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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, 2014

Commission File Number: 001-34698 (Excel Trust, Inc.)

Commission File Number: 000-54962 (Excel Trust, L.P.)

 

 

EXCEL TRUST, INC.

EXCEL TRUST, L.P.

(Exact name of registrant as specified in its charter)

 

 

Excel Trust, Inc.   Maryland   27-1493212
 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Excel Trust, L.P.   Delaware   27-1495445
 

(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.

Excel Trust, Inc.    Yes  x    No  ¨

Excel Trust, L.P.    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).

Excel Trust, Inc.    Yes  x    No  ¨

Excel Trust, L.P.    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.

Excel Trust, Inc.:

 

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

Excel Trust, L.P.:

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   x  (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).

Excel Trust, Inc.    Yes  ¨    No  x

Excel Trust, L.P.    Yes  ¨    No  x

Number of shares of Excel Trust, Inc. common stock outstanding as of July 31, 2014, $0.01 par value per share: 61,116,598 shares

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 2014 of Excel Trust, Inc., a Maryland corporation, and Excel Trust, L.P., a Delaware limited partnership of which Excel Trust, Inc. is the parent company and general partner. Unless stated otherwise or the context otherwise requires, all references in this report to “we,” “our,” “us” or “the Company” refer to Excel Trust, Inc., together with its controlled and consolidated subsidiaries, including Excel Trust, L.P. Unless otherwise indicated or unless the context requires otherwise, all references to the “Operating Partnership” refer to Excel Trust, L.P., a Delaware limited partnership, and its controlled and consolidated subsidiaries.

Excel Trust, Inc. is a real estate investment trust, or REIT, and the general partner of the Operating Partnership. As of June 30, 2014, Excel Trust, Inc. owned an approximate 98.3% partnership interest in the Operating Partnership. The remaining 1.7% partnership interests are owned by non-affiliated investors and certain of our directors and executive officers. As the sole general partner of the Operating Partnership, Excel Trust, Inc. exercises exclusive and complete discretion over the Operating Partnership’s day-to-day management and control, can cause it to enter into certain major transactions, including acquisitions, dispositions and refinancings, and can cause changes in its line of business, capital structure and distribution policies.

There are a few differences between Excel Trust, Inc. and the Operating Partnership, which are reflected in the disclosures in this report. We believe it is important to understand the differences between Excel Trust, Inc. and the Operating Partnership in the context of how Excel Trust, Inc. and the Operating Partnership operate as an interrelated, consolidated company. Excel Trust, Inc. is a REIT, whose only material asset is the partnership interests it holds in the Operating Partnership. As a result, Excel Trust, Inc. does not conduct business itself, other than acting as the sole general partner of the Operating Partnership, issuing equity from time to time and guaranteeing certain debt of the Operating Partnership. The Operating Partnership owns substantially all of the assets of the Company either directly or through its subsidiaries, conducts the operations of the business and is structured as a limited partnership with no publicly traded equity. Except for net proceeds from equity issuances by Excel Trust, Inc., which it is required to contribute to the Operating Partnership in exchange for operating partnership units (“OP units”), the Operating Partnership generates the capital required by the Company’s business through the Operating Partnership’s operations, by the Operating Partnership’s incurrence of indebtedness or through the issuance of OP units.

Non-controlling interests and stockholders’ equity and partners’ capital are the main areas of difference between the condensed consolidated financial statements of Excel Trust, Inc. and those of Excel Trust, L.P. The partnership interests in the Operating Partnership that are not owned by Excel Trust, Inc. are accounted for as limited partners’ capital in the Operating Partnership’s financial statements and as non-controlling interests in Excel Trust, Inc.’s financial statements. The non-controlling interests in Excel Trust, L.P.’s financial statements include the interests of its joint venture partner AB Dothan, LLC. The non-controlling interests in Excel Trust, Inc.’s financial statements include the same non-controlling interests as Excel Trust, L.P., as well as the owners of limited partnership interests in the Operating Partnership, not including Excel Trust, Inc. The differences between stockholders’ equity, partners’ capital and non-controlling interests result from the differences in the equity issued at the Excel Trust, Inc. and Operating Partnership levels.

We believe combining the quarterly reports on Form 10-Q of Excel Trust, Inc. and the Operating Partnership into this single report results in the following benefits:

 

   

Combined reports better reflect how management and the analyst community view the business as a single operating unit;

 

   

Combined reports enhance investors’ understanding of Excel Trust, Inc. and the Operating Partnership by enabling them to view the business as a whole and in the same manner as management;

 

   

Combined reports are more efficient for Excel Trust, Inc. and the Operating Partnership and result in savings in time, effort and expense; and

 

   

Combined reports are more efficient for investors by reducing duplicative disclosure and providing a single document for their review.

To help investors understand the significant differences between Excel Trust, Inc. and the Operating Partnership, this report presents the following separate sections for each of Excel Trust, Inc. and the Operating Partnership:

 

   

condensed consolidated financial statements;

 

   

the following notes to the condensed consolidated financial statements:

 

   

Equity/Partners’ Capital;

 

   

Debt; and

 

   

Earnings per Share/Unit;

 

1


Table of Contents
   

Liquidity and Capital Resources in Management’s Discussion and Analysis of Financial Condition and Results of Operations; and

 

   

Unregistered Sales of Equity Securities and Use of Proceeds.

This report also includes separate Item 4. Controls and Procedures sections and separate Exhibit 31 and 32 certifications for each of Excel Trust, Inc. and Excel Trust, L.P. in order to establish that the Chief Executive Officer and the Chief Financial Officer of Excel Trust, Inc. have made the requisite certifications and Excel Trust, Inc. and Excel Trust, L.P. are compliant with Rule 13a-15 or Rule 15d-15 under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.

 

2


Table of Contents

EXCEL TRUST, INC.

EXCEL TRUST, L.P.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2014

TABLE OF CONTENTS

 

PART I

  Financial Information     4   

Item 1.

  Financial Statements of Excel Trust, Inc.     4   
  Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013     4   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (unaudited)     5   
  Condensed Consolidated Statements of Equity for the six months ended June 30, 2014 and 2013 (unaudited)     6   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)     8   
  Financial Statements of Excel Trust, L.P.  
  Condensed Consolidated Balance Sheets as of June 30, 2014 (unaudited) and December 31, 2013     9   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2014 and 2013 (unaudited)     10   
  Condensed Consolidated Statements of Capital for the six months ended June 30, 2014 and 2013 (unaudited)     11   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited)     12   
  Notes to Condensed Consolidated Financial Statements of Excel Trust, Inc. and Excel Trust, L.P. (unaudited)     13   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations     37   

Item 3.

  Quantitative and Qualitative Disclosures About Market Risk     51   

Item 4.

  Controls and Procedures     52   

PART II

  Other Information     53   

Item 1.

  Legal Proceedings     53   

Item 1A.

  Risk Factors     53   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds     53   

Item 3.

  Defaults Upon Senior Securities     53   

Item 4.

  Mine Safety Disclosures     53   

Item 5.

  Other Information     53   

Item 6.

  Exhibits     54   

Signatures

      55   

 

3


Table of Contents

PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share amounts)

 

     June 30, 2014
(unaudited)
    December 31,
2013
 

ASSETS:

    

Property:

    

Land

   $ 380,363      $ 380,366   

Buildings

     647,401        642,356   

Site improvements

     64,769        63,242   

Tenant improvements

     56,459        54,025   

Construction in progress

     14,980        7,576   

Less accumulated depreciation

     (75,834     (61,479
  

 

 

   

 

 

 

Property, net

     1,088,138        1,086,086   

Cash and cash equivalents

     183,749        3,245   

Restricted cash

     6,973        8,147   

Tenant receivables, net

     3,205        5,117   

Lease intangibles, net

     68,213        78,345   

Deferred rent receivable

     10,342        9,226   

Other assets

     22,572        20,135   

Investment in unconsolidated entities

     8,303        8,520   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,391,495      $ 1,218,821   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 207,048      $ 251,191   

Notes payable

     —         179,500   

Unsecured notes

     348,693        100,000   

Accounts payable and other liabilities

     29,110        21,700   

Lease intangibles, net

     25,845        28,114   

Dividends/distributions payable

     13,160        10,932   
  

 

 

   

 

 

 

Total liabilities(2)

     623,856        591,437   

Commitments and contingencies

    

Equity:

    

Stockholders’ equity

    

Preferred stock, 50,000,000 shares authorized

    

7.0% Series A cumulative convertible perpetual preferred stock, $50,000 liquidation preference ($25.00 per share), 2,000,000 shares issued and outstanding at June 30, 2014 and December 31, 2013

     47,703        47,703   

8.125% Series B cumulative redeemable preferred stock, $92,000 liquidation preference ($25.00 per share), 3,680,000 shares issued and outstanding at June 30, 2014 and December 31, 2013

     88,720        88,720   

Common stock, $.01 par value, 200,000,000 shares authorized; 61,116,598 and 48,381,365 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     610        482   

Additional paid-in capital

     618,578        478,541   

Retained Earnings

     —         —    
  

 

 

   

 

 

 

Total stockholders’ equity

     755,611        615,446   

Non-controlling interests

     12,028        11,938   
  

 

 

   

 

 

 

Total equity

     767,639        627,384   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,391,495      $ 1,218,821   
  

 

 

   

 

 

 

  

 

(1) 

Excel Trust, Inc.’s consolidated total assets at June 30, 2014 and December 31, 2013 include $15,231 and $15,470, respectively, of assets (primarily real estate assets) of a variable interest entity (“VIE”) that can only be used to settle the liabilities of that VIE.

 

(2) 

Excel Trust, Inc.’s consolidated total liabilities at June 30, 2014 and December 31, 2013 include $207 and $220 of accounts payable and other liabilities of a VIE, respectively, that do not have recourse to Excel Trust, Inc.

