerated filer   x
Non-accelerated filer   ¨    (Do not check if a smaller reporting company)   Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Number of shares outstanding as of August 2, 2012 of the registrant’s common stock, $0.01 par value per share: 34,050,675 shares

 

 

 


Table of Contents

PART 1 — FINANCIAL INFORMATION

EXCEL TRUST, INC.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2012

TABLE OF CONTENTS

 

PART I

   Financial Information   

Item 1.

  

Financial Statements

     3   
  

Condensed Consolidated Balance Sheets of Excel Trust, Inc. as of June 30, 2012 (unaudited) and December 31, 2011

     3   
  

Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) of Excel Trust, Inc. for the three and six months ended June 30, 2012 and 2011 (unaudited)

     4   
  

Condensed Consolidated Statements of Equity of Excel Trust, Inc. for the six months ended June 30, 2012 and 2011 (unaudited)

     5   
  

Condensed Consolidated Statements of Cash Flows of Excel Trust, Inc. for the six months ended June 30, 2012 and 2011 (unaudited)

     7   
  

Notes to Condensed Consolidated Financial Statements of Excel Trust, Inc. (unaudited)

     9   

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

     40   

Item 4.

  

Controls and Procedures

     40   

PART II

   Other Information   

Item 1.

  

Legal Proceedings

     41   

Item 1A.

  

Risk Factors

     41   

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

     41   

Item 3.

  

Defaults Upon Senior Securities

     41   

Item 4.

  

Mine Safety Disclosures

     41   

Item 5.

  

Other Information

     41   

Item 6.

  

Exhibits

     42   

Signatures

     43   

 

2


Table of Contents

PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

 

     June 30,  2012
(unaudited)
    December 31,
2011
 

ASSETS:

    

Property:

    

Land

   $ 263,988      $ 236,941   

Buildings

     398,441        287,226   

Site improvements

     41,826        28,257   

Tenant improvements

     33,617        28,517   

Construction in progress

     115        21,312   

Less accumulated depreciation

     (26,804     (18,294
  

 

 

   

 

 

 

Property, net

     711,183        583,959   

Cash and cash equivalents

     7,179        5,292   

Restricted cash

     4,925        3,680   

Tenant receivables, net

     2,995        4,174   

Lease intangibles, net

     72,666        68,556   

Mortgage loan receivable

     —          2,000   

Deferred rent receivable

     4,343        2,997   

Other assets

     17,253        17,013   
  

 

 

   

 

 

 

Total assets

   $ 820,544      $ 687,671   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 272,485      $ 244,961   

Notes payable

     13,629        21,000   

Accounts payable and other liabilities

     15,847        21,080   

Lease intangibles, net

     16,444        13,843   

Dividends/distributions payable

     8,405        5,801   
  

 

 

   

 

 

 

Total liabilities

     326,810        306,685   

Equity:

    

Stockholders’ equity

    

Preferred stock, 50,000,000 shares authorized Series A preferred stock; 7.0% cumulative convertible perpetual preferred stock, $50,000,000 liquidation preference ($25.00 per share), 2,000,000 shares issued and outstanding, at June 30, 2012 and December 31, 2011

     47,703        47,703   

Series B Preferred stock; 8.125% cumulative redeemable preferred stock, $92,000,000 liquidation preference ($25.00 per share), 3,680,000 and 0 shares issued and outstanding, at June 30, 2012 and December 31, 2011, respectively

     88,720        —     

Common stock, $.01 par value, 200,000,000 shares authorized; 33,732,448 and 30,289,813 shares issued and outstanding at June 30, 2012 and December 31, 2011, respectively

     336        302   

Additional paid-in capital

     346,385        319,875   

Cumulative deficit

     (2,471     (3,277
  

 

 

   

 

 

 
     480,673        364,603   

Accumulated other comprehensive loss

     (608     (811
  

 

 

   

 

 

 

Total stockholders’ equity

     480,065        363,792   

Non-controlling interests

     13,669        17,194   
  

 

 

   

 

 

 

Total equity

     493,734        380,986   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 820,544      $ 687,671   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

3


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Revenues:

        

Rental revenue

   $ 17,015      $ 10,467      $ 33,168      $ 18,943   

Tenant recoveries

     3,185        2,220        6,452        4,118   

Other income

     328        102        688        207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     20,528        12,789        40,308        23,268   

Expenses:

        

Maintenance and repairs

     1,352        780        2,674        1,419   

Real estate taxes

     2,460        1,377        4,525        2,513   

Management fees

     198        133        388        250   

Other operating expenses

     953        797        1,782        1,562   

Change in fair value of earn-outs

     —          (328     —          (328

General and administrative

     3,312        3,140        6,815        5,790   

Depreciation and amortization

     8,552        6,400        16,831        10,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     16,827        12,299        33,015        21,767   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net operating income

     3,701        490        7,293        1,501   

Interest expense

     (3,986     (3,503     (7,660     (6,068

Interest income

     53        43        106        84   

Gain on acquisition of real estate and sale of land parcel

     —          —          —          937   

Changes in fair value of financial instruments and gain on OP unit redemption

     589        512        1,051        512   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations

     357        (2,458     790        (3,034

Income from discontinued operations before gain on sale of real estate assets

     —          507        —          1,023   

Gain on sale of real estate assets

     —          3,976        —          3,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from discontinued operations

     —          4,483        —          4,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     357        2,025        790        1,965   

Net loss (income) attributable to non-controlling interests

     11        (89     16        (58
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income available to Excel Trust, Inc.

     368        1,936        806        1,907   

Preferred stock dividends

     (2,744     (875     (4,865     (1,478
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ (2,376   $ 1,061      $ (4,059   $ 429   
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss income from continuing operations per share attributable to the common stockholders — basic and diluted

     (0.08     (0.20     (0.14     (0.29

Net (loss) income per share attributable to the common stockholders — basic and diluted

   $ (0.08   $ 0.06      $ (0.14   $ 0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding — basic and diluted

     32,785        15,856        32,273        15,686   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.1625      $ 0.15      $ 0.325      $ 0.29   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 357      $ 2,025      $ 790      $ 1,965   

Other comprehensive income (loss):

        

Change in unrealized gain on investment in equity securities

     82        —          103        —     

Gain on sale of equity securities (reclassification adjustment)

     —         —         (11     —    

Change in unrealized loss on interest rate swaps

     124        (638     108        (418
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     563        1,387        990        1,547   

Comprehensive (income) loss attributable to non-controlling interests

     4        (37     8        (15
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 567      $ 1,350      $ 998      $ 1,532   
  

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

4


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(Dollars in thousands)

(Unaudited)

 

    Series A
Preferred
Stock
    Series B
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Cumulative
Deficit
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2012

  $ 47,703      $ —          30,289,813      $ 302      $ 319,875      $ (3,277   $ (811   $ 363,792      $ 17,194      $ 380,986   

Net proceeds from sale of preferred stock

    —          88,720        —          —          —          —          —          88,720        —          88,720   

Issuance of restricted common stock awards

    —          —          18,356        —          —          —          —          —          —          —     

Redemption of OP units for common stock and cash

    —          —          193,510        2        2,285        —          —          2,287        (3,545     (1,258

Issuance of common stock for acquisition

    —          —          3,230,769        32        39,076        —          —          39,108        —          39,108   

Noncash amortization of share-based compensation

    —          —          —          —          1,589        —          —          1,589        —          1,589   

Common stock dividends

    —          —          —          —          (10,949     —          —          (10,949     —          (10,949

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (598     (598

Net income

    —          —          —          —          —          806        —          806        (16     790   

Preferred stock dividends

    —          —          —          —          (4,865     —          —          (4,865     —          (4,865

Change in unrealized gain on investment in equity securities

    —          —          —          —          —          —          99        99        4        103   

Change in unrealized loss on interest rate swaps

    —          —          —          —          —          —          104        104        4        108   

Adjustment for non-controlling interest

    —          —          —          —          (626     —          —          (626     626        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

  $ 47,703      $ 88,720        33,732,448      $ 336      $ 346,385      $ (2,471   $ (608   $ 480,065      $ 13,669      $ 493,734   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

5


Table of Contents
    Series A
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Cumulative
Deficit
    Accumulated
other
Comprehensive
Loss
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
    Shares     Amount              

Balance at January 1, 2011

  $ —          15,663,331      $ 156      $ 191,453      $ (3,725   $ (373   $ 187,511      $ 9,099      $ 196,610   

Net proceeds from sale of preferred stock

    47,721        —          —          —          —          —          47,721        —          47,721   

Net proceeds from sale of common stock

    —          14,375,000        144        149,814        —          —          149,958        —          149,958   

Issuance of restricted common stock awards

    —          929,348        9        (9     —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          1,777        —          —          1,777        —          1,777   

Common stock dividends

    —          —          —          (6,965     —          —          (6,965     —          (6,965

Issuance of non-controlling interests

    —          —          —          —          —          —          —          9,035        9,035   

Distributions to non-controlling interests

    —          —          —          —          —          —          —          (324     (324

Net income

    —          —          —          —          1,907        —          1,907        58        1,965   

Preferred stock dividends

    —          —          —          (1,478     —          —          (1,478     —          (1,478

Change in unrealized loss on interest rate swaps

    —          —          —          —          —          (375     (375     (43     (418

Adjustment for non-controlling interests

    —          —          —          361        —          —          361        (361     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2011

  $ 47,721        30,967,679      $ 309      $ 334,953      $ (1,818   $ (748   $ 380,417      $ 17,464      $ 397,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

6


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

     Six Months Ended
June 30, 2012
    Six Months Ended
June 30, 2011
 

Cash flows from operating activities:

    

Net income (loss)

   $ 790      $ 1,965   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Depreciation and amortization

     16,831        10,976   

Gain on acquisition of real estate

     —          (937

Changes in fair value of earn-outs

     —          (328

Changes in fair value of financial instruments and gain on OP unit redemption

     (1,051 )     (512

Gain on sale of real estate assets

     —          (3,976

Deferred rent receivable

     (1,386     (783

Amortization of above and below market leases

     (171     25   

Amortization of deferred balances

     958        569   

Bad debt expense

     395        331   

Share-based compensation expense

     1,589        1,777   

Change in assets and liabilities:

    

Tenant and other receivables

     824        (181

Other assets

     (1,013     8   

Accounts payable and other liabilities

     (1,189     2,784   
  

 

 

   

 

 

 

Net cash provided by operating activities

     16,577        11,718   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property, development and property improvements

     (79,324     (37,335

Capitalized leasing costs

     (1,099     (520

Advance of note receivable

     (750     —     

Collection of mortgage loan receivable

     2,000        —     

Purchase of equity securities

     (125     —     

Proceeds from sale of equity securities

     2,942        —     

Restricted cash

     (1,245     3,533   
  

 

 

   

 

 

 

Net cash used in investing activities

     (77,601     (34,322
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     —          150,579   

Common stock offering costs

     —          (267

Issuance of preferred stock

     89,102        48,425   

Preferred stock offering costs

     (382     (704

OP unit redemptions

     (1,915     —     

Payments on mortgages payable

     (2,146     (1,023

Payments on notes payable

     (46,500     (114,849

Borrowings from notes payable

     39,129        30,000   

Distribution to non-controlling interests

     (644     —     

Preferred stock dividends

     (2,996     —     

Common stock and OP unit dividends/distributions

     (10,314     (5,139

Deferred financing costs

     (423     (2,233
  

 

 

   

 

 

 

Net cash provided (used) by financing activities

     62,911        104,789   
  

 

 

   

 

 

 

Net increase (decrease)

     1,887        82,185   

Cash and cash equivalents, beginning of period

     5,292        6,525   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 7,179      $ 88,710   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $110 and $20

   $ 5,934      $ 5,057   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    
  

 

 

   

 

 

 

Acquisition of real estate for common shares and OP units

   $ 39,108      $ 9,034   
  

 

 

   

 

 

 

Assumption of net mortgage debt in connection with property acquisitions

   $ 29,670      $ 62,366   
  

 

 

   

 

 

 

Assets received in connection with property acquisitions

   $ 772      $ 3,595   
  

 

 

   

 

 

 

Liabilities assumed in connection with property acquisitions

   $ 539      $ 7,962   
  

 

 

   

 

 

 

 

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Table of Contents
     Six Months Ended
June 30, 2012
     Six Months Ended
June 30, 2011
 

Disposition of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $3,976)

   $ —        $ 39,300   
  

 

 

    

 

 

 

Common stock dividends payable

   $ 5,482       $ 4,645   
  

 

 

    

 

 

 

Preferred stock dividends payable

   $ 2,744       $ 729   
  

 

 

    

 

 

 

OP unit distributions payable

   $ 180       $ 211   
  

 

 

    

 

 

 

Accrued additions to operating and development properties

   $ 618       $ 1,405   
  

 

 

    

 

 

 

Accrued offering costs

   $ —         $ 354   
  

 

 

    

 

 

 

Change in unrealized loss on interest rate swaps

   $ 108       $ 220   
  

 

 

    

 

 

 

Change in unrealized gain on marketable securities

   $ 103       $ —     
  

 

 

    

 

 

 

OP unit redemptions (common stock)

   $ 2,287       $ —     
  

 

 

    

 

 

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

8


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EXCEL TRUST, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization:

Excel Trust, Inc. was incorporated in the State of Maryland on December 15, 2009. On April 28, 2010, it commenced operations after completing its initial public offering (the “Offering”). Excel Trust, Inc. is a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. It conducts substantially all of its business through its subsidiary, Excel Trust, L.P., a Delaware limited partnership (the “Operating Partnership” and together with Excel Trust, Inc. referred to as the “Company”). The Company seeks investment opportunities throughout the United States, but focuses on the Northeast, Northwest and Sunbelt regions. The Company generally leases anchor space to national and regional supermarket chains, big-box retailers and select national retailers that frequently offer necessity and value oriented items and generate regular consumer traffic.

The Company is the sole general partner of the Operating Partnership and, as of June 30, 2012, owned a 96.7% interest in the Operating Partnership. The remaining 3.3% interest in the Operating Partnership is held by limited partners. Each partner’s percentage interest in the Operating Partnership is determined based on the number of operating partnership units (“OP units”) owned as compared to total OP units (and potentially issuable OP units, as applicable) outstanding as of each period end and is used as the basis for the allocation of net income or loss to each partner.