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

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Revenues:

    

Rental revenue

   $ 25,179      $ 22,227      $ 50,086      $ 44,129   

Tenant recoveries

     4,855        4,446        10,110        9,076   

Other income

     596        285        1,030        601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     30,630        26,958        61,226        53,806   

Expenses:

    

Maintenance and repairs

     2,186        1,737        4,409        3,418   

Real estate taxes

     2,930        2,992        6,295        5,958   

Management fees

     519        415        1,037        633   

Other operating expenses

     1,615        1,354        3,346        2,862   

Change in fair value of contingent consideration

     —         (1,558 )     —         (1,558 )

General and administrative

     4,158        3,306        7,973        7,137   

Depreciation and amortization

     11,411        10,810        23,207        22,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,819        19,056        46,267        41,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,811        7,902        14,959        12,380   

Interest expense

     (5,981 )     (4,444 )     (10,970 )     (9,022 )

Interest income

     54        48        103        97   

Income (loss) from equity in unconsolidated entities

     95        (65 )     165        (25 )

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

     —         —         —         230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,979        3,441        4,257        3,660   

Income from discontinued operations

     —         31        —         136   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,979        3,472        4,257        3,796   

Net income attributable to non-controlling interests

     (74 )     (105 )     (157 )     (133 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

     1,905        3,367        4,100        3,663   

Preferred stock dividends

     (2,744 )     (2,744 )     (5,488 )     (5,488 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ (839 )   $ 623      $ (1,388 )   $ (1,825 )
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations per share attributable to the common stockholders - basic and diluted

     (0.02 )     0.01        (0.03 )     (0.05 )

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

   $ (0.02 )   $ 0.01      $ (0.03 )   $ (0.04 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     48,567        47,150        48,178        46,256   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.175      $ 0.17      $ 0.35      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,979      $ 3,472      $ 4,257      $ 3,796   

Other comprehensive income:

    

Change in unrealized loss on interest rate swaps

     —         152        —         313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,979        3,624        4,257        4,109   

Comprehensive income attributable to non-controlling interests

     (74 )     (109 )     (157 )     (141 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 1,905      $ 3,515      $ 4,100      $ 3,968   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

5


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)

 

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

Balance at January 1, 2014

  $ 47,703      $ 88,720        48,381,365      $ 482      $ 460,431      $ 18,110      $ —       $ 615,446      $ 11,938      $ 627,384   

Reclassification of dividends, see Note 2

    —         —         —         —         18,110        (18,110     —         —         —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at January 1, 2014, as corrected

    47,703       88,720        48,381,365        482        478,541        —         —         615,446        11,938        627,384   

Net proceeds from sale of common stock

    —         —         12,650,000        127        160,606        —         —         160,733        —         160,733   

Repurchase of common stock

    —         —         (105,775     (1     (1,406     —         —         (1,407     —         (1,407

Forfeiture of restricted common stock awards

    —         —         (466,864     (4     4        —         —         —         —         —    

Issuance of restricted common stock awards

    —         —         657,872        6        (6     —         —         —         —         —    

Noncash amortization of share-based compensation

    —         —         —         —         1,964        —         —         1,964        —         1,964   

Common stock dividends

    —         —         —         —         (19,174     —         —         (19,174     —         (19,174

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         (630     (630

Net income

    —         —         —         —         —         4,100        —         4,100        157        4,257   

Preferred stock dividends

    —         —         —         —         (1,388     (4,100     —         (5,488     —         (5,488

Adjustment for non-controlling interests

    —         —         —         —         (563     —         —         (563     563        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 47,703      $ 88,720        61,116,598      $ 610      $ 618,578      $ —       $ —       $ 755,611      $ 12,028      $ 767,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

Balance at January 1, 2013

  $ 47,703      $ 88,720        44,905,683      $ 448      $ 459,151      $ (1,414   $ (572   $ 594,036      $ 14,736      $ 608,772   

Net proceeds from sale of common stock

    —         —         3,065,528        31        38,867        —         —         38,898        —         38,898   

Issuance of restricted common stock awards

    —         —         33,088        —         —         —         —         —         —         —    

Redemption of OP units for common stock and cash

    —         —         22,074        —         279        —         —         279        (235     44   

Noncash amortization of share-based compensation

    —         —         —         —         1,130        —         —         1,130        —         1,130   

Common stock dividends

    —         —         —         —         (16,160     —         —         (16,160     —         (16,160

Distributions to non-controlling interests

    —         —         —         —         —         —         —         —         (653     (653

Net income

    —         —         —         —         —         3,663        —         3,663        133        3,796   

Preferred stock dividends, as corrected (see Note 2)

    —         —         —         —         (3,239     (2,249     —         (5,488     —         (5,488

Change in unrealized loss on interest rate swaps

    —         —         —         —         —         —         305        305        8        313   

Adjustment for non-controlling interests

    —         —         —         —         (410     —         —         (410     410        —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013, as corrected (see Note 2)

  $ 47,703      $ 88,720        48,026,373      $ 479      $ 479,618      $ —       $ (267   $ 616,253      $ 14,399      $ 630,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 

Cash flows from operating activities:

    

Net income

   $ 4,257      $ 3,796   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     23,207        23,540   

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

     —         (230

Change in fair value of contingent consideration

     —         (1,558

(Income) loss from equity in unconsolidated entities

     (165     25   

Deferred rent receivable

     (1,154     (1,977

Amortization of above- and below-market leases

     (360     219   

Amortization of deferred balances

     813        806   

Bad debt expense

     372        442   

Share-based compensation expense

     1,964        1,130   

Distributions from unconsolidated entities

     322        303  

Change in assets and liabilities (net of the effect of acquisitions):

    

Tenant and other receivables

     1,638        2,190   

Other assets

     (482     (787

Accounts payable and other liabilities

     2,707        (2,456
  

 

 

   

 

 

 

Net cash provided by operating activities

     33,119        25,443   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property (including deposits for potential acquisition)

     (1,000     (30,707

Development of property and property improvements

     (11,935     (9,234

Investments in unconsolidated entities

     —         (106

Return of capital from unconsolidated entities

     —         139   

Receipt of master lease payments

     507        277   

Capitalized leasing costs

     (492     (1,001

Restricted cash

     1,174        (1,536
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,746     (42,168
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     160,908        39,294   

Common stock offering costs

     (94     —    

Repurchase of common stock

     (1,407     —    

Payments on mortgages payable

     (43,996     (32,696

Payments on notes payable

     (222,000     (35,000

Proceeds from notes payable

     42,500        69,000   

Proceeds from unsecured notes

     248,693        —    

Distribution to non-controlling interests

     (630     (634

Preferred stock dividends

     (5,488     (5,488

Common stock dividends

     (16,946     (15,293

Deferred financing costs

     (2,409     (855
  

 

 

   

 

 

 

Net cash provided by financing activities

     159,131        18,328   
  

 

 

   

 

 

 

Net increase

     180,504        1,603   

Cash and cash equivalents, beginning of period

     3,245        5,596   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 183,749      $ 7,199   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $459 and $16

   $ 6,287      $ 7,852   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Liabilities assumed in connection with property acquisitions

   $ —       $ 44   
  

 

 

   

 

 

 

Common stock dividends payable

   $ 10,695      $ 8,164   
  

 

 

   

 

 

 

Preferred stock dividends payable

   $ 2,287      $ 2,287   
  

 

 

   

 

 

 

OP unit distributions payable

   $ 178      $ 208   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 6,808      $ 3,220   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $ —       $ 313   
  

 

 

   

 

 

 

OP unit redemptions (common stock)

   $ —       $ 279   
  

 

 

   

 

 

 

Reclassification of offering costs

   $ —       $ 396   
  

 

 

   

 

 

 

Accrued offering costs

   $ 81     $ —    
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $ —       $ 3,226   
  

 

 

   

 

 

 

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

 

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EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per unit amounts)

 

     June 30, 2014
(unaudited)
    December 31,
2013
 

ASSETS:

    

Property:

    

Land

   $ 380,363      $ 380,366   

Buildings

     647,401        642,356   

Site improvements

     64,769        63,242   

Tenant improvements

     56,459        54,025   

Construction in progress

     14,980        7,576   

Less accumulated depreciation

     (75,834     (61,479
  

 

 

   

 

 

 

Property, net

     1,088,138        1,086,086   

Cash and cash equivalents

     183,749        3,245   

Restricted cash

     6,973        8,147   

Tenant receivables, net

     3,205        5,117   

Lease intangibles, net

     68,213        78,345   

Deferred rent receivable

     10,342        9,226   

Other assets

     22,572        20,135   

Investment in unconsolidated entities

     8,303        8,520   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,391,495      $ 1,218,821   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL:

    

Liabilities:

    

Mortgages payable, net

   $ 207,048      $ 251,191   

Notes payable

     —         179,500   

Unsecured notes

     348,693        100,000   

Accounts payable and other liabilities

     29,110        21,700   

Lease intangibles, net

     25,845        28,114   

Distributions payable

     13,160        10,932   
  

 

 

   

 

 

 

Total liabilities(2)

     623,856        591,437   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

Preferred OP units, 50,000,000 units authorized

    

7.0% Series A cumulative convertible perpetual preferred units, $50,000 liquidation preference ($25.00 per unit), 2,000,000 units issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     47,703        47,703   

8.125% Series B cumulative redeemable preferred units, $92,000 liquidation preference ($25.00 per unit), 3,680,000 units issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     88,720        88,720   

Limited partners’ capital, 1,019,523 and 1,019,523 common OP units issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     1,784        2,167   

General partner’s capital, 61,116,598 and 48,381,365 common OP units issued and outstanding at June 30, 2014 and December 31, 2013, respectively

     627,862        487,133   
  

 

 

   

 

 

 

Total partners’ capital

     766,069        625,723   

Non-controlling interests

     1,570        1,661   
  

 

 

   

 

 

 

Total capital

     767,639        627,384   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 1,391,495      $ 1,218,821   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, L.P.’s consolidated total assets at June 30, 2014 and December 31, 2013 include $15,231 and $15,470, respectively, of assets (primarily real estate assets) of a VIE that can only be used to settle the liabilities of that VIE.

(2) 

Excel Trust, L.P.’s consolidated total liabilities at June 30, 2014 and December 31, 2013 include $207 and $220 of accounts payable and other liabilities of a VIE, respectively, that do not have recourse to Excel Trust, L.P.