2. Summary of Significant Accounting Policies

Basis of Presentation:

The accompanying condensed consolidated financial statements of the Company include all the accounts of the Company, the Operating Partnership and the subsidiaries of the Operating Partnership. The financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and with instructions to Form 10-Q and Article 10 of Regulation S-X. They do not include all the information and footnotes required by GAAP for complete financial statements and have not been audited by independent registered public accountants.

The unaudited interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. In the opinion of management, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the financial statements for the interim periods have been made. Operating results for the six months ended June 30, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. All significant intercompany balances and transactions have been eliminated in consolidation.

Cash and Cash Equivalents:

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents, for which cost approximates fair value, due to their short term maturities.

Restricted Cash:

Restricted cash is comprised of impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements.

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities are deferred rents in the amount of $2.5 million and $3.0 million at June 30, 2012 and December 31, 2011, respectively.

Revenue Recognition:

The Company commences revenue recognition on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In determining what constitutes the leased asset, the Company evaluates whether the Company or the lessee is the owner, for accounting purposes, of the tenant improvements. If the Company is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the Company concludes that it is not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any

 

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tenant improvement allowances funded under the lease are treated as lease incentives, which reduce revenue recognized on a straight-line basis over the remaining non-cancelable term of the respective lease. In these circumstances, the Company begins revenue recognition when the lessee takes possession of the unimproved space for the lessee to construct improvements. The determination of who is the owner, for accounting purposes, of the tenant improvements is highly subjective and determines the nature of the leased asset and when revenue recognition under a lease begins. The Company considers a number of different factors to evaluate whether it or the lessee is the owner of the tenant improvements for accounting purposes. These factors include:

 

   

whether the lease stipulates how and on what a tenant improvement allowance may be spent;

 

   

whether the tenant or 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;

 

   

the responsible party for construction cost overruns; and

 

   

who constructs or directs the construction of the improvements.

Minimum rental revenues are recognized on a straight-line basis over the terms of the related lease. The difference between the amount of cash rent due in a year and the amount recorded as rental income is referred to as the “straight-line rent adjustment.” Rental income (net of write-offs for uncollectible amounts) was increased by $589,000 and $427,000 in the three months ended June 30, 2012 and 2011, respectively, and $1.3 million and $798,000, respectively, in the six months ended June 30, 2012 and 2011 due to the straight-line rent adjustment.

Estimated recoveries from certain tenants for their pro rata share of real estate taxes, insurance and other operating expenses are recognized as revenues in the period the applicable expenses are incurred or as specified in the leases. Other tenants pay a fixed rate and these tenant recoveries are recognized as revenue on a straight-line basis over the term of the related leases.

Property:

Costs incurred in connection with the development or construction of properties and improvements are capitalized. Capitalized costs include pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes and related costs and other direct costs incurred during the period of development. The Company capitalizes costs on land and buildings under development until construction is substantially complete and the property is held available for occupancy. The determination of when a development project is substantially complete and when capitalization must cease involves a degree of judgment. The Company considers a construction project as substantially complete and held available for occupancy upon the completion of landlord-owned tenant improvements or when the lessee takes possession of the unimproved space for construction of its own improvements, but no later than one year from cessation of major construction activity. The Company ceases capitalization on the portion substantially completed and occupied or held available for occupancy, and capitalizes only those costs associated with any remaining portion under construction. In March 2012, the Company reclassified the majority of construction in progress costs relating to two non-operating properties into the corresponding buildings, site improvements and tenant improvements financial statement line items upon substantial completion of development activities.

Maintenance and repairs expenses are charged to operations as incurred. Costs for major replacements and betterments, which include HVAC equipment, roofs, parking lots, etc., are capitalized and depreciated over their estimated useful lives. Gains and losses are recognized upon disposal or retirement of the related assets and are reflected in earnings.

Property is recorded at cost and is depreciated using the straight-line method over the estimated lives of the assets as follows:

 

Building and improvements    15 to 40 years
Tenant improvements    Shorter of the useful lives or the terms of
the related leases

Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed:

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This assessment considers expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants’ ability to perform their duties and pay rent under the terms of the leases. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense, expected to result from the long-lived asset’s use and eventual disposition. The Company’s evaluation as to whether impairment may exist, including estimates of future anticipated cash flows, are highly subjective and could differ materially from actual results in future periods. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Although the Company’s strategy is to hold its properties over a long-term period, if the strategy changes or market conditions dictate that the sale of properties at an earlier date would be preferable, an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less cost to sell.

 

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Investments in Partnerships and Limited Liability Companies:

The Company evaluates its investments in limited liability companies and partnerships to determine whether such entities may be a variable interest entity (“VIE”) and, if a VIE, whether the Company is the primary beneficiary. Generally, an entity is determined to be a VIE when either (1) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support provided by any parties or (2) as a group, the holders of the equity investment lack one or more of the essential characteristics of a controlling financial interest. The primary beneficiary is the entity that has both (1) the power to direct matters that most significantly impact the VIE’s economic performance and (2) the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. The Company considers a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. In addition, the Company considers the form of ownership interest, voting interest, the size of the investment (including loans) and the rights of other investors to participate in policy making decisions, to replace or remove the manager and to liquidate or sell the entity. The obligation to absorb losses and the right to receive benefits when a reporting entity is affiliated with a VIE must be based on ownership, contractual, and/or other pecuniary interests in that VIE.

If the foregoing conditions do not apply, the Company considers whether a general partner or managing member controls a limited partnership or limited liability company. The general partner in a limited partnership or managing member in a limited liability company is presumed to control that limited partnership or limited liability company. The presumption may be overcome if the limited partners or members have either (1) the substantive ability to dissolve the limited partnership or limited liability company or otherwise remove the general partner or managing member without cause or (2) substantive participating rights, which provide the limited partners or members with the ability to effectively participate in significant decisions that would be expected to be made in the ordinary course of the limited partnership’s or limited liability company’s business and thereby preclude the general partner or managing member from exercising unilateral control over the partnership or company. If these criteria are not met and the Company is the general partner or the managing member, as applicable, the consolidation of the partnership or limited liability company is required.

Investments in Equity Securities:

The Company, through its Operating Partnership, holds investments in equity securities in certain publicly-traded companies. The Company does not acquire investments for trading purposes and, as a result, all of the Company’s investments in publicly-traded companies are considered “available-for-sale” and are recorded at fair value. Changes in the fair value of investments classified as available-for-sale are recorded in other comprehensive income. The fair value of the Company’s equity securities in publicly-traded companies is determined based upon the closing trading price of the equity security as of the balance sheet date. The cost of investments sold is determined by the specific identification method, with net realized gains and losses included in other income. For all investments in equity securities, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a non-cash charge to earnings. The factors that the Company considers in making these assessments include, but are not limited to, severity and duration of the unrealized loss, market prices, market conditions, the occurrence of ongoing financial difficulties, available financing, new product initiatives and new collaborative agreements.

Investments in equity securities, which are included in other assets on the accompanying condensed consolidated balance sheets, consisted of the following:

 

     June 30, 2012      December 31, 2011  

Equity securities, initial cost basis

   $ 6,266       $ 9,072   

Gross unrealized gains

     195         138   

Gross unrealized losses

     —           (46
  

 

 

    

 

 

 

Equity securities, fair value(1)

   $ 6,461       $ 9,164   
  

 

 

    

 

 

 

 

(1)

Determination of fair value is classified as Level 1 in the fair value hierarchy based on the use of quoted prices in active markets (see section entitled “Fair Value of Financial Instruments” that follows herein).

The fair value of some of the Company’s investments in equity securities were less than the initial cost basis at December 31, 2011 due to a decrease in their respective stock prices since the initial purchase. However, the fair value of the investments had fully recovered at June 30, 2012 and the Company continues to have the ability and intent to retain the investments for a period of time sufficient to allow for an anticipated recovery in market value. The Company will continue to periodically evaluate whether an other-than-temporary impairment exists for any investment when the fair value is less than the initial cost basis.

 

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During the six months ended June 30, 2012, the Company sold 118,222 shares of preferred stock (including 67,823 shares of preferred stock redeemed by the issuing company) based on a specific identification of the shares sold, resulting in net proceeds of approximately $2.9 million and the recognition of a gain on sale of approximately $0 and $11,000 during the three and six months ended June 30, 2012, respectively, which are included in other income in the accompanying condensed consolidated statements of operations.

Share-Based Payments:

All share-based payments to employees are recognized in earnings based on their fair value on the date of grant. Through June 30, 2012, the Company has awarded only restricted stock awards under its incentive award plan, which are based on shares of the Company’s common stock. The fair value of equity awards that include only service or performance vesting conditions is determined based on the closing market price of the underlying common stock on the date of grant. The fair value of equity awards that include one or more market vesting conditions is determined based on the use of a widely accepted valuation model. The fair value of equity grants is amortized to general and administrative expense ratably over the requisite service period for awards that include only service vesting conditions and utilizing a graded vesting method (an accelerated vesting method in which the majority of compensation expense is recognized in earlier periods) for awards that include one or more market vesting conditions, adjusted for anticipated forfeitures.

Purchase Accounting:

The Company, with the assistance of independent valuation specialists, allocates the purchase price of acquired properties to tangible and identified intangible assets and liabilities based on their respective fair values. The allocation to tangible assets (building and land) is based upon the Company’s determination of the value of the property as if it were vacant using discounted cash flow models similar to those used by independent appraisers. Factors considered include an estimate of carrying costs during the expected lease-up periods taking into account current market conditions and costs to execute similar leases. The fair value of land is derived from comparable sales of land within the same submarket and/or region. The fair value of buildings and improvements, tenant improvements, site improvements and leasing costs are based upon current market replacement costs and other relevant market rate information. Additionally, the purchase price of the applicable property is allocated to the above or below market value of in place leases, the value of in place leases and above or below market value of debt assumed.

The value allocable to the above or below market component of the acquired in place leases is determined based upon the present value (using a discount rate which reflects the risks associated with the acquired leases) of the difference between: (1) the contractual amounts to be paid pursuant to the lease over its remaining term, and (2) our estimate of the amounts that would be paid using fair market rates over the remaining term of the lease. The amounts allocated to above market leases are included in lease intangible assets, net in our accompanying condensed consolidated balance sheets and amortized to rental income over the remaining non-cancelable lease term of the acquired leases with each property. The amounts allocated to below market lease values are included in lease intangible liabilities, net in the Company’s accompanying condensed consolidated balance sheets and amortized to rental income over the remaining non-cancelable lease term plus any below market renewal options of the acquired leases with each property.

The value allocable to above or below market debt is determined based upon the present value of the difference between the cash flow stream of the assumed mortgage and the cash flow stream of a market rate mortgage. The amounts allocated to above or below market debt are included in mortgage payables, net on the accompanying consolidated balance sheets and are amortized to interest expense over the remaining term of the assumed mortgage.

Tenant receivables:

Tenant receivables and deferred rent are carried net of the allowances for uncollectible current tenant receivables and deferred rent. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company maintains an allowance for deferred rent receivable arising from the straight-lining of rents. Such allowance are charged to bad debt expense which is included in other operating expenses on the accompanying condensed consolidated statement of operations. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. At June 30, 2012 and December 31, 2011, the Company had $635,000 and $631,000, respectively, in allowances for uncollectible accounts as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the three months ended June 30, 2012 and 2011, $148,000 and $127,000, respectively, of receivables were charged to bad debt expense. During the six months ended June 30, 2012 and 2011, $395,000 and $331,000, respectively, of receivables were charged to bad debt expense.

 

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Non-controlling Interests

At June 30, 2012 and December 31, 2011, non-controlling interest represented the portion of equity that the Company did not own in those entities it consolidates, including OP units not held by the Company. In conjunction with the Company’s formation transactions, interests in four properties were contributed in exchange for 641,062 OP units. In addition, 764,343 OP units were issued in March 2011 in connection with the acquisition of the Edwards Theatres property (see Note 3).

During the six months ended June 30, 2012, a total of 299,927 OP units related to the Edwards Theatres acquisition were tendered to the Company for redemption, resulting in the issuance of 193,510 shares of common stock and cash payments totaling $1.9 million. The OP units were redeemed for common stock on a one-to-one basis, with additional common stock and cash consideration provided as a result of the accompanying additional redemption obligation that guaranteed consideration equal to $14.00 per OP unit on the date of redemption (see Note 3). At June 30, 2012, 464,416 OP units related to the Edwards Theatres acquisition remained outstanding.

OP units not held by the Company are reflected as non-controlling interests in the Company’s consolidated financial statements. The OP units not held by the Company may be redeemed by the holder for cash. The Company, at its option, may satisfy the redemption obligation with common stock on a one-for-one basis.

Concentration of Risk

The Company maintains its cash accounts in a number of commercial banks. Accounts at these banks are guaranteed by the Federal Deposit Insurance Corporation (“FDIC”) up to $250,000. At various times during the periods, the Company had deposits in excess of the FDIC insurance limit.

In the three and six months ended June 30, 2012 and 2011, no tenant accounted for more than 10% of revenues.

Management Estimates:

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Fair Value of Financial Instruments:

The Company measures financial instruments and other items at fair-value where required under GAAP, but has elected not to measure any additional financial instruments and other items at fair-value as permitted under fair-value option accounting guidance.

Fair-value measurement is determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair-value measurements, there is a fair-value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the assets or liabilities, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety.

The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

The Company has used interest rate swaps to manage its interest rate risk (see Note 11). The valuation of these instruments is determined using widely accepted valuation techniques, including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair-values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived

 

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from observable market interest rate curves. The Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair-value measurements. In adjusting the fair-value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives classified as cash flow hedges fall within Level 2 of the fair-value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of June 30, 2012, the Company has determined that the impact of the credit valuation adjustments on the overall valuation of its derivative positions is not significant. As a result, the Company has determined that its valuations related to derivatives classified as cash flow hedges in their entirety are classified in Level 2 of the fair-value hierarchy (see Note 16).

Changes in the fair value of financial instruments (other than derivative instruments for which an effective hedging relationship exists) are recorded as a charge against earnings in the condensed consolidated statements of operations in the period in which they occur. The Company estimates the fair value of financial instruments at least quarterly based on current facts and circumstances, projected cash flows, quoted market prices, and other criteria. The Company may also utilize the services of independent third-party valuation experts to estimate the fair value of financial instruments, as necessary.

The Company’s investments in equity securities fall within Level 1 of the fair value hierarchy as the Company utilizes observable market-based inputs, based on the closing trading price of securities as of the balance sheet date, to determine the fair value of the investments.

Derivative Instruments:

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its debt funding and the use of derivative financial instruments. Specifically, from time to time the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s investments and borrowings.

In addition, from time to time the Company may execute agreements in connection with business combinations that include embedded derivative instruments as part of the consideration provided to the sellers of the properties. Although these embedded derivative instruments are not intended as hedges of risks faced by the Company, they can provide additional consideration to the Company’s selling counterparties and may be a key component of negotiations.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

The Company records all derivative instruments on the consolidated balance sheets at their fair value. In determining the fair value of derivative instruments, the Company also considers the credit risk of its counterparties, which typically constitute larger financial institutions engaged in providing a wide variety of financial services. These financial institutions generally face similar risks regarding changes in market and economic conditions, including, but not limited to, changes in interest rates, exchange rates, equity and commodity pricing and credit spreads.

Accounting for changes in the fair value of derivative instruments depends on the intended use of the derivative, whether it has been designated as a hedging instrument and whether the hedging relationship has continued to satisfy the criteria to apply hedge accounting. For derivative instruments qualifying as cash flow hedges, the effective portion of changes in the fair value is initially recorded in Accumulated Other Comprehensive Income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in the cash flows of the derivative hedging instrument with the changes in the cash flows of the hedged item or transaction.

 

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The Company formally documents the hedging relationship for all derivative instruments, has accounted for its interest rate swap agreements as cash flow hedges and does not utilize derivative instruments for trading or speculative purposes.

Recent Accounting Pronouncements:

In May 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) No. 2011-04, Amendment to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs (“ASU 2011-04”), which amended Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement. The objective of this guidance is to develop common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with GAAP and International Financial Reporting Standards. The guidance further explains how to measure fair value, but does not require additional fair value measurements. ASU 2011-04 is to be applied prospectively for fiscal years and interim periods within those years beginning after December 15, 2011. The Company’s adoption of this guidance effective January 1, 2012 resulted in additional disclosures in the notes to the Company’s consolidated financial statements, but did not have a material quantitative effect.

3. Acquisitions:

The Company completed four acquisitions in the six months ended June 30, 2012 (in thousands):

 

Property

  

Date Acquired

  

Location

   Square
Footage
     Debt
Assumed
 

Promenade Corporate Center

   January 23, 2012    Scottsdale, AZ      256,176       $ —     

EastChase Market Center

   February 17, 2012    Montgomery, AL      181,431         —     

La Costa Town Center

   February 29, 2012    Carlsbad, CA      121,429         —     

Lake Pleasant Pavilion

   May 16, 2012    Peoria, AZ      178,376         28,250   

The following summary provides an allocation of purchase price for the above acquisitions (in thousands).

 

     Building      Land      Above
Market Leases
     Below
Market Leases
    In-Place
Leases
     Debt
(Premium)/

Discount
    Purchase
Price
 

Promenade Corporate Center(1)

   $ 44,465       $ 4,477       $ 781       $ (749   $ 3,279       $ —        $ 52,253   

EastChase Market Center(2)

     19,567         4,215         360         (1,296     1,804         —          24,650   

La Costa Town Center(2)

     15,054         8,383         86         (2,069     2,046         —          23,500   

Lake Pleasant Pavilion(2)

     28,127         9,958         2,857         (184     2,412         (1,420     41,750   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 107,213       $ 27,033       $ 4,084       $ (4,298   $ 9,541       $ (1,420   $ 142,153   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Remaining useful life(3)

           60         69        49         65     

 

(1)

The purchase price of $52.3 million noted above reflects $13.9 million in cash paid and the issuance of 3,230,769 shares of common stock with a fair value of approximately $39.1 million based on a closing price of $12.11 per share on the date of acquisition. The purchase price is net of an asset recorded by the Company in the amount of $772,000 (included in other assets on the accompanying consolidated balance sheets) to reflect the estimated fair value of funds expected to be received from escrow in connection with master lease agreements executed at the time of acquisition. Monthly master lease payments commence upon the expiration of two existing leases in June 2012 and February 2013 (with terms through May 2013 and January 2015, respectively) unless the related spaces are released with base rents equaling or exceeding the master lease payments. In addition, the seller has agreed to reimburse the Company for any expenditures resulting from tenant improvements or leasing commissions related to the spaces to the extent that funds remain available pertaining to the master lease agreements. See Note 16 for a discussion of changes in the fair value of this asset after the initial acquisition.

(2)

The purchase price allocations for the acquisitions of the EastChase Market Center, La Costa Town Center and Lake Pleasant Pavilion properties are preliminary as of June 30, 2012 and subject to adjustment within the measurement period in accordance with ASC Topic 805, Business Combinations.

(3)

Weighted-average remaining useful life (months) for recorded intangible assets and liabilities as of the date of acquisition.

The following summary provides an allocation of purchase price for property acquisitions that were completed in the six months ended June 30, 2011 (in thousands):

 

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     Building      Land      Above
Market Leases
     Below Market
Leases
    In-Place
Leases
     Debt
(Premium)/

Discount
    Purchase
Price
 

Edwards Theatres(1)

   $ 13,600       $ 10,283       $ —         $ (405   $ 3,109       $ (437   $ 26,150   

Rite Aid(2)

     1,474         550         —           —          347         —          2,371   

Gilroy Crossing

     39,890         22,520         620         (3,038     8,442         —          68,434   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 54,964       $ 33,353       $ 620       $ (3,443   $ 11,898       $ (437   $ 96,955   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

In addition to the cash consideration paid in connection with the acquisition, 764,343 OP units were issued with a fair value of $11.82 per unit at the time of issuance. These OP units can be redeemed beginning in March 2012 for cash or, at the Company’s election, for shares of the Company’s common stock. If the redemption takes place during the period from March 2012 through March 2013 and the price of shares of the Company’s common stock is less than $14.00 per share at the date of redemption, the Company must issue additional shares or cash for the difference. The Company originally recorded a liability of approximately $4.2 million within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets to reflect the estimated fair value of this redemption provision (see footnote 16 for a discussion of changes in the fair value of this liability and OP unit redemptions occurring after the initial acquisition).

(2)

Rite Aid is an outparcel to Vestavia Hills City Center. A gain of $937,000 was recognized on the acquisition of this property, which represented the difference between the fair value at the date of closing and the price paid.

The Company recorded revenues and net income for the three months ended June 30, 2012 of $3.1 million and $87,000, respectively, and for the six months ended June 30, 2012 of $4.7 million and $260,000, respectively, related to the 2012 acquisitions. The Company recorded revenues and a net loss for the three months ended June 30, 2011 of $2.4 million and $53,000 respectively, and for the six months ended June 30, 2011 of $4.9 million and $184,000, respectively, related to the 2011 acquisitions.

The following unaudited pro forma information for the three and six months ended June 30, 2012 and 2011 has been prepared to reflect the incremental effect of the properties acquired in 2012 and 2011 as if such acquisitions had occurred on January 1, 2011 and January 1, 2010, respectively (in thousands).

 

     Three Months Ended      Six Months Ended  
     June 30, 2012      June 30, 2011      June 30, 2012      June 30, 2011  

Revenues

     21,432         16,346       $ 42,747       $ 32,629   

Net income(1)

     112         1,818         599         1,507   

 

(1) 

Pro forma results for the six months ended June 30, 2012 were adjusted to exclude non-recurring acquisition costs of approximately $293,000 related to the 2012 acquisitions. The pro forma results for the six months ended June 30, 2011 were adjusted to include these costs. A portion of the 2012 acquisitions were funded by proceeds from the Series B preferred stock offering (discussed in Note 12 below). However, pro forma net income for the six months ended June 30, 2011 is not adjusted for this funding as the assumed Series B preferred stock quarterly dividends of approximately $1.9 million are not included in the determination of net income (included only as a reduction of net income (loss) attributable to the common stockholders).

4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at June 30, 2012 and December 31, 2011:

 

     June 30,
2012
     December 31,
2011
 
     (in thousands)  

In-place leases, net of accumulated amortization of $16.3 million and $11.8 million as of June 30, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 75 and 83 months as of June 30, 2012 and December 31, 2011, respectively)

   $ 45,401       $ 44,356   

Above market leases, net of accumulated amortization of $3.6 million and $2.6 million as of June 30, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 69 and 75 months as of June 30, 2012 and December 31, 2011, respectively)

     13,571         11,056   

Leasing commissions, net of accumulated amortization of $3.9 million and $2.8 million as of June 30, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 103 and 113 months as of June 30, 2012 and December 31, 2011, respectively)

     13,694         13,144   
  

 

 

    

 

 

 
   $ 72,666       $ 68,556   
  

 

 

    

 

 

 

 

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Estimated amortization of lease intangible assets as of June 30, 2012 for each of the next five years and thereafter is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2012 (remaining six months)

   $ 9,144   

2013

     15,373   

2014

     12,267   

2015

     8,325   

2016

     5,510   

Thereafter

     22,047   
  

 

 

 

Total

   $ 72,666   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended June 30, 2012 and 2011 was $4.6 million and $2.9 million, respectively. Included in these amounts are $823,000 and $406,000, respectively, of amortization of above market lease intangible assets recorded against rental income. Amortization expense recorded on the lease intangible assets for the six months ended June 30, 2012 and 2011 was $9.5 million and $5.3 million, respectively. Included in these amounts are $1.6 million and $743,000, respectively, of amortization of above market lease intangible assets recorded against rental income.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at June 30, 2012 and December 31, 2011:

 

     June 30,
2012
     December 31,
2011
 
     (in thousands)  

Below market leases, net of accumulated amortization of $3.7 million and $2.5 million as of June 30, 2012 and December 31, 2011, respectively (with a weighted average remaining life of 95 and 106 months as of June 30, 2012 and December 31, 2011, respectively)

   $ 16,444       $ 13,843   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended June 30, 2012 and 2011 was $767,000 and $425,000, respectively. Amortization recorded on the lease intangible liabilities for the six months ended June 30, 2012 and 2011 was $1.7 million and $718,000, respectively. These amounts were recorded to rental income in the Company’s condensed consolidated statements of operations.

Estimated amortization of lease intangible liabilities as of June 30, 2012 for each of the next five years and thereafter is as follows (in thousands):

 

Year Ending December 31,

   Amount  

2012 (remaining six months)

   $ 1,552   

2013

     2,780   

2014

     2,546   

2015

     2,001   

2016

     1,600   

Thereafter

     5,965   
  

 

 

 

Total

   $ 16,444   
  

 

 

 

6. Variable Interest Entities

Consolidated Variable Interest Entities

Included within the consolidated financial statement is the 50% owned joint venture with AB Dothan, LLC, that is deemed a VIE, and for which the Company is the primary beneficiary as it has the power to direct activities that most significantly impact the economic performance of the VIE. The joint venture’s activities principally consist of owning and operating a neighborhood retail center with 171,670 square feet of gross leasable area located in Dothan, Alabama.

As of June 30, 2012 and December 31, 2011, total carrying amount of assets was approximately $16.2 million and $16.5 million, respectively, which includes approximately $13.7 million and $14.0 million, respectively, of real estate assets. As of June 30, 2012 and December 31, 2011, the total carrying amount of liabilities was approximately $14.5 million and $14.6 million, respectively.

 

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Table of Contents

Unconsolidated Variable Interest Entities

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower which has been identified as a VIE. In June 2012, the counterparty repaid the loan in full. The Company did not consolidate the VIE because it did not have the ability to control the activities that most significantly impacted the VIE’s economic performance. See Note 7 for an additional description of the nature, purposes and activities of the Company’s VIE and interests therein.

7. Mortgage and Loan Receivable

On December 9, 2010, the Company loaned $2.0 million to an unaffiliated borrower. The proceeds were used to facilitate the land acquisition and development of a shopping center anchored by Publix in Brandon, Florida. The loan was secured with a second mortgage trust deed on the property and was personally guaranteed by members of the borrower. In June 2012, the mortgage loan receivable was repaid in full, including interest accrued through the date of repayment.

In connection with the loan, the Company also entered into a purchase and sale agreement to acquire this property upon completion of development, at the Company’s election. In June 2012, the Company executed an amendment whereby the closing date for the potential acquisition was extended through December 31, 2012.

In June 2012, the Company extended a note receivable in the amount of $750,000 to a third party . The note receivable bears interest at 10.0% per annum, with the principal and accrued interest due upon maturity in June 2014. The loan is recourse to the borrower and secured by the third party’s profits interests in one of the Company’s consolidated properties. The balance is included in Other Assets on the accompanying condensed consolidated balance sheets.

8. Mortgages Payable, net

Mortgages payable at June 30, 2012 and December 31, 2011 consist of the following (in thousands):

 

     Carrying Amount of
Mortgage Notes
    Contractual
Interest Rate
    Effective
Interest Rate
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   June 30,
2012
     December 31,
2011
          

Five Forks Place

   $ 4,975       $ 5,067        5.50     5.50   $ 39         2013   

Grant Creek Town Center

     15,520         15,694        5.75     5.75     105         2013   

Park West Place(2)

     55,800         55,800        2.75     3.91     182         2013   

Excel Centre

     12,408         12,532        6.08     6.08     85         2014   

Merchant Central

     4,514         4,560        5.94     6.75     30         2014   

Edwards Theatres

     12,017         12,174        6.74     5.50     95         2014   

Gilroy Crossing

     47,026         47,409        5.01     5.01     263         2014   

The Promenade

     50,534         51,359        4.80     4.80     344         2015   

5000 South Hulen

     13,767         13,876        5.60     6.90     83         2017   

Lake Pleasant Pavilion

     28,250         —          6.09     5.00     143         2017   

Rite Aid — Vestavia Hills

     1,264         1,341        7.25     7.25     21         2018   

Lowe’s, Shippensburg

     13,678         13,840        7.20     7.20     110         2031   

Northside Mall(3)

     12,000         12,000        0.19     1.19     2         2035   
  

 

 

    

 

 

          
   $ 271,753       $ 245,652            

Less: premium (discount)(4)

     732         (691         
  

 

 

    

 

 

          

Mortgage notes payable, net

   $ 272,485       $ 244,961            
  

 

 

    

 

 

          

 

(1)

This represents the monthly payment of principal and interest at June 30, 2012.