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

 

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EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Revenues:

    

Rental revenue

   $ 25,179      $ 22,227      $ 50,086      $ 44,129   

Tenant recoveries

     4,855        4,446        10,110        9,076   

Other income

     596        285        1,030        601   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     30,630        26,958        61,226        53,806   

Expenses:

    

Maintenance and repairs

     2,186        1,737        4,409        3,418   

Real estate taxes

     2,930        2,992        6,295        5,958   

Management fees

     519        415        1,037        633   

Other operating expenses

     1,615        1,354        3,346        2,862   

Change in fair value of contingent consideration

     —         (1,558 )     —         (1,558 )

General and administrative

     4,158        3,306        7,973        7,137   

Depreciation and amortization

     11,411        10,810        23,207        22,976   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     22,819        19,056        46,267        41,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     7,811        7,902        14,959        12,380   

Interest expense

     (5,981 )     (4,444 )     (10,970 )     (9,022 )

Interest income

     54        48        103        97   

Income (loss) from equity in unconsolidated entities

     95        (65 )     165        (25 )

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

     —         —         —         230   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     1,979        3,441        4,257        3,660   

Income from discontinued operations

     —         31        —         136   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     1,979        3,472        4,257        3,796   

Net income attributable to non-controlling interests

     (90 )     (85 )     (183 )     (172 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

     1,889        3,387        4,074        3,624   

Preferred operating unit distributions

     (2,744 )     (2,744 )     (5,488 )     (5,488 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the unitholders

   $ (855 )   $ 643      $ (1,414 )   $ (1,864 )
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations per unit attributable to the unitholders - basic and diluted

     (0.02 )     0.01        (0.03 )     (0.05 )

Net (loss) income per unit attributable to the unitholders - basic and diluted

   $ (0.02 )   $ 0.01      $ (0.03 )   $ (0.04 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding - basic and diluted

     49,586        48,375        49,198        47,490   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common OP unit

   $ 0.175      $ 0.17      $ 0.35      $ 0.34   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 1,979      $ 3,472      $ 4,257      $ 3,796   

Other comprehensive income:

    

Change in unrealized loss on interest rate swaps

     —         152        —         313   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     1,979        3,624        4,257        4,109   

Comprehensive income attributable to non-controlling interests

     (90 )     (85 )     (183 )     (172 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, L.P.

   $ 1,889      $ 3,539      $ 4,074      $ 3,937   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CAPITAL

(Dollars in thousands)

(Unaudited)

 

    Preferred
Operating
Partnership
Units
    Limited Partners’
Capital
    General Partner’s
Capital
                         
    Series A     Series B     Common
OP
Units
    Amount     Common
OP
Units
    Amount     Accumulated
other
Comprehensive
Loss
    Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance at January 1, 2014

  $ 47,703      $ 88,720        1,019,523      $ 2,166        48,381,365      $ 487,134      $ —       $ 625,723      $ 1,661      $ 627,384   

Net proceeds from issuance of common OP units

    —         —         —         —         12,650,000        160,733        —         160,733        —         160,733   

Repurchase of common OP units

    —         —         —         —         (105,775     (1,407     —         (1,407     —         (1,407

Forfeiture of restricted common OP unit awards

    —         —         —         —         (466,864     —         —         —         —         —    

Issuance of restricted common OP unit awards

    —         —         —         —         657,872        —         —         —         —         —    

Noncash amortization of share-based compensation

    —         —         —         —         —         1,964        —         1,964        —         1,964   

OP unit distributions

    (1,750     (3,738     —         (356     —         (19,174     —         (25,018     (274     (25,292

Net income (loss)

    1,750        3,738        —         (26     —         (1,388     —         4,074        183        4,257   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

  $ 47,703      $ 88,720        1,019,523      $ 1,784        61,116,598      $ 627,862      $ —       $ 766,069      $ 1,570      $ 767,639   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Preferred
Operating
Partnership
Units
    Limited Partners’
Capital
    General Partner’s
Capital
                         
    Series A     Series B     Common
OP
Units
    Amount     Common
OP
Units
    Amount     Accumulated
other
Comprehensive
Loss
    Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance at January 1, 2013

  $ 47,703      $ 88,720        1,245,019      $ 5,512        44,905,683      $ 465,612      $ (620   $ 606,927      $ 1,845      $ 608,772   

Net proceeds from sale of common OP units

    —         —         —         —         3,065,528        38,898        —         38,898        —         38,898   

Issuance of restricted common OP unit awards

    —         —         —         —         33,088        —         —         —         —         —    

Redemption of common OP units

    —         —         (19,904     (235     22,074        279        —         44        —         44   

Noncash amortization of share-based compensation

    —         —         —         —         —         1,130        —         1,130        —         1,130   

OP unit distributions

    (1,750     (3,738     —         (416     —         (16,160     —         (22,064     (237     (22,301

Net income (loss)

    1,750        3,738        —         (39     —         (1,825     —         3,624        172        3,796   

Change in unrealized loss on interest rate swaps

    —         —         —         —         —         —         313        313        —         313   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

  $ 47,703      $ 88,720        1,225,115      $ 4,822        48,026,373      $ 487,934      $ (307   $ 628,872      $ 1,780      $ 630,652   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30, 2014
    Six Months Ended
June 30, 2013
 

Cash flows from operating activities:

    

Net income

   $ 4,257      $ 3,796   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     23,207        23,540   

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

     —         (230

Change in fair value of contingent consideration

     —         (1,558

(Income) loss from equity in unconsolidated entities

     (165     25   

Deferred rent receivable

     (1,154     (1,977

Amortization of above- and below-market leases

     (360     219   

Amortization of deferred balances

     813        806   

Bad debt expense

     372        442   

Share-based compensation expense

     1,964        1,130   

Distributions from unconsolidated entities

     322        303   

Change in assets and liabilities (net of the effect of acquisitions):

    

Tenant and other receivables

     1,638        2,190   

Other assets

     (482     (787

Accounts payable and other liabilities

     2,707        (2,456
  

 

 

   

 

 

 

Net cash provided by operating activities

     33,119        25,443   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property (including deposits for potential acquisition)

     (1,000     (30,707

Development of property and property improvements

     (11,935     (9,234

Investments in unconsolidated entities

     —         (106

Return of capital from unconsolidated entities

     —         139   

Receipt of master lease payments

     507        277   

Capitalized leasing costs

     (492     (1,001

Restricted cash

     1,174        (1,536
  

 

 

   

 

 

 

Net cash used in investing activities

     (11,746     (42,168
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common OP units

     160,814        36,304   

Repurchase of common OP units

     (1,407     —    

Payments on mortgages payable

     (43,996     (32,696

Payments on notes payable

     (222,000     (35,000

Proceeds from notes payable

     42,500        69,000   

Proceeds from unsecured notes

     248,693        —    

Distribution to non-controlling interests

     (274     (237

Preferred OP unit distributions

     (5,488     (5,488

Common OP unit distributions

     (17,302     (15,690

Deferred financing costs

     (2,409     (855
  

 

 

   

 

 

 

Net cash provided by financing activities

     159,131        15,338   
  

 

 

   

 

 

 

Net increase (decrease)

     180,504        (1,387

Cash and cash equivalents, beginning of period

     3,245        5,596   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 183,749      $ 4,209   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized of $459 and $16

   $ 6,287      $ 7,852   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Liabilities assumed in connection with property acquisitions

   $ —       $ 44   
  

 

 

   

 

 

 

Common OP unit distributions payable

   $ 10,873      $ 8,372   
  

 

 

   

 

 

 

Preferred OP unit distributions payable

   $ 2,287      $ 2,287   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 6,808      $ 3,220   
  

 

 

   

 

 

 

Change in unrealized loss on interest rate swaps

   $ —       $ 313   
  

 

 

   

 

 

 

OP unit redemptions

   $ —       $ 279   
  

 

 

   

 

 

 

Reclassification of offering costs

   $ —       $ 396   
  

 

 

   

 

 

 

Accrued offering costs

   $ 81      $ —    
  

 

 

   

 

 

 

Reclassification of real estate to held for sale

   $ —       $ 3,226   
  

 

 

   

 

 

 

Amount due from Parent Company (proceeds from issuance of common OP units)

   $ —       $ 2,990   
  

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, INC. AND EXCEL TRUST, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization:

Excel Trust, Inc., a Maryland corporation (the “Parent Company”), 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 the Parent Company referred to as the “Company”). The Company seeks investment opportunities throughout the United States, but focuses on the West Coast, East Coast 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 Parent Company is the sole general partner of the Operating Partnership and, as of June 30, 2014, owned a 98.3% interest in the Operating Partnership. The remaining 1.7% 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 and all entities in which the Company has a controlling interest. 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, 2013. 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company is required to continually evaluate its VIE relationships and consolidate investments in these entities when it is determined to be the primary beneficiary of their operations. A VIE is broadly defined as an entity where either (1) the equity investors as a group, if any, lack the power through voting or similar rights to direct the activities of an entity that most significantly impact the entity’s economic performance or (2) the equity investment at risk is insufficient to finance that entity’s activities without additional subordinated financial support.

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 $3.0 million and $3.5 million at June 30, 2014 and December 31, 2013, 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

 

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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 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) increased by $552,000 and $1.1 million in the three months ended June 30, 2014 and 2013, respectively, and by $1.2 million and $2.0 million in the six months ended June 30, 2014 and 2013, respectively, due to the straight-line rent adjustment. Percentage rent is recognized after tenant sales have exceeded defined thresholds (if applicable) and was $183,000 and $185,000 in the three months ended June 30, 2014 and 2013, respectively, and $398,000 and $570,000 in the six months ended June 30, 2014 and 2013, respectively.

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.

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

 

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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, a property may be classified as held for sale and an impairment loss may be recognized to reduce the property to the lower of the carrying amount or fair value less cost to sell. There was no impairment recorded for the six months ended June 30, 2014 or 2013.

Investments in Partnerships and Limited Liability Companies:

The Company evaluates its investments in limited liability companies and partnerships to determine whether any such entities may be a 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 Company will consolidate the partnership or limited liability company.

Investments that are not consolidated, over which the Company exercises significant influence but does not control, are accounted for under the equity method of accounting. These investments are recorded initially at cost and subsequently adjusted for the Company’s portion of earnings or losses and for cash contributions and distributions. Under the equity method of accounting, the Company’s investment is reflected in the condensed consolidated balance sheets and its share of net income or loss is included in the condensed consolidated statements of operations and comprehensive income.

For all investments in unconsolidated entities, 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.

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, 2014, the Company has awarded only restricted stock awards under its incentive award plan, which are based on shares of the Parent 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.

 

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Purchase Accounting:

The Company, with the assistance of independent valuation specialists as needed, records the purchase price of acquired properties as tangible and identified intangible assets and liabilities based on their respective fair values. Tangible assets (building and land) are recorded 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 recorded as 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, as applicable.

The value recorded as 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) the Company’s estimate of the amounts that would be paid using fair market rates at the time of acquisition over the remaining term of the lease. The amounts recorded as above-market leases are included in lease intangible assets, net in the Company’s 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 recorded as 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 fixed price renewal options of the acquired leases with each property.