 

(2)

The loan bears interest at a rate of LIBOR plus 2.50% (interest rate of 2.75% at June 30, 2012). In December 2010, the Company entered into interest rate swap contracts, which fix LIBOR at an average of 1.41% for the term of the loan.

 

(3)

The debt represents redevelopment revenue bonds to be used for the redevelopment of this property, which mature in November 2035. Interest is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.19% at June 30, 2012). The interest rate on the bonds is currently priced off of the Securities Industry and Financial Markets Association, or SIFMA, index but could change based on the credit of the bonds. The bonds are secured by a $12.1 million letter of credit issued by the Company from the Company’s unsecured revolving credit facility. An underwriter’s discount related to the original issuance of the bonds with a remaining balance of $112,000 at June 30, 2012 will be amortized as additional interest expense through November 2035.

 

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Table of Contents
(4)

Represents (a) the fair value adjustment on assumed debt on acquired properties at the time of acquisition to account for below or above market interest rates and (b) underwriter’s discount for the issuance of redevelopment bonds.

Total interest cost capitalized for the three and six months ended June 30, 2012 was $29,000 and $139,000, respectively. Total interest cost capitalized for the three and six months ended June 30, 2011 was $128,000 and $148,000, respectively.

The Company’s mortgage debt maturities at June 30, 2012 for each of the next five years and thereafter are as follows (in thousands):

 

Year Ending December 31,

   Amount  

2012 (remaining six months)

   $ 2,053   

2013

     80,420   

2014

     76,834   

2015

     47,375   

2016

     1,335   

Thereafter

     63,736   
  

 

 

 
   $ 271,753   
  

 

 

 

 

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Table of Contents

9. Notes Payable

The Company’s unsecured revolving credit facility has a borrowing capacity of $200.0 million, which may be increased from time to time up to an additional $200.0 million for a total borrowing capacity of $400.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is July 7, 2014 and may be extended for one additional year at the Company’s option (extended subsequent to June 30, 2012 – see below). The Company, among other things, is subject to covenants requiring the maintenance of (1) maximum leverage ratios on unsecured, secured and overall debt and (2) minimum fixed coverage ratios. On January 23, 2012, the Company entered into a fourth amendment to its credit agreement, which increased the maximum secured indebtedness ratio to 40% of total asset value (as defined in the credit agreement) and modified certain other terms and conditions of the unsecured revolving credit facility. At June 30, 2012, the Company believes that it was in compliance with all the covenants in the credit agreement.

The unsecured revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on the Company’s leverage ratio. The Company will also pay a 0.35% fee for any unused portion of the unsecured revolving credit facility. Borrowings from the unsecured revolving credit facility were $0 at June 30, 2012. The Company issued a $12.1 million letter of credit from the unsecured revolving credit facility, which secures an outstanding $12.0 million bond payable for the Northside Mall. This bond is included with the mortgages payable on the Company’s condensed consolidated balance sheet. At June 30, 2012, there was approximately $134.5 million available for borrowing under the unsecured revolving credit facility.

On July 20, 2012, the Company entered into an amended and restated credit agreement, which provided an increase in borrowings available under the credit facility from $200.0 million to $250.0 million, decreased the fees pertaining to the unused capacity and the applicable interest rate and extended the maturity date. The amended maturity date is July 19, 2016, which may be extended for one additional year at the Company’s option. In addition, the amendment improved certain other terms and conditions of the unsecured revolving credit facility.

The Company has entered into a construction loan agreement in connection with construction activities at one of its development properties. The construction loan provides for borrowings of up to $18.0 million, which bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on the Company’s leverage ratio, with a maturity date of March 1, 2013. The maturity date may be extended for each of two one-year extension periods, at the Company’s option and upon the satisfaction of conditions precedent. As of June 30, 2012, there were $13.6 million in outstanding borrowings on the construction loan at an interest rate of 2.45%.

10. Earnings Per Share

Basic earnings (loss) per share is computed by dividing (loss) income available to common stockholder by the weighted average shares outstanding, as adjusted for the effect of participating securities. The Company’s unvested restricted share awards are participating securities as they contain non-forfeiture rights to dividends. The impact of unvested restricted share awards on earnings (loss) per share has been calculated using the two-class method whereby earnings are allocated to the unvested restricted share awards based on dividends and the unvested restricted shares’ participation rights in undistributed earnings (losses).

The calculation of diluted earnings per share for the three and six months ended June 30, 2012 and 2011 does not include unvested restricted common shares, contingently issuable shares (Note 3), or OP units as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the common stockholders. In addition, common shares issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock were anti-dilutive and were not included in the calculation of diluted earnings per share based on the “if converted” method for the three and six months ended June 30, 2012 and 2011.

 

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Table of Contents

Computations of basic and diluted earnings per share for the three and six months ended June 30, 2012 and 2011 (in thousands, except share data) were as follows:

 

    Three Months Ended     Six Months Ended  
    June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Basic earnings per share:

       

Income (loss) from continuing operations

  $ 357      $ (2,458   $ 790      $ (3,034

Preferred dividends

    (2,744     (875     (4,865     (1,478

Allocation to participating securities

    (149     (157     (299     (305

Loss from continuing operations attributable to non-controlling interests

    11        277        16        252   
 

 

 

   

 

 

   

 

 

   

 

 

 

Loss from continuing operations attributable to the common stockholders

  $ (2,525   $ (3,213   $ (4,358   $ (4,565
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

  $ (2,376   $ 1,061      $ (4,059   $ 429   

Allocation to participating securities

    (149     (157     (299     (305
 

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income applicable to the common stockholders

  $ (2,525   $ 904      $ (4,358   $ 124   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

       

Basic and diluted

    32,785,490        15,855,786        32,273,468        15,685,606   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

       

Loss from continuing operations per share attributable to the common stockholders

  $ (0.08   $ (0.20   $ (0.14   $ (0.29

Income from discontinued operations per share attributable to the common stockholders

    —          0.26        —          0.30   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss per share attributable to the common stockholders

  $ (0.08   $ 0.06      $ (0.14   $ 0.01   
 

 

 

   

 

 

   

 

 

   

 

 

 

11. Derivatives and Hedging Activities

In December 2010, the Company executed two pay-fixed interest rate swaps with a notional value of $55.8 million (weighted average interest rate of 1.41%) to hedge the variable cash flows associated with one of the Company’s mortgage payables. As a result of the interest rate swaps, the Company either (1) receives the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate is less than LIBOR or (2) pays such difference if the Strike Rate is greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The Company had no derivative financial instruments prior to the execution of the two swaps.

During the three and six months ended June 30, 2012, the Company recorded no amounts in earnings attributable to hedge ineffectiveness. During the next twelve months, the Company estimates that an additional $607,000 will be reclassified from other comprehensive income as an increase to interest expense.

As of June 30, 2012, the Company had the following outstanding interest rate swaps and other derivatives instruments (in thousands):

 

     Fair Value(1)      Current Notional
Amount
     Strike Rate    Expiration Date

Type of Derivative Instrument

   June 30,
2012
     December 31,
2011
          

Interest rate swaps(2)

   $ 857       $ 965       $ 55,800       1.34% to 1.48%    December 2013

Other derivative instrument(3)

     1,345         3,050             March 2013
  

 

 

    

 

 

          

Total derivative instruments

   $ 2,202       $ 4,015            
  

 

 

    

 

 

          

 

(1)

Fair value of derivative instruments does not include any related accrued interest payable to the counterparty.

 

(2)

The interest rate swaps are classified within accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

 

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Table of Contents
(3)

The Company’s purchase agreement executed in connection with the acquisition of the Edwards Theatres property in March 2011 contained a provision determined to be an embedded derivative instrument. The embedded derivative provides a guaranteed fair value for the OP units provided to the sellers of the property if redeemed for shares of the Company’s common stock or cash, at the Company’s election, prior to March 2013. The fair value of the embedded derivative at each period is calculated through the use of a Monte Carlo valuation model based on the historical volatility and closing price of the Company’s common stock and a risk-free interest rate (see Note 16 for discussion of changes in the fair value of this derivative). The embedded derivative is classified within accounts payable and other liabilities in the accompanying condensed consolidated balance sheets.

Tabular Disclosure of the Effect of Derivative Instruments on the Income Statement

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the three months ended June 30, 2012 and 2011 (in thousands):

 

     Income Statement Impact of Derivative Instruments
For the Three Months Ended June 30, 2012
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
    Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (39     Interest expense       $ (163   Other income/expense    $ —     

Other derivatives

     —          —          —        Changes in fair value of

financial

instruments and gain
on OP unit redemption

     589   
  

 

 

      

 

 

      

 

 

 

Total

   $ (39      $ (163      $ 589   
  

 

 

      

 

 

      

 

 

 

 

     Income Statement Impact of Derivative Instruments
For the Three Months Ended June 30, 2011
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
    Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (802     Interest expense       $ (163   Other income/expense    $ —     

Other derivatives

     —          —          —        Changes in fair value of

financial

instruments and gain
on OP unit redemption

     512   
  

 

 

      

 

 

      

 

 

 

Total

   $ (802      $ (163      $ 512   
  

 

 

      

 

 

      

 

 

 

 

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Table of Contents

The tables below present the effect of the Company’s derivative financial instruments on the consolidated statements of operations for the six months ended June 30, 2012 and 2011 (in thousands):

 

     Income Statement Impact of Derivative Instruments
For the Six Months Ended June 30, 2012
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
    Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (212     Interest expense       $ (320   Other income/expense    $ —     

Other derivatives

     —          —          —        Changes in fair value of

financial

instruments and gain
on OP unit redemption

     1,051   
  

 

 

      

 

 

      

 

 

 

Total

   $ (212      $ (320      $ 1,051   
  

 

 

      

 

 

      

 

 

 

 

     Income Statement Impact of Derivative Instruments
For the Six Months Ended June 30, 2011
 
     Amount of
Unrealized
Gain/(loss)
Recognized in
OCI on
Derivative
(Effective
Portion)
    Location of Loss
Reclassified from
Accumulated OCI
into Income
(Effective Portion)
     Amount of
Gain/(loss)
Reclassified from
Accumulated
OCI into Income
(Effective
Portion)
    Location of Gain/
(loss) Recognized in
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness
Testing)
   Amount of
Gain/(loss)
Recognized in
Income on
Derivative
(Ineffective
Portion and
Amount
Excluded from
Effectiveness
Testing)
 

Derivative instruments:

            

Interest rate swaps

   $ (733     Interest expense       $ (315   Other income/expense    $ —     

Other derivatives

     —          —          —        Changes in fair value of

financial

instruments and gain
on OP unit redemption

     512   
  

 

 

      

 

 

      

 

 

 

Total

   $ (733      $ (315      $ 512   
  

 

 

      

 

 

      

 

 

 

Credit-risk-related Contingent Features

Under the terms of the two interest rate swaps detailed above, the Company could be declared in default on its obligations under the swap agreements in the event that it defaults on any of its indebtedness, even if repayment of the indebtedness has not been accelerated by the lender. Additionally, because the Company’s derivative counterparty is also the lender for the hedged floating rate credit agreement, the swap agreements incorporate the loan covenant provisions of the Company’s indebtedness. Failure to comply with the loan covenant provisions would result in the Company being in default on any derivative instrument obligations covered by the agreement.

If the Company had breached any of these provisions at June 30, 2012, it could have been required to settle its obligations under the agreements at their termination value. As of June 30, 2012, the termination value defined as the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, was a liability of approximately $911,000. As of June 30, 2012, the Company has not posted any collateral related to these agreements.

Although the Company’s derivative contracts are subject to a master netting arrangement, the Company does not net its derivative fair values or any existing rights or obligations to cash collateral on the consolidated balance sheet.

 

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Table of Contents

12. Equity

The Company has issued restricted stock awards to senior executives, directors and employees totaling 1,100,042 shares of common stock (net of forfeitures of 3,000 shares), which are included in the total shares of common stock outstanding as of June 30, 2012.

As of June 30, 2012, the Company had outstanding 2,000,000 shares of 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (“Series A preferred stock”), with a liquidation preference of $25.00 per share. The Company pays cumulative dividends on the Series A preferred stock when, as and if declared by the Company’s Board of Directors, at a rate of 7.00% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Series A preferred stock is $1.75, payable quarterly in arrears on the 15th calendar day of January, April, July and October of each year. Holders of the Series A preferred stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances.

The Series A preferred stock is convertible, at the holders’ option, at any time and from time to time, into common stock of the Company at an initial conversion rate of 1.6667 shares of common stock per share of Series A preferred stock, which is equivalent to an initial conversion price of $15.00 per share. The conversion price will be subject to customary adjustments in certain circumstances. On or after April 1, 2014, the Company may, at its option, convert some or all of the Series A preferred stock if the closing price of the common stock equals or exceeds 140% of the conversion price for at least 20 of the 30 consecutive trading days ending the day before the notice of exercise of conversion is sent and the Company has either declared and paid, or declared and set apart for payment, any unpaid dividends that are in arrears on the Preferred Stock. Net proceeds from this offering were approximately $47.7 million. The Company used the net proceeds of this offering to repay a portion of the outstanding indebtedness under the unsecured revolving credit facility.

The Company’s Board of Directors has authorized a stock repurchase program under which the Company may acquire up to $30.0 million of its common stock in open market and negotiated purchases with no expiration date. Through June 30, 2012, the Company has repurchased 674,866 shares of its common stock for an aggregate cost of approximately $6.7 million (including transaction costs) at a weighted average purchase price of $9.99 per share. The shares were subsequently retired by the Company.