The value recorded as 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 recorded as above- or below-market debt are included in mortgage payables, net in the Company’s accompanying condensed 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 allowances 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, 2014 and December 31, 2013, the Company had $466,000 and $895,000, respectively, in allowances for uncollectible accounts (including straight-line deferred rent receivables) as determined to be necessary to reduce receivables to the estimate of the amount recoverable. During the three months ended June 30, 2014 and 2013, $165,000 and $104,000, respectively, of receivables were charged to bad debt expense. During the six months ended June 30, 2014 and 2013, $372,000 and $442,000, respectively, of receivables were charged to bad debt expense.

Non-controlling Interests:

Non-controlling interests on the condensed consolidated balance sheets of the Parent Company relate to the OP units that are not owned by the Parent Company and the portion of consolidated joint ventures not owned by the Parent Company. The OP units not held by the Parent Company may be redeemed by the Parent Company at the holder’s option for cash. The Parent Company, at its option, may satisfy the redemption obligation with common stock on a one-for-one basis, which has been further evaluated to determine that permanent equity classification on the balance sheets is appropriate.

During the six months ended June 30, 2013, a total of 19,904 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Company for redemption, resulting in the issuance of 22,074 shares of the Parent Company’s common stock. The OP units were redeemed for common stock on a one-for-one basis, with additional common stock 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. The remaining additional redemption obligation of $246,000 associated with the 2011 Edwards Theatres acquisition expired on March 11, 2013 and was reclassified and recognized as a gain in changes in fair value of financial instruments and gain on OP unit redemption (net of a loss of $16,000 on the OP unit redemption) on the accompanying condensed consolidated financial statements. The remaining outstanding OP units related to the 2011 Edwards Theatres acquisition continue to be redeemable by the OP unitholders for cash or common stock on a one-for-one basis (the determination of redemption for cash or common stock is at the Parent Company’s option).

Non-controlling interests on the condensed consolidated balance sheets of the Operating Partnership represent the portion of equity that the Operating Partnership does not own in those entities it consolidates.

 

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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, 2014 and 2013, no tenant accounted for more than 10% of revenues.

At June 30, 2014, the Company’s gross real estate assets in the states of California, Arizona, Virginia and Texas represented approximately 33.5%, 15.0%, 12.9% and 12.6%, respectively, of the Company’s total assets. At December 31, 2013, the Company’s gross real estate assets in the states of California, Arizona, Virginia and Texas represented approximately 23.9%, 17.6%, 14.7% and 13.7%, respectively, of the Company’s total assets. For the six months ended June 30, 2014, the Company’s revenues derived from properties located in the states of California, Arizona, Texas and Virginia represented approximately 23.9%, 17.4%, 14.1% and 11.4%, respectively, of the Company’s total revenues. For the six months ended June 30, 2013, the Company’s revenues derived from properties located in the states of California, Arizona, Virginia and Texas represented approximately 21.5%, 18.9%, 12.0% and 10.6%, respectively, of the Company’s total 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 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.

Changes in the fair value of financial instruments (other than derivative instruments for which an effective hedging relationship exists and available-for-sale securities) 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 (primarily utilizing Level 3 inputs). The Company may also utilize the services of independent third-party valuation experts to estimate the fair value of financial instruments, as necessary.

 

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Derivative Instruments:

The Company is exposed to certain risks 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 condensed 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.

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.

 

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Changes in Accumulated Other Comprehensive Loss:

The following table reflects amounts that were reclassified from accumulated other comprehensive loss and included in earnings for the six months ended June 30, 2014 and 2013 (dollars in thousands):

 

     Parent Company     Operating Partnership  
     Six Months Ended     Six Months Ended  
     June 30,
2014
     June 30,
2013
    June 30,
2014
     June 30,
2013
 

Balance – January 1

   $ —        $ (572   $ —        $ (620

Unrealized loss on interest rate swaps:

          

Unrealized losses

     —          (12     —          (12

Amount reclassified and recognized in net income(1)

     —          325        —          325   
  

 

 

    

 

 

   

 

 

    

 

 

 

Net change in other comprehensive income

     —          313        —          313   

Total other comprehensive loss allocable to non-controlling interests

     —          (8     —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Balance – June 30

   $ —        $ (267   $ —        $ (307
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(1) 

Amounts reclassified from unrealized loss on derivative instruments are included in interest expense in the condensed consolidated statements of operations.

Revision to Consolidated Financial Statements:

Subsequent to the issuance of the Parent Company’s consolidated financial statements for the year ended December 31, 2013, the Parent Company determined that certain dividends paid that were reflected as a reduction of additional paid-in capital should have been reflected as a reduction of available retained earnings. The Parent Company reviewed the impact of this correction with respect to the prior period consolidated financial statements and determined that the correction was not material. However, the Parent Company has revised the accompanying condensed consolidated balance sheet at December 31, 2013 to reflect this correction in the prior period. The effect of the correction to the consolidated balance sheets is an increase to additional paid-in capital and a corresponding decrease to retained earnings of $18.1 million at December 31, 2013. The effect of the correction to the consolidated statement of equity for the six months ended June 30, 2013 was an increase in reported additional paid-in capital from $477.4 million to $479.6 million and a decrease in reported cumulative (deficit) retained earnings from $2.2 million to $0. The effect of the correction on previously issued unaudited quarterly reports for the nine months ended September 30, 2013 is an increase to additional paid-in capital and a corresponding decrease to retained earnings of $15.7 million. The condensed consolidated statement of equity for the six months ended June 30, 2014 included herein reflects a reclassification of $18.1 million from additional paid-in capital to retained earnings relating to the year ended December 31, 2013. This correction had no effect on previously reported revenues, net income, earnings per share, cash flows or total stockholders’ equity.

Recent Accounting Pronouncements:

In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in this update change the requirements for reporting discontinued operations. As a result of ASU 2014-08, a disposal of a component of an entity or a group of components is required to be reported in discontinued operations only if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. ASU 2014-08 also requires an entity to provide certain disclosures about a disposal of an individually significant component of such entity that does not qualify for discontinued operations presentation in the financial statements. The Company chose to early adopt ASU 2014-08 on January 1, 2014, which did not have a material impact on the Company’s consolidated financial position or results of operations.

In May 2014, the FASB issued ASU No. 2014-09, Revenue Recognition – Revenue from Contracts with Customers (“ASU 2014-09”). The amendments in this update require companies to recognize revenue when a customer obtains control rather than when companies have transferred substantially all risks and rewards of a good or service. This update is effective for annual reporting periods beginning on or after December 31, 2016 and for interim periods therein and requires expanded disclosures. The Company is currently assessing the impact of the adoption of ASU 2014-09 on our consolidated financial position and results of operations.

 

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3. Acquisitions:

The Company completed the following property acquisition in the six months ended June 30, 2013, which was acquired for cash (dollars in thousands):

 

Property

  

Date Acquired

  

Location

   Debt
Assumed
 

Tracy Pavilion

   January 24, 2013    Tracy, CA    $ —    

The following summary provides an allocation of purchase price for the above acquisition (dollars in thousands):

 

     Building      Land      Above-Market
Leases
     Below-Market
Leases
    In-Place
Leases
     Debt
(Premium)/Discount
     Other      Purchase
Price
 

Tracy Pavilion

   $ 22,611       $ 6,193       $ 163       $ (1,136   $ 2,907       $ —        $ —        $ 30,738   

Remaining useful life(1)

           54         95        62            

 

(1) 

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

The Company recorded revenues and a net loss for the three months ended June 30, 2013 of $746,000 and $10,000, respectively, and for the six months ended June 30, 2013 of $1.3 million and $12,000, respectively, related to the 2013 acquisition.

The following unaudited pro forma information for the three and six months ended June 30, 2013 has been prepared to reflect the incremental effect of the property acquired in 2013, as if such acquisition had occurred on January 1, 2012 (dollars in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30, 2013      June 30, 2013  

Revenues

   $ 27,463       $ 55,113   

Net income(1)

   $ 3,472       $ 3,840   

 

(1) 

Pro forma results for the six months ended June 30, 2013 were adjusted to exclude non-recurring acquisition costs of approximately $57,000 related to the 2013 acquisition.

In May and June 2014, the Company entered into purchase agreements to acquire four retail properties for approximately $367.1 million (of which approximately $324.4 million is to be paid in cash at closing due to the assumption of approximately $42.7 million of debt). These four properties are located in Florida and Utah and comprise approximately 1.9 million square feet of gross leasable area. The acquisition of these properties is subject to due diligence and other customary closing conditions. There can be no assurances that these conditions will be satisfied or that the acquisitions will close on the terms described herein, or at all.

4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at June 30, 2014 and December 31, 2013:

 

     June 30,
2014
     December 31,
2013
 
     (in thousands)  

In-place leases, net of accumulated amortization of $27.8 million and $26.7 million as of June 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 77 and 78 months as of June 30, 2014 and December 31, 2013, respectively)

   $ 40,600       $ 47,058   

Above-market leases, net of accumulated amortization of $8.1 million and $7.5 million as of June 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 60 and 62 months as of June 30, 2014 and December 31, 2013, respectively)

     11,816         13,725   

Leasing commissions, net of accumulated amortization of $7.9 million and $7.1 million as of June 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 97 and 99 months as of June 30, 2014 and December 31, 2013, respectively)

     15,797         17,562   
  

 

 

    

 

 

 
   $     68,213       $ 78,345   
  

 

 

    

 

 

 

 

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Estimated amortization of lease intangible assets as of June 30, 2014 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining six months)

   $ 8,083   

2015

     12,451   

2016

     9,477   

2017

     8,301   

2018

     6,854   

Thereafter

     23,047   
  

 

 

 

Total

   $ 68,213   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended June 30, 2014 and 2013 was $4.8 million and $5.5 million, respectively. Included in these amounts are $909,000 and $1.1 million, respectively, of amortization of above-market lease intangible assets recorded against rental revenue. Amortization expense recorded on the lease intangible assets for the six months ended June 30, 2014 and 2013 was $10.1 million and $12.8 million, respectively. Included in these amounts are $1.9 million and $2.6 million, respectively, of amortization of above-market lease intangible assets recorded against rental revenue.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at June 30, 2014 and December 31, 2013:

 

     June 30,
2014
     December 31,
2013
 
     (in thousands)  

Below-market leases, net of accumulated amortization of $9.1 million and $7.9 million as of June 30, 2014 and December 31, 2013, respectively (with a weighted-average remaining life of 119 and 123 months as of June 30, 2014 and December 31, 2013, respectively)

   $     25,845       $ 28,114   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended June 30, 2014 and 2013 was $1.2 million and $877,000, respectively. Amortization recorded on the lease intangible liabilities for the six months ended June 30, 2014 and 2013 was $2.3 million for both periods. These amounts were recorded as rental revenue in the Company’s condensed consolidated statements of operations.

Estimated amortization of lease intangible liabilities as of June 30, 2014 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining six months)

   $ 1,801   

2015

     3,160   

2016

     2,771   

2017

     2,639   

2018

     2,437   

Thereafter

     13,037   
  

 

 

 

Total

   $ 25,845   
  

 

 

 

6. Variable Interest Entities

Consolidated Variable Interest Entities

Included within the condensed consolidated financial statements 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 (“GLA”) located in Dothan, Alabama.

As of June 30, 2014 and December 31, 2013, total carrying amount of assets was approximately $15.2 million and $15.5 million, respectively, which includes approximately $13.2 million and $13.3 million, respectively, of real estate assets at the end of each period. As of June 30, 2014 and December 31, 2013, the total carrying amount of liabilities was approximately $12.3 million and $12.4 million, respectively.

 

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7. Mortgage Loan and Note Receivable

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 maturity date of the loan was extended for an additional two-month period, with a new maturity date of August 25, 2014. The loan is recourse to the borrower. The balance is included in other assets on the accompanying condensed consolidated balance sheets.

8. Debt

Debt of the Parent Company

The Parent Company does not directly hold any indebtedness. All of the Company’s debt is held directly or indirectly by the Operating Partnership. However, the Parent Company has guaranteed the Operating Partnership’s unsecured revolving credit facility (including the letter of credit that secures the redevelopment revenue bonds at the Northside Mall property) and the Operating Partnership’s senior unsecured notes.

Debt of the Operating Partnership

Mortgages Payable

Mortgages payable held by the Operating Partnership at June 30, 2014 and December 31, 2013 consist of the following (dollars in thousands):

 

     Carrying Amount of
Mortgage Notes
     Contractual
Interest Rate
(June 30, 2014)
    Effective
Interest Rate
(June 30, 2014)
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   June 30,
2014
     December 31,
2013
           

Edwards Theatres

   $ —          11,520         —         —         —          —    

Excel Centre

     —          12,018         —         —         —          —    

Merchant Central

     —          4,370         —         —         —          —    

Red Rock Commons(2)

     —          13,970         —         —         —          —    

Gilroy Crossing

     45,406         45,836         5.01     5.01     263         October 2014   

The Promenade

     47,042         47,957         4.80     4.80     344         October 2015   

5000 South Hulen

     13,300         13,421         5.60     6.90     83         April 2017   

Lake Pleasant Pavilion

     27,679         27,855         6.09     5.00     143         October 2017   

Rite Aid — Vestavia Hills

     925         1,015         7.25     7.25     21         October 2018   

Living Spaces-Promenade(3)

     6,875         7,075         7.88     4.59     80         November 2019   

West Broad Village(4)

     39,700         39,700         3.33     3.33     110         May 2020   

Lowe’s, Shippensburg

     12,970         13,157         7.20     7.20     110         October 2031   

Northside Mall(5)

     12,000         12,000         0.07     1.07     1         November 2035   
  

 

 

    

 

 

           
     205,897         249,894             

Plus: premium(6)

     1,151         1,297             
  

 

 

    

 

 

           

Mortgage notes payable, net

   $ 207,048       $ 251,191             
  

 

 

    

 

 

           

 

(1) 

Amount represents the monthly payment of principal and interest at June 30, 2014.

 

(2) 

The Red Rock Commons construction loan was voluntarily prepaid by the Company in June 2014.

 

(3) 

The Company acquired an additional land parcel that it did not previously own at The Promenade retail property in August 2013 and in connection with such acquisition, the Company assumed a mortgage note with a fixed interest rate of 7.88%.

 

(4) 

The loan at the West Broad Village property was refinanced in April 2013 and bears a fixed rate of 3.33% with a new maturity date of May 1, 2020. Debt payments are interest-only through May 2016.

 

(5) 

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 0.07% at June 30, 2014 and 0.10% at December 31, 2013). The interest rate on the bonds is currently priced off of the Securities Industry and Financial Markets Association 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 $102,000 and $105,000 at June 30, 2014 and December 31, 2013, respectively, is being amortized as additional interest expense through November 2035.

 

(6) 

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) an underwriter’s discount for the issuance of redevelopment bonds.

 

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Total interest cost capitalized for the three months ended June 30, 2014 and 2013 was $264,000 and $16,000, respectively, and for the six months ended June 30, 2014 and 2013 was $459,000 and $16,000, respectively.

The Company’s mortgage debt maturities at June 30, 2014 for each of the next five years and thereafter are as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2014 (remaining six months)

   $ 47,129   

2015

     47,918   

2016

     2,362   

2017

     41,436   

2018

     2,196   

Thereafter

     64,856   
  

 

 

 
   $ 205,897   
  

 

 

 

Notes Payable

Unsecured Revolving Credit Facility

The Operating Partnership’s unsecured revolving credit facility has a borrowing capacity of $300.0 million, which may be increased from time to time up to an additional $200.0 million for a total borrowing capacity of $500.0 million, subject to receipt of lender commitments and other conditions precedent. The maturity date is April 6, 2018 and may be extended for an additional six months at the Operating Partnership’s option. The Operating Partnership, 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. At June 30, 2014, the Operating Partnership believes that it was in compliance with all financial covenants in the credit agreement.

As of June 30, 2014, the unsecured revolving credit facility bore interest at the rate of LIBOR plus a margin of 90 to 170 basis points, depending on the Parent Company’s credit rating. As of June 30, 2014, the Operating Partnership was responsible for paying a fee of 0.25% or 0.30% on the full capacity of the facility. Borrowings from the unsecured revolving credit facility were $0 and $179.5 million (with a weighted-average interest rate of 1.67%) at June 30, 2014 and December 31, 2013, respectively. The Operating Partnership has issued $16.9 million in letters of credit from the unsecured revolving credit facility, which secure an outstanding $12.0 million bond payable for the Northside Mall property and construction activities at the Southlake Park Village property. The Northside Mall property bond is included with the mortgages payable on the Company’s condensed consolidated balance sheets. At June 30, 2014, there was approximately $262.6 million available for borrowing under the unsecured revolving credit facility.

Unsecured Notes

Unsecured Senior Notes due 2020 and 2023

As of June 30, 2014, the Operating Partnership had outstanding $100.0 million aggregate principal amount of senior unsecured notes issued to various entities associated with the Prudential Capital Group. Of the senior unsecured notes, $75.0 million are designated Series A Notes and will mature in November 2020, with a fixed interest rate of 4.40%, and $25.0 million are designated Series B Notes and will mature in November 2023, with a fixed interest rate of 5.19% (the Series A Notes and the Series B Notes are referred to collectively as the “Notes due 2020 and 2023”). The terms of the Notes due 2020 and 2023 are governed by a Note Purchase Agreement, dated November 12, 2013 (the “Purchase Agreement”), among the Operating Partnership, as issuer, the Parent Company and the purchasers named therein. Interest on the Notes due 2020 and 2023 is payable quarterly, beginning on February 12, 2014. The Operating Partnership may prepay all or a portion of the Notes due 2020 and 2023 upon notice to the holders for 100% of the principal amount so prepaid plus a make-whole premium as set forth in the Purchase Agreement.

The Purchase Agreement contains various restrictive covenants, including limitations on the Operating Partnership’s ability to incur additional indebtedness and requirements to maintain a pool of unencumbered assets. The Operating Partnership’s obligations under the Notes due 2020 and 2023 are fully and unconditionally guaranteed by the Parent Company and certain of its subsidiaries. Certain events would be considered events of default and could result in the acceleration of the maturity of the Notes.

Unsecured Senior Notes due 2024

On May 12, 2014, the Operating Partnership completed the issuance of $250.0 million aggregate principal amount of 4.625% senior unsecured notes due 2024 (the “Notes due 2024”). The Notes due 2024 bear interest at 4.625% per annum and were issued at 99.477% of the principal amount to yield 4.691% to maturity. Interest is payable on May 15 and November 15 of each year beginning November 15, 2014 until the maturity date of May 15, 2024. The Operating Partnership’s obligations under the Notes due 2024 are

 

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fully and unconditionally guaranteed by the Parent Company. On or before February 15, 2024, the Operating Partnership may redeem all or a portion of the Notes due 2024 upon notice to the holders at a redemption price equal to the greater of (1) 100% of the principal amount of the Notes due 2024 being redeemed and (2) 100% of the principal amount plus a make-whole premium as set forth in the Indenture governing the Notes due 2024 (the “Indenture”), plus accrued and unpaid interest up to, but not including, the redemption date. After February 15, 2024, the redemption price will be equal to 100% of the principal amount of the Notes due 2024 being redeemed, plus accrued and unpaid interest up to, but not including, the redemption date. Proceeds from the issuance of the Notes due 2024 were used to repay a portion of the outstanding indebtedness under the Company’s unsecured revolving credit facility and for other general corporate and working capital purposes.

The Notes due 2024 are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership. However, the Notes due 2024 are effectively subordinated to the Operating Partnership’s existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Operating Partnership’s subsidiaries, including guarantees provided by the Operating Partnership’s subsidiaries under the Company’s unsecured line of credit.

The Indenture contains certain covenants that, among other things, limit the Parent Company’s and the Operating Partnership’s ability to consummate a merger, consolidation or sale of all or substantially all of their assets or incur additional indebtedness.

The carrying value of the Notes due 2024:

 

     June 30,
2014
    December 31,
2013
 
     (in thousands)  

Principal amount

   $ 250,000      $ —    

Unamortized debt discount

     (1,307     —    
  

 

 

   

 

 

 
   $ 248,693      $ —    
  

 

 

   

 

 

 

In connection with this debt offering, the Operating Partnership incurred approximately $1.6 million of underwriting discount, which has been recorded as deferred financing costs and is being amortized over the term of the Notes due 2024.