On January 31, 2012, the Company completed the issuance of 3,680,000 shares of 8.125% Series B preferred stock (“Series B preferred stock”), with a liquidation preference of $25.00 per share, including the exercise of an overallotment option of 480,000 shares. The Company pays cumulative dividends on the Series B preferred stock, when, as and if declared by the Company’s board of directors, at a rate of 8.125% per annum, subject to adjustment in certain circumstances. The annual dividend on each share of Series B preferred stock is $2.03125, payable quarterly in arrears on the 15th calendar day of January, April, July and October of each year. Holders of the Series B preferred stock generally have no voting rights except for limited voting rights if the Company fails to pay dividends for six or more quarterly periods (whether or not consecutive) and in certain other circumstances. At any time on and after January 31, 2017, the Company may, at its option, redeem the Series B preferred stock, in whole or from time to time in part, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. In addition, upon the occurrence of a change of control, the Company or a successor may, at its option, redeem the Series B preferred stock, in whole or in part and within 120 days after the first date on which such change of control occurred, by paying $25.00 per share, plus any accrued and unpaid dividends to, but not including, the date of redemption. Net proceeds from this offering were approximately $88.7 million. The Company used the net proceeds of this offering to repay the outstanding indebtedness under its unsecured revolving credit facility and for other general corporate and working capital purposes.

On March 9, 2012, the Company entered into equity distribution agreements (the “2012 Equity Distribution Agreements”) with four sales agents, under which it can issue and sell shares of its common stock having an aggregate offering price of up to $50.0 million from time to time through, at its discretion, any of the sales agents. The sales of common stock made under the 2012 Equity Distribution Agreements will be made in “at the market” offerings as defined in Rule 415 of the Securities Act of 1933, as amended (the “Securities Act”). During the six months ended June 30, 2012, no shares were issued under any of the 2012 Equity Distribution Agreements. Subsequent to June 30, 2012, the Company completed the issuance of 254,100 shares pursuant to the 2012 Equity Distribution Agreements, resulting in net proceeds of approximately $3.0 million at an average stock issuance price of $12.17 per share.

Consolidated net income is reported in the Company’s condensed consolidated financial statements at amounts that include the amounts attributable to both the common stockholders and the non-controlling interests. In conjunction with the Company’s formation transactions, interests in four properties were contributed in exchange for 641,062 OP units. In March 2011, the Company issued an additional 764,343 OP units in connection with the acquisition of the Edwards Theatres property. During the six months ended June 30, 2012, a total of 299,927 OP units related to the Edwards Theatres acquisition were tendered to the Company for redemption, resulting in the issuance of an additional 193,510 shares of common stock and cash payments totaling approximately $1.9 million to former unitholders (see Note 16 for further discussion).

 

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OP units not held by the Company are reflected as non-controlling interest in the Company’s condensed consolidated financial statements and included as equity. OP units not held by the Company have redemption provisions that permit the Operating Partnership to settle in either cash or common stock at the option of the Operating Partnership, which have been further evaluated to determine that permanent equity classification on the balance sheet is appropriate.

The following table shows the vested ownership interests in the Operating Partnership as of June 30, 2012 and December 31, 2011:

 

     June 30, 2012     December 31, 2011  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     32,813,808         96.7     29,271,593         95.4

Non-controlling interest consisting of:

          

OP units

     1,105,478         3.3     1,405,405         4.6
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     33,919,286         100.0     30,676,998         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

A charge/credit is recorded each period in the consolidated statements of income for the non-controlling interests’ proportionate share of the Company’s net income (loss). Ownership interests held by the Company do not include unvested restricted stock.

2010 Equity Incentive Award Plan

The Company has established the 2010 Equity Incentive Award Plan of Excel Trust, Inc. and Excel Trust, L.P. (the “2010 Plan”), pursuant to which the Company’s Board of Directors or a committee of its independent directors may make grants of stock options, restricted stock, stock appreciation rights and other stock-based awards to its non-employee directors, employees and consultants. The maximum number of shares of the Company’s common stock that may be issued pursuant to the 2010 Plan is 1,350,000 (of which 249,958 shares of common stock remain available for issuance as of June 30, 2012).

The following shares of restricted common stock were issued during the three months ended March 31, 2012 and June 30, 2012:

 

Grant Data

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

Three months ended March 31, 2012(1)

   $ 12.42         5,000         4   

Three months ended June 30, 2012(2)

   $ 11.99         13,356         1   

 

(1)

Shares issued to certain of the Company’s employees. These shares vest over four years with 25% vesting on the first anniversary of the grant date and the remainder vesting in equal quarterly installments thereafter.

(2)

Shares issued to members of the Company’s board of directors. These shares vest in equal monthly installments.

Shares of the Company’s restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the administrator of the 2010 Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions expire upon vesting. Shares of the Company’s restricted common stock have full voting rights and rights to dividends upon grant. During the three and six months ended June 30, 2012, the Company recognized compensation expense of $804,000 and $1.6 million, respectively, related to the restricted common stock grants ultimately expected to vest. During the three and six months ended June 30, 2011, the Company recognized compensation expense of $1.2 million and $1.8 million, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has estimated $0 in forfeitures. Stock compensation expense is included in general and administrative in the Company’s accompanying condensed consolidated statements of operations.

 

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As of June 30, 2012 and December 31, 2011, there was approximately $5.0 million and $6.4 million, respectively, of total unrecognized compensation expense related to the non-vested shares of the Company’s restricted common stock. As of June 30, 2012, this expense was expected to be recognized over a weighted-average remaining period of 2.5 years.

 

     Number of Unvested
Shares of
Restricted
Common Stock
    Weighted
Average Grant
Date Fair Value
 

Balance — January 1, 2012

     1,018,220      $ 10.69   

Grants

     18,356      $ 12.11   

Forfeitures

     —        $ —     

Vested

     (117,936   $ 12.18   
  

 

 

   

 

 

 

Balance — June 30, 2012

     918,640      $ 9.99   
  

 

 

   

 

 

 

Expected to vest — June 30, 2012

     918,640      $ 9.99   
  

 

 

   

 

 

 

401(k) Retirement Plan

The Company maintains a 401(k) retirement plan covering substantially all employees, which permits participants to defer up to the maximum allowable amount of their eligible compensation as determined by the Internal Revenue Service. This deferred compensation, together with Company matching contributions equal to 100% of employee deferrals up to 3.0% of eligible compensation and 50% of employee deferrals for the next 2.0% of eligible compensation, is fully vested and funded as of June 30, 2012. Costs related to the matching portion of the plan were approximately $30,000 and $21,000, respectively, for the three months ended June 30, 2012 and 2011 and approximately $57,000 and $41,000, respectively, for the six months ended June 30, 2012 and 2011.

13. Related Party Transactions

Subsequent to the Offering, many of the employees of Excel Realty Holdings, LLC (“ERH”) became employees of the Company. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. In the three months ended June 30, 2012 and 2011, approximately $79,000 and $57,000, respectively, was reimbursed to the Company from ERH and included in other income in the consolidated statements of operations. In the six months ended June 30, 2012 and 2011, approximately $148,000 and $106,000, respectively, was reimbursed to the Company from ERH and included in other income in the consolidated statements of operations.

14. Income Taxes

The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). To continue to qualify as a REIT, the Company must meet a number of organizational and operational requirements, including the requirement that it distribute currently at least 90% of its REIT taxable income to its stockholders. It is the Company’s intention to comply with these requirements and maintain the Company’s REIT status. As a REIT, the Company generally will not be subject to corporate federal, state or local income taxes on income it distributes currently (in accordance with the Code and applicable regulations) to its stockholders. If the Company fails to qualify as a REIT in any taxable year, then it will be subject to federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, properties and operations and to federal income and excise taxes on its taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

15. Commitments and Contingencies

Litigation:

The Company is not presently subject to any material litigation nor, to its knowledge, is any material litigation threatened against it which if determined unfavorably, would have a material effect on its condensed consolidated financial position, results of operations or cash flows.

 

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Environmental Matters:

The Company follows the policy of monitoring its properties for the presence of hazardous or toxic substances. While there can be no assurance that a material environmental liability does not exist at its properties, the Company is not currently aware of any environmental liability with respect to its properties that would have a material effect on its condensed consolidated balance sheets, results of operations or cash flows. Further, the Company is not aware of any environmental liability or any unasserted claim or assessment with respect to an environmental liability that it believes would require additional disclosure or the recording of a loss contingency.

Property Acquisitions:

In connection with the Company’s note receivable secured by real estate, the Company also entered into a purchase and sale agreement to acquire the property at its election (see Note 7). The purchase price will be dependent upon leasing and net operating income of the property when and if acquired.

Other

The Company’s other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In management’s opinion, these matters are not expected to have a material adverse effect on its condensed consolidated balance sheets, results of operations or cash flows. In addition, the Company expects to incur approximately $9.2 million in construction costs on two non-operating properties (primarily related to leasing commissions and final tenant build-outs).

16. Fair Value of Financial Instruments

The Company is required to disclose fair value information relating to financial instruments that are remeasured on a recurring basis and those that are only initially recognized at fair value (not required to be subsequently remeasured). The Company’s disclosures of estimated fair value of financial instruments were determined using available market information and appropriate valuation methods. The use of different assumptions or methods of estimation may have a material effect on the estimated fair value of financial instruments.

The following table reflects the fair values of the Company’s financial assets and liabilities that are required to be measured at fair value on a recurring basis and changes in the fair value for each reporting period (in thousands):

 

     Balance at
June 30,
2012
    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

         

Interest rate swaps (see Note 11)

   $ (857   $ —         $ (857   $ —     

Contingent consideration related to business combinations(1)

     772        —           —          772   

Derivative instrument related to business combinations (see Note 11)(2)

     (1,345     —           —          (1,345

Investment in equity securities (see Note 2)

     6,461        6,461         —          —     

 

     Balance at
December 31,
2011
    Quoted Prices in
Active Markets
(Level 1)
     Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

         

Interest rate swaps (see Note 11)

   $ (965   $ —         $ (965   $ —     

Contingent consideration related to business combinations(3)

     (1,613     —           —          (1,613

Derivative instrument related to business combinations (see Note 11)(2)

     (3,050     —           —          (3,050

Investment in equity securities (see Note 2)

     9,164        9,164         —          —     

 

(1)

Amount reflects the fair value of funds expected to be received pursuant to master lease agreements executed in connection with the Promenade Corporate Center acquisition. The Company has estimated the fair value of the asset based on its expectations of the probability of leasing or releasing spaces within the term of the master lease agreements and corresponding estimates for time required to lease, lease rates and funds required for tenant improvements and lease commissions. This amount has been included in other assets in the accompanying consolidated balance sheets, with subsequent changes in the fair value of the asset recorded as a gain (loss) in earnings in the period in which the change occurs.

 

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Table of Contents
(2)

Amount reflects the fair value of a provision within a purchase agreement that provides a guaranteed redemption value for OP units provided to the sellers of a property acquired in March 2011 (see Note 3 for additional details). The Company has estimated the fair value of the embedded derivative instrument using a Monte Carlo valuation model based on the historical volatility and closing price of the Company’s common stock and a risk-free interest rate. This amount is included in accounts payable and other liabilities in the accompanying consolidated balance sheets, with changes in the fair value of the embedded derivative recorded as gain (loss) on changes in fair value of financial instruments and gain on OP unit redemption in the consolidated statements of operations.

During the six months ended June 30, 2012, 299,927 OP units were tendered to the Company for redemption, resulting in the issuance of 193,510 shares of common stock and cash payments totaling approximately $1.9 million. The Company has recognized the acquisition of non-controlling interests based on the fair value of shares issuable in connection with the one-for-one redemption right available to all holders of OP units. The Company recognized gains of approximately $175,000 and $349,000 in the three and six months ended June 30, 2012, respectively, as a result of the excess of the fair value of the guarantee over the fair value of the consideration required to settle. In total, the Company recognized an increase in additional paid in capital and common stock, par value, of approximately $2.3 million. The Company also recognized additional gains of $415,000 and $702,000 in the three and six months ended June 30, 2012, respectively, for changes in fair value of financial instruments and gain on OP unit redemption in the consolidated statements of operations as a result of updated valuations of the remaining provision.

 

(3)

Additional consideration was due the prior owners of two properties acquired in 2010 based on their ability to lease-up vacant space or sell a land parcel through a defined period following the acquisition date. Additional consideration in the amount of $391,000 relating to one of the two properties was paid in 2011. The remaining contingent consideration included in the balance of accounts payable and other liabilities in the accompanying consolidated balance sheet at December 31, 2011 represents approximately $1.6 million in earn-outs paid to a prior owner in January 2012.

The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2012 (in thousands):

 

    Contingent Consideration
Related to Business
Combinations
    Derivative Instruments Related
to Business Combinations
 

Beginning balance, January 1, 2012

  $ (1,613   $ (3,050

Total gains:

   

Included in earnings(1)

    —          1,051   

Purchases, issuances, or settlements(1)

    2,385        654   
 

 

 

   

 

 

 

Ending balance, June 30, 2012

  $ 772      $ (1,345
 

 

 

   

 

 

 

 

(1)

The change of $2.4 million for contingent consideration related to business combinations during the six months ended June 30, 2012 is comprised of (1) a decrease in the liability balance due to the payment of approximately $1.6 million in earn-outs in January 2012 and (2) the recognition of a master lease asset of $772,000 related to the acquisition of the Promenade Corporate Center property. The change of $1.7 million for derivative instruments related to business combinations during the six months ended June 30, 2012 is comprised of (1) a decrease of $1.0 million due to a redemption of OP units related to the acquisition of the Edwards Theatres property (which includes a gain of $349,000 that is included in earnings) and (2) a gain of $702,000 included in earnings related to the change in the fair value of the derivative liability.

 

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Table of Contents

The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2011 (in thousands):

 

    Contingent Consideration
Related to Business
Combinations
    Derivative Instruments Related
to Business Combinations
 

Beginning balance, January 1, 2011

  $ (2,438   $ —     

Total gains:

   

Included in earnings(1)

    328        512   

Purchases, issuances, or settlements(1)

    —          (4,204
 

 

 

   

 

 

 

Ending balance, June 30, 2011

  $ (2,110   $ (3,692
 

 

 

   

 

 

 

 

(1)

The change of $328,000 for contingent consideration related to business combinations during the six months ended June 30, 2011 is due to changes in the Company’s initial estimates of the fair value of contingent consideration as a result of a fewer number of executed leases. The change of $3.7 million for derivative instruments related to business combinations during the six months ended June 30, 2011 is comprised of (1) the recognition of a liability in the amount of $4.2 million in connection with the purchase of the Edwards Theatres property in March 2011 and (2) a gain of $512,000 included in earnings related to the change in the fair value of the derivative liability.

There were no additional gains or losses, purchases, sales, issuances, settlements, or transfers in or out related to fair value measurements using level three inputs during the three and six months ended June 30, 2012 and 2011.

The following table provides quantitative disclosure about significant unobservable inputs related to financial assets and liabilities measured on a recurring basis (Level 3 of the fair value hierarchy) as of June 30, 2012:

 

    Fair Value at
June 30, 2012
    Valuation
Technique(s)
  Unobservable Input   Range (Weighted
Average)

Contingent consideration related to business
combinations
(1)

 

 

$

 

772

 

  

 

 

Cash flow

  Tenant improvement
allowance

Lease commission

TI construction period

 

 

$12.00/sf 6.0%

2 months

Derivative instrument related to business
combinations
(2)

 

 

$

 

1,345

 

  

 

 

Monte Carlo

  Share volatility

Expected term

Risk free rate

 

 

46.0% 0.7 years 0.2%

 

(1)

The significant unobservable inputs used in the fair value measurement of the master lease agreement asset are any estimated tenant improvement allowances, leasing commissions and the construction periods associated with projected new leasing. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for market lease rates is accompanied by a directionally similar change in the assumption used for tenant improvement allowances and/or leasing commissions.

(2)

The significant unobservable inputs used in the fair value measurement of the redemption provision are share volatility, risk-free rate and expected term. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the share volatility is reflective of changes in the underlying fair value of the Company’s common stock and those of peer companies utilized in the analysis (Level 1 of the fair value hierarchy), which could significantly affect the estimated fair value of the underlying derivative instrument.

The Company has not elected the fair value measurement option for any of its other financial assets or liabilities. The Company has estimated the fair value of its financial assets using a discounted cash flow analysis based on an appropriate market rate for a similar type of instrument. The Company has estimated the fair value of its financial liabilities by using either (1) a discounted cash flow analysis using an appropriate market discount rate for similar types of instruments, or (2) a present value model and an interest rate that includes a credit value adjustment based on the estimated value of the property that serves as collateral for the underlying debt. The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts.

 

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The fair values of certain additional financial assets and liabilities at June 30, 2012 and December 31, 2011 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (in thousands):

 

     June 30, 2012      December 31, 2011  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Note receivable (Other Assets)

   $ 750      $ 750      $ —         $ —     

Mortgage loan receivable

     —           —           2,000         2,000   

Financial liabilities:

           

Mortgage notes payable

     272,485         277,736         244,961         248,597   

Notes payable

     13,629         13,617         21,000         20,661   

17. Segment Disclosure

The Company’s reportable segments consist of the two types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties and Retail Properties. The Company was formed for the primary purpose of owning and operating Retail Properties. As such, administrative costs after the Offering are shown under the Retail Properties segment. The Retail Properties operating segment also includes undeveloped land which the Company intends to develop into retail properties.

The Company evaluates the performance of the operating segments based upon property net operating income. “Property Net Operating Income” is defined as operating revenues (rental revenue and tenant recoveries) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses). The Company also evaluates interest expense, interest income and depreciation and amortization by segment. Corporate general and administrative expense, interest expense related to corporate indebtedness and other non-recurring gains or losses are reflected within the Retail Properties operating segment as this constitutes the Company’s primary business objective and represents the majority of its operations. There is no intersegment activity.

The following tables reconcile the Company’s segment activity to its condensed consolidated results of operations and financial position for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Office Properties:

      

Total revenues

   $ 2,274      $ 797      $ 4,106      $ 1,619   

Property operating expenses

     (819     (168     (1,416     (338
  

 

 

   

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     1,455        629        2,690        1,281   

General and administrative

     (29     (1     (97     (1

Depreciation and amortization

     (1,055     (239     (1,849     (479

Interest expense

     (197     (201     (395     (400
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     174        188        349        401   

Income from discontinued operations

     —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 174      $ 188      $ 349      $ 401   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retail Properties:

        

Total revenues

   $ 18,254      $ 11,992      $ 36,202      $ 21,649   

Property operating expenses

     (4,144     (2,919     (7,953     (5,406
  

 

 

   

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     14,110        9,073        28,249        16,243   

General and administrative

     (3,283     (3,139     (6,718     (5,789

Depreciation and amortization

     (7,497     (6,161     (14,982     (10,082

Interest expense

     (3,789     (3,302     (7,265     (5,668

Interest income

     53        43        106        84   

Changes in fair value of earn-outs

     —          —          —          937   

Changes in fair value of financial instruments and gain on OP unit redemption

     589        840        1,051        840   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     For the Three Months Ended     For the Six Months Ended  
     June 30,
2012
    June 30,
2011
    June 30,
2012
    June 30,
2011
 

Income (loss) from continuing operations

     183        (2,646     441        (3,435

Income from discontinued operations

     —          4,483        —          4,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ 183      $ 1,837      $ 441      $ 1,564   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Reportable Segments:

        

Total revenues

   $ 20,528      $ 12,789      $ 40,308      $ 23,268   

Property operating expenses

     (4,963     (3,087     (9,369     (5,744
  

 

 

   

 

 

   

 

 

   

 

 

 

Property net operating income, as defined

     15,565        9,702        30,939        17,524   

General and administrative

     (3,312     (3,140     (6,815     (5,790

Depreciation and amortization

     (8,552     (6,400     (16,831     (10,561

Interest expense

     (3,986     (3,503     (7,660     (6,068

Interest income

     53        43        106        84   

Changes in fair value of earn-outs

     —          —          —          937   

Gain on changes in fair value of financial instruments and gain on OP unit redemption

     589        840        1,051        840   
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations

     357        (2,458     790        (3,034

Income from discontinued operations

     —          4,483        —          4,999   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income

   $ 357      $ 2,025      $ 790      $ 1,965   
  

 

 

   

 

 

   

 

 

   

 

 

 

Attributable to Controlling Interest:

        

Income (loss) attributable to Excel Trust, Inc.

   $ 357      $ 2,025      $ 790      $ 1,965   

Net loss (income) attributable to non-controlling interests in operating partnership

     86        (94     157        (95

Net income attributable to non-controlling interests in consolidated joint ventures

     (75     5        (141     37   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Excel Trust, Inc.

   $ 368      $ 1,936      $ 806      $ 1,907   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     June 30,      December 31,  
     2012      2011  

Assets:

     

Office Properties:

     

Total assets

   $ 67,758       $ 15,562   

Retail Properties:

     

Total assets

     752,786         672,109   
  

 

 

    

 

 

 

Total Reportable Segments & Consolidated Assets:

     

Total assets

   $ 820,544       $ 687,671   
  

 

 

    

 

 

 

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Excel Trust, Inc., a Maryland corporation, and any of our subsidiaries.

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the retail industry or the markets in which we operate; changes in local, regional and national economic conditions; our inability to compete effectively; our inability to collect rent from tenants; defaults on or non-renewal of leases by tenants; increased interest rates and operating costs; decreased rental rates or increased vacancy rates; our failure to obtain necessary outside financing on favorable terms or at all; changes in the availability of additional acquisition opportunities; our inability to successfully complete real estate acquisitions; our failure to successfully operate acquired properties and operations; our failure to qualify or maintain our status as a REIT; our inability to attract and retain key personnel; government approvals, actions and initiatives, including the need for compliance with environmental requirements; financial market fluctuations; changes in real estate and zoning laws and increases in real property tax rates; the effects of earthquakes and other natural disasters; and lack of or insufficient amounts of insurance. While forward-looking statements reflect our good faith beliefs (or those of the indicated third parties), they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. In addition, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2011. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Management’s Overview and Summary

We are a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. Our strategy is to acquire high quality, well-located, dominant retail properties that generate attractive risk-adjusted returns. We target competitively protected properties in communities that have stable demographics and have historically exhibited favorable trends, such as strong population and income growth. We consider competitively protected properties to be located in the most prominent shopping districts in their respective markets, ideally situated at major intersections. We generally lease our anchor space to national and regional supermarket chains, big-box retailers and select national retailers that frequently offer necessity and value oriented items and generate regular consumer traffic. Our tenants often carry goods that are less impacted by fluctuations in the broader U.S. economy and consumers’ disposable income, which we believe generates more predictable property-level cash flows.

As of June 30, 2012, we owned an operating portfolio consisting of 23 retail properties totaling approximately 4.2 million square feet of gross leasable area (including a 50% consolidated joint venture), which were approximately 94.2% leased and had a weighted average remaining lease term of approximately seven years, based on gross leasable area. In addition, we owned two commercial office properties totaling 338,333 square feet of gross leasable area, which were 84.3% leased as of June 30, 2012. We utilize a portion of the Excel Centre property as our headquarters and the Promenade Corporate Center property. We also owned two non-operating development properties, which had substantially completed construction and were partially leased as of June 30, 2012.

Our operations are carried on primarily through our Operating Partnership. Pursuant to contribution agreements, we and our Operating Partnership received a contribution of interests in four properties as well as the property management, leasing and real

 

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estate development operations of the properties in exchange for the issuance of shares of our common stock or OP units and/or the payment of cash to the contributors and the assumption of debt and other specified liabilities in connection with our initial public offering.

We receive income primarily from rents and reimbursement payments received from tenants under existing leases at each of our properties. Potential impacts to our income include unanticipated tenant vacancies, vacancy of space that takes longer to re-lease and, for non triple-net leases, operating costs that cannot be recovered from our tenants through contractual reimbursement formulas in our leases. Our operating results therefore depend materially on the ability of our tenants to make required payments and overall real estate market conditions.

Critical Accounting Policies

A complete discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2011 which was filed with the Securities and Exchange Commission, or SEC, and is accessible on the SEC’s website at www.sec.gov.

New Accounting Standards

See Note 2 to the condensed consolidated financial statements included elsewhere herein for disclosure of new accounting standards.

Results of Operations

We operate through two reportable business segments: retail properties and office properties. The office segment consists of two properties, Excel Centre, a portion of which is utilized as our headquarters, and the Promenade Corporate Center. These properties total 338,333 square feet of gross leasable area. All of our other properties are reported in the retail segment. At June 30, 2012, we owned 23 retail operating properties with a total of approximately 4.2 million square feet of gross leasable area.

We evaluate the performance of our segments based upon property net operating income. “Property Net Operating Income” is defined as operating revenues (rental revenue and tenant recoveries) less property operating expenses (maintenance and repairs, real estate taxes, management fees, and other operating expenses). We also evaluate interest expense, interest income and depreciation and amortization by segment. Corporate general and administrative expense, interest expense related to corporate indebtedness and other non-recurring gains or losses are reflected within the retail properties operating segment as this constitutes the Company’s primary business objective and represents the majority of its operations.

You should read the following discussion in conjunction with the segment information disclosed in Note 17 to our condensed consolidated financial statements in accordance with ASC 280, Segment Reporting. Our results of operations for the three and six months ended June 30, 2012 and 2011 may not be indicative of our future results of operations.

Retail Properties

In the six months ended June 30, 2012, we acquired three retail operating properties for a total of approximately $89.9 million, including the assumption of a mortgage note in the amount of $28.3 million. We utilized borrowings from our unsecured revolving credit facility and proceeds from our Series B preferred stock offering to acquire these properties. At June 30, 2012, we owned 23 retail operating properties totaling approximately 4.2 million square feet. The properties were 94.2% leased and 20 leases were signed or renewed in the six months ended June 30, 2012 for a total of approximately 42,000 square feet. The following is a comparison of the retail properties segment operating results of the Company, for the three and six months ended June 30, 2012 and 2011.

Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $6.3 million, or 52.2%, to $18.3 million for the three months ended June 30, 2012 compared to $12.0 million for the three months ended June 30, 2011. The increase was primarily related to our acquisition of seven retail operating properties after March 31, 2011, the commencement of leases at a property formerly under redevelopment that was placed into service in 2011, and the commencement of a portion of the leases at our non-operating development properties in 2011 and 2012.

Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $1.2 million, or 42.0%, to $4.1 million for the three months ended June 30, 2012 compared to $2.9 million for the three months ended June 30, 2011. The increase was primarily related to the acquisition of seven retail operating properties after March 31, 2011, the commencement of leases at a property formerly under redevelopment that was placed into service in 2011 and the commencement of a portion of the leases at our non-operating development properties in 2011 and 2012.

 

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General and administrative expenses were $3.3 million for the three months ended June 30, 2012 compared to $3.1 million for the three months ended June 30, 2011. Included was share-based compensation expense for the three months ended June 30, 2012 and 2011 of $804,000 and $1.3 million, respectively. The increase was due to higher acquisition costs related to completed and pending acquisitions, benefit and compensation costs related to an increase in total employees, and an increase in other professional and audit fees, partially offset by the decrease in share-based compensation expense as a result of the graded vesting method of recognizing compensation expense related to the 2011 performance-based stock awards, which results in declining amounts of compensation expense in 2012 and 2013 as compared to 2011.

Depreciation and amortization expense increased $1.3 million, or 21.7%, to $7.5 million for the three months ended June 30, 2012 compared to $6.2 million for the three months ended June 30, 2011. The increase was primarily related to our acquisition of seven retail operating properties after March 31, 2011 and the commencement of depreciation at our two development properties in 2012.

Interest expense increased $477,000, or 14.6%, to $3.7 million for the three months ended June 30, 2012 compared to $3.3 million for the three months ended June 30, 2011. The increase was primarily due to the assumption of approximately $142.3 million of mortgage debt in connection with our property acquisitions in 2011 and 2012, partially offset by a decrease in the interest rate and fees associated with our unsecured revolving credit facility as a result of a June 2011 amendment and a decrease in the average borrowings outstanding on our unsecured revolving credit facility for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.