The Notes due 2020, 2023 and 2024 are senior unsecured obligations of the Operating Partnership and rank equally in right of payment with all other senior unsecured indebtedness of the Operating Partnership with the exception of the Notes due 2024, which are subordinated to the Notes due 2020 and 2023. However, the Notes due 2020, 2023 and 2024 are effectively subordinated to the Operating Partnership’s existing and future mortgages and other secured indebtedness (to the extent of the value of the collateral securing such indebtedness) and to all existing and future preferred equity and liabilities, whether secured or unsecured, of the Operating Partnership’s subsidiaries, including guarantees provided by the Operating Partnership’s subsidiaries under the Company’s unsecured line of credit.

9. Earnings Per Share of the Parent Company

Basic earnings (loss) per share of the Parent Company is computed by dividing income (loss) applicable to common stockholders by the weighted-average shares outstanding, as adjusted for the effect of participating securities. The Parent Company’s unvested restricted share awards are participating securities as they contain non-forfeitable 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, 2014 does not include 747,365 and 487,961 shares, respectively, of unvested restricted common stock or 1,019,523 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. The calculation of diluted earnings per share for the three and six months ended June 30, 2013 does not include 694,162 and 697,162 shares, respectively, of unvested restricted common stock or 1,225,115 and 1,233,143 OP units, respectively, 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, 3,367,200 shares of common stock for the three and six months ended June 30, 2014 and 3,333,400 shares of common stock for the three and six months ended June 30, 2013, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (“Series A preferred stock”), were anti-dilutive and were not included in the calculation of diluted earnings per share based on the “if converted” method.

 

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Computations of basic and diluted earnings per share for the three and six months ended June 30, 2014 and 2013 (in thousands, except share data) were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Basic earnings per share:

        

Income from continuing operations

   $ 1,979      $ 3,441      $ 4,257      $ 3,660   

Preferred dividends

     (2,744     (2,744     (5,488     (5,488

Allocation to participating securities

     (129     (114     (257     (228

Income from continuing operations attributable to non-controlling interests

     (74     (105     (157     (152
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations applicable to the common stockholders

   $ (968   $ 478      $ (1,645   $ (2,208
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ (839   $ 623      $ (1,388   $ (1,825

Allocation to participating securities

     (129     (114     (257     (228
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income applicable to the common stockholders

   $ (968   $ 509      $ (1,645   $ (2,053
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

        

Basic and diluted

     48,566,816        47,150,296        48,178,118        46,256,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

        

(Loss) income from continuing operations per share attributable to the common stockholders

   $ (0.02   $ 0.01      $ (0.03   $ (0.05

Income from discontinued operations per share attributable to the common stockholders

     —         —         —         0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per share attributable to the common stockholders

   $ (0.02   $ 0.01      $ (0.03   $ (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

10. Earnings Per Unit of the Operating Partnership

Basic earnings (loss) per unit of the Operating Partnership is computed by dividing income (loss) applicable to unitholders by the weighted-average OP units outstanding, as adjusted for the effect of participating securities. The Operating Partnership’s unvested restricted OP unit awards are participating securities as they contain non-forfeitable rights to dividends. The impact of unvested restricted OP unit awards on earnings (loss) per unit has been calculated using the two-class method whereby earnings are allocated to the unvested restricted OP unit awards based on distributions and the unvested restricted OP units’ participation rights in undistributed earnings (losses).

The calculation of diluted earnings per unit for the three and six months ended June 30, 2014 does not include 747,365 and 487,961 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the unitholders. The calculation of diluted earnings per unit for the three and six months ended June 30, 2013 does not include 694,633 and 697,162 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to loss from continuing operations and net loss attributable to the unitholders. In addition, 3,367,200 OP units for the three and six months ended June 30, 2014 and 3,333,400 OP units for the three and six months ended June 30, 2013, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Units (“Series A preferred units”), were anti-dilutive and were not included in the calculation of diluted earnings per unit based on the “if converted” method.

 

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Computations of basic and diluted earnings per unit for the three and six months ended June 30, 2014 and 2013 (in thousands, except unit data) were as follows:

 

     Three Months Ended     Six Months Ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Basic earnings per unit:

        

Income from continuing operations

   $ 1,979      $ 3,441      $ 4,257      $ 3,660   

Preferred distributions

     (2,744     (2,744     (5,488     (5,488

Allocation to participating securities

     (129     (114     (257     (228

Income from continuing operations attributable to non-controlling interests

     (90     (85     (183     (172
  

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) income from continuing operations applicable to the unitholders

   $ (984   $ 498      $ (1,671   $ (2,228
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the unitholders

   $ (855   $ 643      $ (1,414   $ (1,864

Allocation to participating securities

     (129     (114     (257     (228
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income applicable to the unitholders

   $ (984   $ 529      $ (1,671   $ (2,092
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding:

        

Basic and diluted

     49,586,339        48,375,411        49,197,641        47,489,502   
  

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per unit:

        

Income (loss) from continuing operations per unit attributable to the unitholders

   $ (0.02   $ 0.01      $ (0.03   $ (0.05

Income from discontinued operations per unit attributable to the unitholders

     —         —         —         0.01   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income per unit attributable to the unitholders

   $ (0.02   $ 0.01      $ (0.03   $ (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

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) received the difference between a fixed interest rate (the “Strike Rate”) and one-month LIBOR if the Strike Rate was less than LIBOR or (2) paid such difference if the Strike Rate was greater than LIBOR. No initial investment was made to enter into either of the interest rate swap agreements. The two interest rate swaps were settled in December 2013 in connection with the repayment of the underlying mortgage note at the Park West Place property. The Company had no derivative financial instruments outstanding at June 30, 2014 and had no derivative financial instruments outstanding prior to the execution of the two swaps.

During the three and six months ended June 30, 2013, the Company did not record any amounts in earnings attributable to hedge ineffectiveness.

 

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Table of Contents

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 condensed consolidated statements of operations for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

     Three Months Ended     Six Months Ended  
     June 30,
2014
     June 30,
2013
    June 30,
2014
     June 30,
2013
 

Amount of unrealized loss recognized in OCI (effective portion):

          

Interest rate swaps

   $ —        $ (12   $ —        $ (12

Other derivatives

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —        $ (12   $ —        $ (12
  

 

 

    

 

 

   

 

 

    

 

 

 

Amount of loss reclassified from accumulated OCI into income (effective portion):

          

Interest rate swaps (interest expense)

   $ —        $ (163   $ —        $ (325

Other derivatives

     —          —         —          —    
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —        $ (163   $ —        $ (325
  

 

 

    

 

 

   

 

 

    

 

 

 

Amount of gain recognized in income (ineffective portion and amount excluded from effectiveness testing):

          

Interest rate swaps (other income/expense)

   $ —        $ —       $ —        $ —    

Other derivatives (changes in fair value of financial instruments and gain on OP unit redemption)

     —          —         —          230   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —        $ —       $ —        $ 230   
  

 

 

    

 

 

   

 

 

    

 

 

 

12. Equity of the Parent Company

The Parent Company has issued restricted stock awards to senior executives, directors and employees totaling 1,327,509 shares of common stock (net of forfeitures of 489,864 shares), which are included in the total shares of common stock outstanding as of June 30, 2014.

As of June 30, 2014, the Parent Company had outstanding 2,000,000 shares of Series A preferred stock, with a liquidation preference of $25.00 per share. The Parent Company pays cumulative dividends on the Series A preferred stock when, as and if declared by the Parent 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 or about the 15th 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 Parent 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 Parent Company. The initial conversion rate of the Series A preferred stock was 1.6667 shares of common stock per share of Series A preferred stock. Effective September 26, 2013 (the ex-dividend date), the conversion rate was adjusted to 1.6836 shares of common stock per share of Series A preferred stock as a result of the aggregate dividends that the Parent Company declared and paid on its common stock, beginning with the quarter ended September 30, 2011 and through the quarter ended September 30, 2013, being in excess of the reference dividend of $0.15 per share. The conversion rate will continue to be subject to customary adjustments in certain circumstances. Beginning on April 1, 2014, the Parent 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 Parent Company has either declared and paid, or declared and set apart for payment, any unpaid dividends that are in arrears on the Series A preferred stock.

As of June 30, 2014, the Parent Company had outstanding 3,680,000 shares of 8.125% Series B Cumulative Redeemable Preferred Stock (“Series B preferred stock”), with a liquidation preference of $25.00 per share. The Parent Company pays cumulative dividends on the Series B preferred stock, when, as and if declared by the Parent 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 or about the 15th 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 Parent 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 Parent 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 Parent 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.

 

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The Parent Company’s board of directors has authorized a stock repurchase program under which the Parent Company may acquire up to $50.0 million of its common stock and preferred stock in open market and negotiated purchases with no expiration date (the repurchase program was increased from $30.0 million to $50.0 million in February 2014). In the six months ended June 30, 2014, the Parent Company repurchased 105,775 shares of its common stock for an aggregate cost of approximately $1.4 million (including transaction costs) at a weighted-average purchase price of $12.52 per share. The repurchased shares of common stock were subsequently retired by the Parent Company with the funds provided from the sale of the OP units to the Operating Partnership. No stock was repurchased during the year ended December 31, 2013. As of June 30, 2014, approximately $41.9 million remained available under the stock repurchase program to acquire outstanding shares of the Parent Company’s common stock and preferred stock.

The Parent Company and the Operating Partnership have entered into equity distribution agreements (the “Equity Distribution Agreements”) with four sales agents, under which the Parent Company can issue and sell shares of its common stock from time to time through, at its discretion, any of the sales agents. The Equity Distribution Agreements were initially entered into in March 2012 with an aggregate offering price of up to $50.0 million and subsequently amended and restated in May 2013, permitting additional sales with an aggregate offering price of up to $100.0 million. The sales of common stock made under the Equity Distribution Agreements are made in “at the market” offerings as defined in Rule 415 under the Securities Act of 1933, as amended. During the year ended December 31, 2013, the Parent Company issued 3,211,928 shares of common stock pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $40.7 million at an average stock issuance price of $13.05 per share. The net proceeds of $40.7 million were contributed to the Operating Partnership in exchange for 3,211,928 OP units. During the six months ended June 30, 2014, the Parent Company did not issue any shares pursuant to the Equity Distribution Agreements.

On June 25, 2014, the Parent Company completed the issuance of 12,650,000 shares of common stock, including the exercise of an option to purchase an additional 1,650,000 shares, resulting in net proceeds of approximately $160.7 million, after deducting the underwriters’ discount and commissions and offering expenses. The net proceeds were contributed to the Operating Partnership in exchange for 12,650,000 OP units.