A gain on changes in fair value of financial instruments and gain on OP unit redemption of approximately $589,000 was recognized in the three months ended June 30, 2012 as a result of (1) a decrease in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 and (2) the redemption of 178,075 OP units (see Notes 3 and 16 of the consolidated financial statements contained elsewhere herein for further discussion). A gain on changes in fair value of financial instruments of approximately $512,000 was recognized in the three months ended June 30, 2011 as a result of a decrease in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 (see Notes 3 and 16 of the consolidated financial statements contained elsewhere herein for further discussion). In addition, a gain of approximately $328,000 on changes in fair value of earn-outs (included in total expenses in the accompanying condensed consolidated statements of income) was recognized in the three months ended June 30, 2011 as a result of a decrease in the estimated fair value of additional consideration due to sellers of properties acquired in 2010 from updated leasing assumptions related to prospective leasing.

Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

Total revenues, which include rental revenues and tenant recoveries including insurance, property taxes and other operating expenses paid by tenants, increased by $14.6 million, or 67.2%, to $36.2 million for the six months ended June 30, 2012 compared to $21.6 million for the six months ended June 30, 2011. The increase was primarily related to our acquisition of eight retail operating properties (not including Rite Aid, an outparcel to Vestavia Hills City Center) in 2011 and 2012, the commencement of leases at a property formerly under redevelopment that was placed into service in 2011, and the commencement of a portion of the leases at our two development properties in 2011 and 2012.

Property operating expenses, which include maintenance and repair expenses, real estate taxes, management fees and other operating expenses including bad debts, increased by $2.5 million, or 47.1%, to $7.9 million for the six months ended June 30, 2012 compared to $5.4 million for the six months ended June 30, 2011. The increase was primarily related to the acquisition of seven retail operating properties in 2011 and 2012 that are not under triple-net leases (one property and the Rite Aid outparcel at Vestavia Hills City Center acquired in 2011 were under triple-net leases), the commencement of leases at a property formerly under redevelopment that was placed into service in 2011 and the commencement of a portion of the leases at our non-operating development properties in 2011 and 2012.

General and administrative expenses were $6.7 million for the six months ended June 30, 2012 compared to $5.8 million for the six months ended June 30, 2011. Included was share-based compensation expense for the six months ended June 30, 2012 and 2011 of $1.6 million and $1.8 million, respectively. The increase was primarily due to an overall increase in compensation expense (including benefits and payroll taxes), which increased by approximately $517,000 due to an overall increase in total employees, partially offset by the decrease in share-based compensation expense as a result of the graded vesting method of recognizing compensation expense related to the 2011 performance-based stock awards, which results in declining amounts of compensation expense in 2012 and 2013 as compared to 2011. The increase was also due to higher acquisition costs related to completed and pending acquisitions, benefit and compensation costs related to an increase in total employees, and an increase in other professional and audit fees.

Depreciation and amortization expense increased $4.9 million, or 48.6%, to $15.0 million for the six months ended June 30, 2012 compared to $10.1 million for the six months ended June 30, 2011. The increase was primarily related to our acquisition of eight retail operating properties (not including Rite Aid, an outparcel to Vestavia Hills City Center) in 2011 and 2012 and the commencement of depreciation at our two development properties in 2012.

 

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Interest expense increased $1.6 million, or 28.2%, to $7.2 million for the six months ended June 30, 2012 compared to $5.6 million for the six months ended June 30, 2011. The increase was primarily due to the assumption of approximately $142.3 million of mortgage debt in connection with our property acquisitions in 2011 and 2012, partially offset by a decrease in the interest rate and fees associated with our unsecured revolving credit facility as a result of a June 2011 amendment and a decrease in the average borrowings outstanding on our unsecured revolving credit facility for the six months ended June 30, 2012 as compared to the six months ended June 30, 2011.

A gain on acquisition of real estate and sale of land parcel of approximately $937,000 was recognized during the six months ended June 30, 2011 related to a property acquired in 2011, representing the difference between the fair value at the date of closing and the price paid (see Note 3 of the consolidated financial statements contained elsewhere herein).

A gain on changes in fair value of financial instruments and gain on OP unit redemption of approximately $1.1 million was recognized in the six months ended June 30, 2012 as a result of (1) a decrease in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 and (2) the redemption of 299,927 OP units (see Notes 3 and 16 of the consolidated financial statements contained elsewhere herein for further discussion). A gain on changes in fair value of financial instruments of approximately $512,000 was recognized in the six months ended June 30, 2011 as a result of a decrease in the estimated fair value of the redemption provision of OP units arising from a property acquired in 2011 (see Notes 3 and 16 of the consolidated financial statements contained elsewhere herein for further discussion). In addition, a gain of approximately $328,000 on changes in fair value of earn-outs (included in total expenses in the accompanying condensed consolidated statements of income) was recognized in the six months ended June 30, 2011 as a result of a decrease in the estimated fair value of additional consideration due to sellers of properties acquired in 2010 from updated leasing assumptions related to prospective leasing.

Commercial Office Properties

In the six months ended June 30, 2012, we acquired one commercial office property, the Promenade Corporate Center, for a total of approximately $53.0 million, consisting of $13.9 million in cash and the issuance of shares of the Company’s common stock valued at approximately $39.1 million. The following is a comparison, for the three and six months ended June 30, 2012 and 2011 of the commercial office properties segment operating results of the Company.

Comparison of the Three Months Ended June 30, 2012 to the Three Months Ended June 30, 2011

Total revenues increased by $1.5 million, or 185.3% to $2.3 million for the three months ended June 30, 2012 compared to $797,000 for the three months ended June 30, 2011. The increase was the result of the acquisition of the Promenade Corporate Center in January 2012 and the commencement of new leases at the Excel Centre property in 2012.

Property operating expenses increased by $651,000, or 387.5% to $819,000 for the three months ended June 30, 2012 compared to $168,000 for the three months ended June 30, 2011. The increase was primarily the result of the acquisition of the Promenade Corporate Center in January 2012.

General and administrative expenses were $29,000 for the three months ended June 30, 2012 compared to $1,000 for the three months ended June 30, 2011. The increase was primarily due to costs related to the acquisition of the Promenade Corporate Center in January 2012.

Depreciation and amortization expense increased by $816,000, or 341.4% to $1.1 million for the three months ended June 30, 2012 compared to $239,000 for the three months ended June 30, 2011. The increase was primarily the result of the acquisition of the Promenade Corporate Center in January 2012.

Interest expense did not change significantly ($201,000 for the three months ended June 30, 2012 and $197,000 for the three months ended June 30, 2011) as there was no significant change in the mortgage balance outstanding related to the Excel Centre property other than scheduled principal amortization from monthly debt payments (no debt was assumed related to the acquisition of the Promenade Corporate Center).

Comparison of the Six Months Ended June 30, 2012 to the Six Months Ended June 30, 2011

Total revenues increased by $2.5 million, or 153.6% to $4.1 million for the six months ended June 30, 2012 compared to $1.6 million for the six months ended June 30, 2011. The increase was primarily the result of the acquisition of the Promenade Corporate Center in January 2012.

Property operating expenses increased by $1.1 million, or 318.9% to $1.4 million for the six months ended June 30, 2012 compared to $338,000 for the six months ended June 30, 2011. The increase was primarily the result of the acquisition of the Promenade Corporate Center in January 2012.

 

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General and administrative expenses were $97,000 for the six months ended June 30, 2012 compared to $1,000 for the three months ended June 30, 2011. The increase was primarily due to costs related to the acquisition of the Promenade Corporate Center in January 2012.

Depreciation and amortization expense increased by $1.4 million, or 286.0% to $1.8 million for the six months ended June 30, 2012 compared to $479,000 for the six months ended June 30, 2011. The increase was primarily the result of the acquisition of the Promenade Corporate Center in January 2012.

Interest expense did not change significantly ($395,000 for the six months ended June 30, 2012 and $401,000 for the six months ended June 30, 2011) as there was no significant change in the mortgage balance outstanding related to the Excel Centre property other than scheduled principal amortization from monthly debt payments (no debt was assumed related to the acquisition of the Promenade Corporate Center).

Cash Flows

The following is a comparison, for the six months ended June 30, 2012 and 2011, of the cash flows of the Company.

Cash and cash equivalents were $7.2 million and $88.7 million at June 30, 2012 and 2011, respectively.

Net cash provided by operating activities was $16.6 million for the six months ended June 30, 2012 compared to $11.7 million for the six months ended June 30, 2011, an increase of $4.9 million. The increase was primarily due to cash flow generated by acquisitions and cash rent starts on new leases as well as a decrease from non-cash reconciling adjustments recognized during the six months ended June 30, 2011 (primarily gains on the acquisition and sale of real estate totaling approximately $4.9 million).

Net cash used in investing activities was $77.6 million for the six months ended June 30, 2012 compared to $34.3 million for the six months ended June 30, 2011, an increase of $43.3 million. The increase in net cash used was primarily the result of an increase in property acquisitions during the six months ended June 30, 2012 compared to the same period in 2011, partially offset by proceeds from the sale of equity securities in the amount of approximately $2.9 million and the collection of an outstanding mortgage loan receivable in the amount of $2.0 million.

Net cash provided by financing activities was $62.9 million for the six months ended June 30, 2012 compared to $104.8 million for the six months ended June 30, 2011, a decrease of $41.9 million. The decrease was primarily due to lower net proceeds from common and preferred stock offerings of $88.7 million compared to $198.0 million for the six months ended June 30, 2012 and 2011, respectively, higher payments on mortgage notes in 2012, and cash payments totaling $1.9 million pursuant to the redemption of OP units during the six months ended June 30, 2012. The decrease was partially offset by a decrease in payments on notes payable of $46.5 million compared to $114.8 million for the six months ended June 30, 2012 and 2011, respectively.

Funds From Operations

We present funds from operations, or FFO, because we consider FFO an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs, many of which present FFO when reporting their results. FFO is intended to exclude GAAP historical cost depreciation and amortization of real estate and related assets, which assumes that the value of real estate assets diminishes ratably over time. Historically, however, real estate values have risen or fallen with market conditions. Because FFO excludes depreciation and amortization unique to real estate, gains and losses from property dispositions and extraordinary items, it provides a performance measure that, when compared year-over-year, reflects the impact to operations from trends in occupancy rates, rental rates, operating costs, development activities and interest costs, providing perspective not immediately apparent from net income. We compute FFO in accordance with standards established by the National Association of Real Estate Investment Trusts, or NAREIT. As defined by NAREIT, FFO represents net income (loss) (computed in accordance with GAAP), excluding real estate-related depreciation and amortization, impairment charges and net gains (losses) on the disposition of real estate assets and after adjustments for unconsolidated partnerships and joint ventures. Our computation may differ from the methodology for calculating FFO utilized by other equity REITs and, accordingly, may not be comparable to such other REITs. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties. FFO should not be considered as an alternative to net income (loss) (computed in accordance with GAAP) as an indicator of our financial performance or to cash flow from operating activities (computed in accordance with GAAP) as an indicator of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to pay dividends or make distributions.

The following table presents a reconciliation of our FFO for the three and six months ended June 30, 2012 and 2011 (in thousands):

 

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     For the Three Months Ended     For the Six Months Ended  
     June 30, 2012     June 30, 2011     June 30, 2012     June 30, 2011  

Net (loss) income attributable to the common stockholders

   $ (2,376   $ 1,061      $ (4,059   $ 429   

Non-controlling interests in operating partnership

     (86     94        (157     95   

Depreciation and amortization

     8,552        6,607        16,831        10,976   

Depreciation and amortization related to joint venture

     (85     (45     (124     (45

Gain on acquisition of real estate

     —          —          —          (937

Gain on sale of real estate assets

     —          (3,976     —          (3,976
  

 

 

   

 

 

   

 

 

   

 

 

 

Funds from operations

   $ 6,005      $ 3,741      $ 12,491      $ 6,542   
  

 

 

   

 

 

   

 

 

   

 

 

 

Liquidity and Capital Resources

At June 30, 2012, we had $7.2 million of cash and cash equivalents on hand.

Our short-term liquidity requirements consist primarily of funds to pay for operating expenses and other expenditures directly associated with our properties, including:

 

   

interest expense and scheduled principal payments on outstanding indebtedness,

 

   

general and administrative expenses,

 

   

future distributions expected to be paid to our stockholders and limited partners of our Operating Partnership,

 

   

anticipated and unanticipated capital expenditures, tenant improvements and leasing commissions and

 

   

construction of our three non-operating properties

Our long term liquidity requirements consist primarily of funds to pay for property acquisitions, scheduled debt maturities, renovations, expansions, capital commitments, construction obligations and other non-recurring capital expenditures that need to be made periodically, and the costs associated with acquisitions and developments of new properties that we pursue.

We intend to satisfy our short-term liquidity requirements through our existing working capital and cash provided by our operations. We believe our rental revenue net of operating expenses will generally provide cash inflows to meet our debt service obligations (excluding debt maturities), pay general and administrative expenses and fund regular distributions. We anticipate being able to refinance or will borrow from our unsecured credit facility to pay for upcoming debt maturities. We expect to incur approximately $9.2 million of additional construction costs on our two non-operating properties (primarily related to leasing commissions and final tenant build-outs). Funds for these costs are expected to come from new mortgage financing, borrowings from our unsecured revolving credit facility and existing cash. We intend to satisfy our other long-term liquidity requirements through our existing working capital, cash provided by indebtedness, long-term secured and unsecured indebtedness and the use of net proceeds from the disposition of non-strategic assets. In addition, we may, from time to time, offer and sell additional shares of preferred stock, as well as debt securities, common stock, warrants, rights and other securities to the extent necessary or advisable to meet our liquidity needs.

On January 23, 2012, we entered into a fourth amendment to our credit agreement, which increased the maximum secured indebtedness ratio to 40% of total asset value (as defined in the credit agreement) and modified certain other terms and conditions of the unsecured revolving credit facility.