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. During the period from March 2012 to March 2013, a total of 591,474 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Parent Company for redemption, resulting in the issuance of an additional 531,768 shares of common stock and cash payments totaling approximately $1.9 million to former unitholders (see Note 19 for further discussion).

A charge/credit is recorded each period in the condensed consolidated statements of income for the non-controlling interests’ proportionate share of the Company’s net income (loss).

On June 30, 2014, the Parent Company accrued a liability for a dividend of $10.7 million payable to the common stockholders of record, a dividend of $2.7 million payable to the preferred stockholders of record and a distribution of $178,000 payable to the holders of record of OP units as of June 30, 2014, each of which was paid in July 2014.

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 Parent 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 (an equivalent amount of common OP units are issued to the Parent Company for each such grant with similar terms and conditions). The maximum number of shares of the Parent Company’s common stock that may be issued pursuant to the 2010 Plan is 2,850,000 (of which 1,523,016 shares of common stock remain available for issuance as of June 30, 2014).

The following shares of restricted common stock were issued during the six months ended June 30, 2014:

 

Grant Date

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

March 7, 2014(1)

   $ 12.57         4,000         4   

March 18, 2014(2)

   $ 12.80         558,331         1, 3   

March 24, 2014(3)

   $ 12.56         83,500         3   

May 13, 2014(4)

   $ 12.89         12,412         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 senior management and other employees of the Company. A portion of the stock grants (452,500 shares of restricted common stock) vest over a three-year period and include performance or service conditions. The remaining stock grants (105,831 shares of restricted common stock) include a variety of performance and market conditions, with the restricted shares vesting at the discretion of the Parent Company’s board of directors on December 31, 2014 based on the achievement of the Company’s objectives during the year ended December 31, 2014.

 

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(3) 

Shares issued to certain of the Company’s employees. These shares vest over a three-year period with 33% vesting in equal annual installments on December 31, 2014, 2015 and 2016.

 

(4) 

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

Shares of the Parent 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 Parent Company’s restricted common stock have full voting rights and rights to dividends upon grant. The Company recognized compensation expense during the three and six months ended June 30, 2014 of $1.4 million and $2.0 million, respectively, and for the three and six months ended June 30, 2013 of $568,000 and $1.1 million, respectively, related to the restricted common stock grants ultimately expected to vest. Accounting Standards Codification (“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 for all periods presented. Stock compensation expense is included in general and administrative expense in the accompanying condensed consolidated statements of operations.

As of June 30, 2014 and December 31, 2013, there was approximately $8.0 million and $1.6 million, respectively, of total unrecognized compensation expense related to the non-vested shares of the Parent Company’s restricted common stock. As of June 30, 2014 and December 31, 2013, this expense was expected to be recognized over a weighted-average remaining period of 2.1 and 1.1 years, respectively.

 

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

Balance - January 1, 2014

     611,683      $ 9.73   

Grants

     658,243      $ 12.77   

Forfeitures

     (466,864   $ 8.88   

Vested(1)

     (68,589   $ 12.70   
  

 

 

   

 

 

 

Balance - June 30, 2014

     734,473      $ 12.72   
  

 

 

   

 

 

 

 

(1) 

During the six months ended June 30, 2014, 525 shares of common stock were surrendered to the Parent Company and subsequently retired in lieu of cash payments for taxes due on the vesting of restricted stock. The forfeiture of these shares is reflected in the accompanying condensed consolidated statements of equity and capital as a decrease of the total restricted common shares issued during each period presented.

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, 2014. Costs related to the matching portion of the plan for the three months ended June 30, 2014 and 2013 were approximately $41,000 and $38,000, respectively. Costs related to the matching portion of the plan for the six months ended June 30, 2014 and 2013 were approximately $80,000 and $73,000, respectively.

13. Equity of the Operating Partnership

As of June 30, 2014, the Operating Partnership had outstanding 62,136,121 OP units. The Parent Company owned 98.3% of the partnership interests in the Operating Partnership at June 30, 2014, is the Operating Partnership’s general partner and is responsible for the management of the Operating Partnership’s business. As the general partner of the Operating Partnership, the Parent Company effectively controls the ability to issue common stock of the Parent Company upon a limited partner’s notice of redemption. In addition, the Parent Company has generally acquired OP units upon a limited partner’s notice of redemption in exchange for shares of its common stock. The redemption provisions of OP units owned by limited partners that permit the Parent Company to settle in either cash or common stock at the option of the Parent Company are further evaluated in accordance with applicable accounting guidance to determine whether temporary or permanent equity classification on the balance sheet is appropriate. The Operating Partnership evaluated this guidance, including the requirement to settle in unregistered shares, and determined that these OP units meet the requirements to qualify for presentation as permanent equity.

 

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In addition, as of June 30, 2014, the Operating Partnership had outstanding 2,000,000 Series A preferred units and 3,680,000 8.125% Series B Cumulative Redeemable Preferred Units (collectively referred to as the “Preferred Units”). The Preferred Units were issued to the Parent Company in exchange for the net proceeds from the issuance of preferred stock of the Parent Company and contain the same terms and conditions as the preferred stock instruments (including, among other things, distribution rates and exchange or redemption provisions).

In the six months ended June 30, 2014, the Operating Partnership repurchased 105,775 common OP units from the Parent Company (in connection with the Parent Company’s repurchase of its common stock) for an aggregate cost of approximately $1.4 million (including transaction costs) at a weighted-average purchase price of $12.52 per unit. The OP units were subsequently retired by the Operating Partnership. No OP units were repurchased from the Parent Company in connection with repurchases of its common stock during the year ended December 31, 2013.

In connection with the Equity Distribution Agreements, during the year ended December 31, 2013 the Operating Partnership issued 3,211,928 OP units to the Parent Company in exchange for net proceeds of approximately $40.7 million, which were used to repay outstanding indebtedness under its unsecured revolving credit facility and for other general corporate and working capital purposes. During the six months ended June 30, 2014, the Operating Partnership did not issue any OP units to the Parent Company in connection with the Equity Distribution Agreements.

On June 25, 2014, the Operating Partnership issued 12,650,000 OP units to the Parent Company in exchange for net proceeds of approximately $160.7 million, which are intended to partially fund certain property acquisitions that have recently been placed under contract and for other general corporate and working capital purposes. These acquisitions are subject to the completion of due diligence and the satisfaction of other closing conditions.

Consolidated net income is reported in the Operating Partnership’s condensed consolidated financial statements at amounts that include the amounts attributable to both the unitholders and the non-controlling interests in a consolidated joint venture property. During the period from March 2012 to March 2013, a total of 591,474 OP units related to the 2011 Edwards Theatres acquisition were tendered to the Parent Company for redemption, resulting in the issuance of an additional 531,768 shares of the Parent Company’s common stock (and the issuance of an equivalent number of OP units to the Parent Company) and cash payments totaling approximately $1.9 million to former unitholders (see Note 19 for further discussion).

The following table shows the vested partnership interests in the Operating Partnership as of June 30, 2014 and December 31, 2013:

 

     June 30, 2014     December 31, 2013  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     60,382,125         98.3     47,769,682         97.9

Non-controlling interests consisting of:

          

OP units held by employees and third parties

     1,019,523         1.7     1,019,523         2.1
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     61,401,648         100.0     48,789,205         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

14. Investment in Unconsolidated Entities

The Company has formed a limited liability company (“La Costa LLC”) with GEM Realty Capital, Inc. (“GEM”) in which the Company and GEM hold 20% and 80% ownership interests, respectively. La Costa LLC is the owner of the La Costa Town Center property. The Company’s ownership interest in La Costa LLC is reflected in the accompanying balance sheets at the Company’s historical cost basis as an investment in a profit-sharing arrangement. La Costa LLC does not qualify as a VIE and consolidation is not required as the Company does not control the operations of the property and the majority owner bears the majority of any losses incurred. The Company receives 20% of the cash flow distributions and may receive a greater portion of cash distributions in the future based upon the performance of the property and the availability of cash for distribution. In addition, the Company receives fees in its role as the day-to-day property manager and for any development services that it provides. The Company’s interest in the income or losses of the underlying venture is reflected in a manner similar to the equity method of accounting.

On June 18, 2014, La Costa LLC entered into a purchase and sale agreement for the disposition of the La Costa Town Center property for a sales price of approximately $33.0 million, excluding closing costs. The sale of the property is subject to due diligence and other customary closing conditions. There can be no assurances that these conditions will be satisfied or that the disposition will close on the terms described herein, or at all.

The Company also holds a 50% tenant-in-common ownership interest in The Fountains at Bay Hill property (“Bay Hill”). The remaining 50% undivided interest in the Bay Hill property is held by MDC Fountains, LLC (“MDC”). The Bay Hill property does not qualify as a VIE and consolidation is not required as the Company does not control the operations of the property. The Company

 

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receives 50% of the cash flow distributions and recognizes 50% of the results of operations. In addition, the Company receives fees in its role as the day-to-day property manager. The Company’s 50% ownership interest is reflected in the accompanying balance sheets as an investment in unconsolidated entities and the Company’s interest in the income or losses of the property is recorded based on the equity method of accounting.

General information on the La Costa LLC and Bay Hill properties as of June 30, 2014 was as follows:

 

Unconsolidated Investment

   Partner      Ownership Interest     Formation/
Acquisition Date
   Property

La Costa LLC(1)

     GEM         20   September 7, 2012    La Costa Town Center

Bay Hill(2)

     MDC         50   October 19, 2012    The Fountains at Bay Hill

 

(1) 

At June 30, 2014, La Costa LLC had real estate assets of $23.8 million, total assets of $25.1 million, mortgages payable of $14.1 million and total liabilities of $14.4 million. At December 31, 2013, La Costa LLC had real estate assets of $23.4 million, total assets of $25.7 million, mortgages payable of $14.1 million and total liabilities of $14.5 million. Total revenues were $471,000 and $862,000, total expenses were $662,000 and $1.3 million (including interest expense) and net loss was $191,000 and $452,000 for the three and six months ended June 30, 2014, respectively. Total revenues were $393,000 and $2.3 million, total expenses were $844,000 and $2.5 million (including interest expense) and net loss was $451,000 and $264,000 for the three and six months ended June 30, 2013, respectively. The mortgage note was assumed with the contribution of the property and bears interest at the rate of LIBOR plus a margin of 575 basis points (5.9% at each of June 30, 2014 and December 31, 2013). The mortgage note has a maturity date of October 1, 2014, which may be extended for three additional one-year periods at La Costa LLC’s election and upon the satisfaction of certain conditions (including the payment of an extension fee upon the exercise of the second and third renewal options, execution of an interest rate cap and the establishment of certain reserve accounts). La Costa LLC has also entered into an interest rate cap related to the mortgage note, which limits LIBOR to a maximum of 3.0% and expires on October 1, 2014.

 

(2) 

At June 30, 2014, Bay Hill had real estate assets of $36.7 million, total assets of $39.4 million, mortgages payable of $23.2 million and total liabilities of $25.4 million. At December 31, 2013, Bay Hill had real estate assets of $37.0 million, total assets of $39.9 million, mortgages payable of $23.4 million and total liabilities of $25.6 million. Total revenues were $950,000 and $1.9 million, total expenses were $683,000 and $1.4 million (including interest expense) and net income was $267,000 and $511,000 for the three and six months ended June 30, 2014, respectively. Total revenues were $895,000 and $1.9 million, total expenses were $843,000 and $1.8 million (including interest expense) and net loss was $52,000 and $56,000 for the three and six months ended June 30, 2013, respectively. The mortgage note assumed with the acquisition of the Bay Hill property bears interest at the rate of LIBOR plus a margin of 325 basis points (3.4% at each of June 30, 2014 and December 31, 2013). The mortgage note has a maturity date of April 2, 2015, which may be extended for two additional one-year periods at the borrower’s election and upon the satisfaction of certain conditions.

15. Discontinued Operations

On July 19, 2013, the Company completed the disposition of the Walgreens property, located in North Corbin, Kentucky, for a sales price of approximately $4.5 million, excluding closing costs. On September 13, 2013, the Company completed the disposition of the Grant Creek Town Center property, located in Missoula, Montana, for a sales price of approximately $32.3 million, excluding closing costs. The Grant Creek Town Center property sale was classified as an exchange pursuant to section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”); therefore, the funds were restricted as to their usage and were reflected as restricted cash on the condensed consolidated balance sheets at September 30, 2013. The Company subsequently utilized the funds to provide the purchase price for the acquisition of two properties during the three months ended December 31, 2013.

All properties sold were part of the retail properties segment – see Note 21. The following table provides information regarding the disposition of the properties:

 

     (in thousands)                

Property

   Sales Price      Gain on Sale      Date of Sale      Acquisition Date  

Walgreens — North Corbin

   $ 4,514       $ 1,129         7/19/2013         5/24/2010   

Grant Creek Town Center

   $ 32,343       $ 10,926         9/13/2013         8/27/2010   

 

 

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The results of operations for the properties are reported as discontinued operations for all periods presented in the accompanying condensed consolidated statements of operations. The following table summarizes the revenue and expense components that comprise income from discontinued operations (dollars in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,
2014
     June 30,
2013
     June 30,
2014
     June 30,
2013
 

Total revenues

   $ —        $ 575       $ —        $ 1,257   

Total expenses

     —          544         —          1,121   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income before non-controlling interests and gain on sale of real estate assets

     —          31         —          136   

Gain on sale of real estate assets

     —          —          —          —    

Non-controlling interest in discontinued operations(1)

     —          —          —          19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income from discontinued operations available to the common stockholders

   $ —        $ 31       $ —        $ 155   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

Amounts represent the portion of non-controlling interest related to OP units not held by the Parent Company that would be attributable to discontinued operations (no amounts would be allocable with respect to the condensed consolidated financial statements of the Operating Partnership).

16. Related Party Transactions

Subsequent to the Parent Company’s initial public offering, many of the employees of Excel Realty Holdings, LLC (“ERH”, a company that managed the operations of the Parent Company’s predecessor under various management agreements) became employees of the Company. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. For the three months ended June 30, 2014 and 2013, approximately $84,000 and $65,000, respectively, was reimbursed to the Company from ERH and included in other income in the condensed consolidated statements of operations. For the six months ended June 30, 2014 and 2013, approximately $160,000 and $148,000, respectively, was reimbursed to the Company from ERH and included in other income in the condensed consolidated statements of operations.

At June 30, 2013, the Operating Partnership had recognized an amount due from the Parent Company of approximately $2.9 million (classified within other assets in the condensed consolidated balance sheets) relating to proceeds from the issuance of the Parent Company’s common stock (with the issuance of an equivalent number of common OP units to the Parent Company), which had not yet been contributed to the Operating Partnership. The Operating Partnership collected the receivable in July 2013.

17. Income Taxes

Income Taxes of the Parent Company

The Parent Company elected to be taxed as a REIT under the Code, beginning with the taxable year ended December 31, 2010. To qualify as a REIT, the Parent 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 (excluding any net capital gain). It is the Parent Company’s intention to comply with these requirements and maintain the Parent Company’s REIT status. As a REIT, the Parent 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 Parent 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 Parent Company qualifies for taxation as a REIT, it 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 and on the taxable income of any of its taxable REIT subsidiaries.

Income Taxes of the Operating Partnership

As a partnership, the allocated share of income of the Operating Partnership is included in the income tax returns of the general and limited partners. Accordingly, no accounting for income taxes is required in the accompanying condensed consolidated financial statements. The Operating Partnership may be subject to certain state or local taxes on its income and property.

The Operating Partnership has formed a taxable REIT subsidiary (the “TRS”) on behalf of the Parent Company. In general, the TRS may perform non-customary services for tenants, hold assets that the Parent Company cannot hold directly and, except for the operation or management of health care facilities or lodging facilities or the providing of any person, under a franchise, license or otherwise, rights to any brand name under which any lodging facility or health care facility is operated, may engage in any real estate

 

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or non-real estate related business. The TRS is subject to corporate federal income taxes on its taxable income at regular corporate tax rates. The TRS accounts for income taxes in accordance with the provisions of the Income Taxes Topic of the FASB ASC, which requires the Company to account for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between GAAP carrying amounts and their respective tax bases.

18. 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 consolidated financial position, results of operations or cash flows.

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.

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 construction costs relating to development projects on portions of existing operating properties and at its non-operating properties (Chimney Rock Phase II and Southlake Park Village) and the redevelopment of its unconsolidated La Costa Town Center property.

19. 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 (dollars in thousands):

 

     Balance at
June 30,
2014
     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:

           

Assets:

           

Other assets related to business combinations

   $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 
     Balance at
December 31,
2013
     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:

           

Assets:

           

Other assets related to business combinations(1)

   $ 507       $ —        $ —        $ 507   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 condensed 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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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, 2014 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
 

Beginning balance, January 1, 2014

   $ 507   

Total gains: included in earnings

     —    

Purchases, issuances or settlements

     (507
  

 

 

 

Ending balance, June 30, 2014

   $ —    
  

 

 

 

 

(1) 

The change of $507,000 for other assets related to business combinations during the six months ended June 30, 2014 is comprised of cash payments received on the master lease asset.

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, 2013 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
    Contingent Consideration
Related to Business
Combinations (2)
    Derivative Instruments
Related to Business
Combinations (3)
 

Beginning balance, January 1, 2013

   $ 992      $ (1,787   $ (274

Total gains: Included in earnings

     6        1,552        246   

Purchases, issuances or settlements

     (277     —         28   
  

 

 

   

 

 

   

 

 

 

Ending balance, June 30, 2013

   $ 721      $ (235   $ —    
  

 

 

   

 

 

   

 

 

 

 

(1) 

The change of $271,000 for other assets related to business combinations during the six months ended June 30, 2013 is comprised of payments received on the master lease assets and an increase in the estimated fair value of funds to be received from escrow of $6,000.

 

(2) 

The change of $1.6 million for contingent consideration related to business combinations represents the reversal of a contingent liability related to the earn-out for one property as a result of a shortfall in expected leasing of vacant space at the property (recognized as changes in fair value of contingent consideration in the condensed consolidated statements of operations). The remaining earn-out has a fair value of approximately $235,000 based on the funds expected to be paid to the former owner, with the earn-out period expiring on September 30, 2013.

 

(3) 

The change of $274,000 for derivative instruments related to business combinations during the six months ended June 30, 2013 is related to changes to the redemption provision for OP units issued in connection with the 2011 Edwards Theatres acquisition as a result of (a) a decrease of $246,000 due to recognition of a gain included in earnings related to changes in the fair value of the redemption obligation and (b) a decrease of $28,000 due to the redemption of corresponding OP units.

There were no additional gains or losses, purchases, sales, issuances, settlements, or transfers in or out related to any of the three levels of the fair value hierarchy during the six months ended June 30, 2014 and 2013.

The Company has not elected the fair value measurement option for any of its other financial assets or liabilities. The Company estimates 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 estimates 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.

 

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The fair values of certain additional financial assets and liabilities at June 30, 2014 and December 31, 2013 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (dollars in thousands):

 

     June 30, 2014      December 31, 2013  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets:

           

Note receivable (Other Assets)

   $ 750       $ 750       $ 750       $ 750   

Financial liabilities:

           

Mortgage notes payable

     207,048         213,866         251,191         254,473   

Notes payable

     —          —          179,500         179,500   

Unsecured notes

     350,000         353,176         100,000         100,000   

20. Subsequent Events

On July 1, 2014, the Company entered into a purchase and sale agreement for the disposition of the Lowe’s property for a sales price of approximately $24.4 million, excluding closing costs. The sale of the property is subject to due diligence and other customary closing conditions. There can be no assurances that these conditions will be satisfied or that the disposition will close on the terms described herein, or at all.

21. Segment Disclosure

The Company’s reportable segments consist of the three types of commercial real estate properties for which management internally evaluates operating performance and financial results: Office Properties, Multi-family Properties and Retail Properties. The Company was formed for the primary purpose of owning and operating Retail Properties. As such, administrative costs 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 operating income. “Property Operating Income” is defined as operating revenues (rental revenue, tenant recoveries and other income) 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.

 

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Table of Contents

The following tables reconcile the Company’s segment activity to its consolidated results of operations and financial position for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):

 

     For the Three Months Ended     For the Six Months Ended  
     June 30,
2014
    June 30,
2013
    June 30,
2014
    June 30,
2013
 

Office Properties:

        

Total revenues

   $ 2,233      $ 2,326      $ 4,394      $ 4,376   

Property operating expenses

     (890     (841     (1,743     (1,686
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     1,343        1,485        2,651        2,690   

Changes in fair value of contingent consideration

     —         6        —         6   

General and administrative costs

     —         (2     (5     (7

Depreciation and amortizati