The unsecured revolving credit facility has a borrowing capacity of $200.0 million, which may be increased from time to time up to an additional $200.0 million for a total borrowing capacity of $400.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is July 7, 2014 and may be extended for one additional year at our option. The unsecured revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio. We also pay a 0.35% fee for any unused portion of the unsecured revolving credit facility. Borrowings under the unsecured revolving credit facility were $0 at June 30, 2012. In addition, we issued a $12.1 million letter of credit from the unsecured revolving credit facility, which secures an outstanding $12.0 million bond payable for the Northside Mall. This bond is included with the mortgages payable on our consolidated balance sheet. At June 30, 2012, there was approximately $134.5 million available for borrowing under the unsecured revolving credit facility.

 

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On July 20, 2012, we entered into an amended and restated credit agreement, which provided an increase in borrowings available under our credit facility from $200.0 million to $250.0 million, decreased the fees pertaining to the unused capacity and the applicable interest rate and extended the maturity date. The amended maturity date is July 19, 2016, which may be extended for one additional year at our option. In addition, the amendment improved certain other terms and conditions of the unsecured revolving credit facility.

Our ability to borrow funds under the credit agreement and the amount of funds available under the credit agreement at any particular time, are subject to our meeting borrowing base requirements. The amount of funds we can borrow is determined by the net operating income of our unencumbered assets that comprise the borrowing base. We are also subject to financial covenants relating to maximum leverage ratios on unsecured, secured and overall debt, minimum fixed coverage ratios, minimum amount of net worth, dividend payment restrictions, and certain investment limitations.

The following is a summary of key financial covenants and their covenant levels as of June 30, 2012:

 

     Required     Actual  

Key financial covenant:

    

Ratio of total liabilities to total asset value (maximum)

     60.0     35.9

Ratio of adjusted EBITDA to fixed charges (minimum)

     1.50        1.63   

Ratio of secured indebtedness to total asset value (maximum)

     40.0     34.4

 

(1)

For a complete listing of all debt covenants related to our consolidated indebtedness as well as definitions of the above terms, please refer to our applicable filings with the SEC.

Under our credit agreement, cash dividends on our common stock, as well as our preferred stock, may not exceed the greater of (1) 95% of our FFO (as defined in the credit agreement), and (2) the amount required for us to qualify and maintain our REIT status. If an event of default exists, we may only make distributions sufficient to qualify and maintain our REIT status. As of June 30, 2012, we believe that we were in compliance with all of the covenants under our credit agreement.

We have filed a shelf registration statement with the SEC, as amended, which permits us, from time to time, to offer and sell debt securities, common stock, preferred stock, warrants and other securities to the extent necessary or advisable to meet our liquidity needs.

On January 31, 2012, we completed the issuance of 3,680,000 shares of Series B preferred stock, with a liquidation preference of $25.00 per share. We pay cumulative dividends on the Series B preferred stock, when, as and if declared by our board of directors, at a rate of 8.125% per annum. Net proceeds from this offering were approximately $88.7 million. We used the net proceeds of this offering to repay the outstanding indebtedness under our unsecured revolving credit facility, with the remainder intended to fund future acquisitions and for other general corporate and working capital purposes.

On March 9, 2012, we entered into equity distribution agreements with four sales agents, under which we can issue and sell shares of our common stock having an aggregate offering price of up to $50.0 million from time to time through, at our discretion, any of the sales agents. The sales of common stock made under the equity distribution agreements will be made in “at the market” offerings as defined in the Securities Act. During the six months ended June 30, 2012, no shares were issued under any of the equity distribution agreements. Subsequent to June 30, 2012, we completed the issuance of 254,100 shares pursuant to the equity distribution agreements, resulting in net proceeds of approximately $3.0 million at an average stock issuance price of $12.17 per share.

We may from time to time seek to repurchase or redeem outstanding shares of our common stock or preferred stock or other securities in open market purchases, privately negotiated transactions or otherwise. Such repurchases or redemptions, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

As of June 30, 2012, our ratio of debt-to-gross undepreciated asset value was approximately 33.7%. Our organizational documents do not limit the amount or percentage of debt that we may incur, nor do they limit the types of properties we may acquire or develop, and our Board of Directors may modify our debt policy from time to time. The amount of leverage we will deploy for particular investments in our target assets will depend upon our management team’s assessment of a variety of factors, which may include the anticipated liquidity and price volatility of the target assets in our investment portfolio, the potential for losses, the availability and cost of financing the assets, our opinion of the creditworthiness of our financing counterparties, the health of the U.S. economy and commercial mortgage markets, our outlook for the level, slope and volatility of interest rates, the credit quality of our target assets and the collateral underlying our target assets. Accordingly, the ratio of debt-to-gross undepreciated asset value may increase or decrease beyond the current amount.

 

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Commitments, Contingencies and Contractual Obligations

The following table outlines our contractual obligations (dollars in thousands) at June 30, 2012 related to our mortgage and note indebtedness and other commitments:

 

     Payments by Period  
     2012
(six months)
     2013-2014      2015-2016      Thereafter      Total  

Principal payments — fixed rate debt(1)

   $ 2,053       $ 157,254       $ 48,710       $ 51,736       $ 259,753   

Principal payments — variable rate debt(2)

     —           13,629         —           12,000         25,629   

Interest payments — fixed rate debt(1)

     6,302         21,067         8,475         9,152         44,996   

Interest payments — variable rate debt(2)

     178         101         46         391         716   

Construction costs(3)

     1,900         7,273         —           —           9,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   $ 10,433       $ 199,324       $ 57,231       $ 73,279       $ 340,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Includes a mortgage payable at our Park West Place property, which bears interest at a rate of LIBOR plus 2.5% (contractual interest rate of 2.75% at June 30, 2012). In December 2010, we entered into two interest rate swap contracts equal to the notional value of the mortgage payable, which fix LIBOR at an average of 1.41% for the term of the mortgage.

(2)

Includes redevelopment revenue bonds at our Northside Mall property and outstanding borrowings on our unsecured revolving credit facility and our construction loan (our unsecured revolving credit facility had a balance of $0 at June 30, 2012). Interest on the redevelopment bonds is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.19% at June 30, 2012). The unsecured revolving credit facility and the construction loan each bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio (interest rate of 2.45% at June 30, 2012).

(3)

Amount represents our estimate of costs expected to be incurred to complete the construction of our two non-operating properties.

Off-Balance Sheet Arrangements

In June 2012, a $2.0 million note receivable to PC Retail, LLC to facilitate the land acquisition and development of a shopping center anchored by Publix in Brandon, Florida was repaid in full, including interest accrued through the date of repayment. We have also entered into a purchase and sale agreement with PC Retail, LLC to acquire the property upon completion of development. The purchase price will be based on the income from leasing of the center. In June 2012, we executed an amendment whereby the closing date for the potential acquisition was extended through December 31, 2012.

We do not have any other relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purposes entities, which typically are established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Further, we have not guaranteed any obligations of unconsolidated entities nor do we have any commitments or intent to provide funding to any such entities. Accordingly, we are not materially exposed to any other financing, liquidity, market or credit risk that could arise if we had engaged in these relationships, than as described above.

Distribution Policy

We have elected to be taxed as a REIT under the Code. To continue to qualify as a REIT, we must meet a number of organizational and operational requirements, including the requirement that we distribute currently at least 90% of our REIT taxable income to our stockholders. It is our intention to comply with these requirements and maintain our REIT status. As a REIT, we generally will not be subject to corporate United States federal, state or local income taxes on income we distribute currently (in accordance with the Code and applicable regulations) to our stockholders. If we fail to qualify as a REIT in any taxable year, we will be subject to United States federal, state and local income taxes at regular corporate rates and may not be able to qualify as a REIT for subsequent tax years. Even if we qualify for United States federal taxation as a REIT, we may be subject to certain state and local taxes on our income properties and operations and to United States federal income and excise taxes on our taxable income not distributed in the amounts and in the time frames prescribed by the Code and applicable regulations thereunder.

 

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Table of Contents

Inflation

Some of our leases contain provisions designed to mitigate the adverse impact of inflation. These provisions generally increase rental rates during the terms of the leases either at fixed rates or indexed escalations (based on the Consumer Price Index or other measures). We may be adversely impacted by inflation on our leases that do not contain indexed escalation provisions. In addition, most of our leases require the tenant to pay its share of operating expenses, including common area maintenance costs, real estate taxes and insurance. This may reduce our exposure to increases in costs and operating expenses resulting from inflation, assuming our properties remain leased and tenants fulfill their obligations to reimburse us for such expenses.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments depend upon prevailing market interest rates. Market risk is the exposure to loss resulting from changes in interest rates, foreign currency exchange rates, commodity prices and equity prices. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control contribute to interest rate risk.

The fair value of mortgages payable (before premium or discount) at June 30, 2012 was approximately $277.7 million compared to the carrying amount of $272.5 million. A 100 basis point increase in market interest rates would result in a decrease in the fair value of our fixed-rate debt by approximately $5.1 million at June 30, 2012. A 100 basis point decrease in market interest rates would result in an increase in the fair market value of our fixed-rate debt by approximately $5.3 million at June 30, 2012.

We have entered into a $200.0 million unsecured revolving credit facility. The unsecured revolving credit facility bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio. As of June 30, 2012, we had $12.1 million of debt and commitments outstanding under our unsecured revolving credit facility, comprised of a $12.1 million letter of credit issued under the facility. At June 30, 2012, the outstanding balance on our unsecured revolving credit facility was $0.

We have entered into an $18.0 million construction loan agreement in connection with construction activities at one of our development properties. The construction loan bears interest at the rate of LIBOR plus a margin of 220 basis points to 300 basis points, depending on our leverage ratio. At June 30, 2012, the outstanding balance on our construction loan was $13.6 million at an interest rate of 2.45%.

In order to modify and manage the interest rate characteristics of our outstanding debt and to limit the effects of interest rate risks on our operations, we may utilize a variety of financial instruments, including interest rate swaps, caps, floors and other interest rate exchange contracts. The use of these types of instruments to hedge our exposure to changes in interest rates carries additional risks, including counterparty credit risk, the enforceability of hedging contracts and the risk that unanticipated and significant changes in interest rates will cause a significant loss of basis in the contract. To limit counterparty credit risk we will seek to enter into such agreements with major financial institutions with high credit ratings. There can be no assurance that we will be able to adequately protect against the foregoing risks and that we will ultimately realize an economic benefit that exceeds the related amounts incurred in connection with engaging in such hedging activities. We do not enter into such contracts for speculative or trading purposes.

As of June 30, 2012, we had two interest rate derivatives that were designated as cash flow hedges of interest rate risk. Both derivatives were interest rate swaps and the notional amount totaled $55.8 million. The interest rate swap contracts fixed LIBOR at an average of 1.41% for the term of a mortgage loan which expires in December 2013. The fair value of these derivative financial instruments was approximately $857,000 and is classified in accounts payable and other liabilities on the accompanying condensed consolidated balance sheets.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act) that are designed to ensure that information required to be disclosed in our reports under the Exchange Act, is processed, recorded, summarized, and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

As required by Rule 13a-15(b) under the Exchange Act, we carried out an evaluation, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded, as of that time, that our disclosure controls and procedures were effective at the reasonable assurance level.

 

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Table of Contents

Changes in Internal Control over Financial Reporting

In addition, there has been no change in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15(d)-15(f) under the Exchange Act) that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

We are not presently involved in any material litigation nor, to our knowledge, is any material litigation threatened against us or our properties that we believe would have a material adverse effect on our financial position, results of operations or liquidity. We are involved in routine litigation arising in the ordinary course of business, none of which we believe to be material.

 

Item 1A. Risk Factors

For a discussion of our potential risks and uncertainties, see the section entitled “Risk Factors” beginning on page 9 in our Annual Report on Form 10-K for the year ended December 31, 2011 which was filed with the SEC and is accessible on the SEC’s website at www.sec.gov. There have been no material changes to the risk factors disclosed in the Form 10-K.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

Not applicable.

 

Item 5. Other Information

None.

 

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Table of Contents
Item 6. Exhibits

 

Exhibit
Number

  

Description of Exhibit

  10.1    Amended and Restated Credit Agreement, dated July 20, 2012, by and among Excel Trust, L.P., as Borrower, Excel Trust, Inc., as Parent, Wells Fargo Securities, LLC and KeyBanc Capital Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, National Association, as Administrative Agent, KeyBank National Association, as Syndication Agent, US Bank, National Association, PNC Bank, National Association and Union Bank, N.A., as Documentation Agents, and certain other lenders party thereto.(1)
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.†
101.SCH    XBRL Taxonomy Extension Schema Document.†
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.†
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.†
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.†

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
(1)

Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2012.

 

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Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

EXCEL TRUST, INC.
By:  

/s/    GARY B. SABIN

  Gary B. Sabin
 

Chairman and Chief Executive Officer

(Principal Executive Officer)

By:  

/s/    JAMES Y. NAKAGAWA

  James Y. Nakagawa
 

Chief Financial Officer

(Principal Financial Officer)

Date: August 2, 2012

 

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Table of Contents

EXHIBIT INDEX

 

Exhibit
Number

  

Description of Exhibit

  10.1    Amended and Restated Credit Agreement, dated July 20, 2012, by and among Excel Trust, L.P., as Borrower, Excel Trust, Inc., as Parent, Wells Fargo Securities, LLC and KeyBanc Capital Markets, Inc., as Joint Lead Arrangers and Joint Bookrunners, Wells Fargo Bank, National Association, as Administrative Agent, KeyBank National Association, as Syndication Agent, US Bank, National Association, PNC Bank, National Association and Union Bank, N.A., as Documentation Agents, and certain other lenders party thereto.(1)
  31.1    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  31.2    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  32.1    Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document.†
101.SCH    XBRL Taxonomy Extension Schema Document.†
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document.†
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document.†
101.LAB    XBRL Taxonomy Extension Label Linkbase Document.†
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document.†

 

Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under these sections.
(1) 

Incorporated herein by reference to Excel Trust, Inc.’s Current Report on Form 8-K filed with the Securities and Exchange Commission on July 25, 2012.

 

44

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