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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 March 31, 2015

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   x    Accelerated filer   ¨
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 April 29, 2015, $0.01 par value per share: 63,403,152 shares

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended March 31, 2015 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” or “our operating partnership” refer to Excel Trust, L.P. 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 March 31, 2015, Excel Trust, Inc. owned an approximate 98.4% partnership interest in the Operating Partnership. The remaining 1.6% 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 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 and partners’ capital 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 MARCH 31, 2015

TABLE OF CONTENTS

 

PART I

  Financial Information     4   
Item 1.   Financial Statements of Excel Trust, Inc.    
4
  
  Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014     4   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)     5   
  Condensed Consolidated Statements of Equity for the three months ended March 31, 2015 and 2014 (unaudited)     6   
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (unaudited)     8   
  Financial Statements of Excel Trust, L.P.  
  Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014     9   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three months ended March 31, 2015 and 2014 (unaudited)     10   
  Condensed Consolidated Statements of Capital for the three months ended March 31, 2015 and 2014 (unaudited)     11   
  Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014 (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     38   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     51   
Item 4.   Controls and Procedures     52   
PART II   Other Information     52   
Item 1.   Legal Proceedings     52   
Item 1A.   Risk Factors     52   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     54   
Item 3.   Defaults Upon Senior Securities     54   
Item 4.   Mine Safety Disclosures     54   
Item 5.   Other Information     54   
Item 6.   Exhibits     55   
Signatures       56   

 

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)

 

     March 31, 2015
(unaudited)
    December 31,
2014
 

ASSETS:

    

Property:

    

Land

   $ 433,635      $ 455,112   

Buildings

     860,390        921,604   

Site improvements

     83,222        87,305   

Tenant improvements

     65,484        70,549   

Construction in progress

     16,927        8,819   

Less accumulated depreciation

     (92,993     (90,543
  

 

 

   

 

 

 

Property, net

     1,366,665        1,452,846   

Cash and cash equivalents

     5,525        6,603   

Restricted cash

     94,102        8,272   

Tenant receivables, net

     5,772        5,794   

Lease intangibles, net

     110,068        123,373   

Deferred rent receivable

     10,376        11,479   

Other assets

     20,404        32,081   

Real estate held for sale, net of accumulated depreciation

     27,295         

Investment in unconsolidated entities

     6,671        6,689   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,646,878      $ 1,647,137   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 192,956      $ 192,748   

Notes payable

     199,000        238,000   

Unsecured notes

     398,791        398,758   

Accounts payable and other liabilities

     37,920        34,338   

Liabilities of real estate held for sale

     2,207        —    

Lease intangibles, net

     37,439        42,470   

Dividends/distributions payable

     13,580        12,857   
  

 

 

   

 

 

 

Total liabilities(2)

     881,893        919,171   

Commitments and contingencies

    

Equity:

    

Stockholders’ equity

    

Preferred stock, 50,000,000 shares authorized

    

7.0% Series A cumulative convertible perpetual preferred stock, $29,524 liquidation preference ($25.00 per share), 1,180,975 shares issued and outstanding at March 31, 2015 and December 31, 2014

     28,168        28,168   

8.125% Series B cumulative redeemable preferred stock, $92,000 liquidation preference ($25.00 per share), 3,680,000 shares issued and outstanding at March 31, 2015 and December 31, 2014

     88,720        88,720   

Common stock, $.01 par value, 200,000,000 shares authorized; 63,403,152 and 61,113,372 shares issued and outstanding at March 31, 2015 and December 31, 2014, respectively

     633        610   

Additional paid-in capital

     628,517        597,723   

Retained Earnings

     6,215         

Accumulated other comprehensive gain

           168  
  

 

 

   

 

 

 

Total stockholders’ equity

     752,253        715,389   

Non-controlling interests

     12,732        12,577   
  

 

 

   

 

 

 

Total equity

     764,985        727,966   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,646,878      $ 1,647,137   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, Inc.’s consolidated total assets at March 31, 2015 and December 31, 2014 include $40,302 and $39,783, respectively, of assets (primarily real estate assets) of two variable interest entities (“VIEs”) that can only be used to settle the liabilities of those VIEs.

 

(2) 

Excel Trust, Inc.’s consolidated total liabilities at March 31, 2015 and December 31, 2014 include $968 and $823 of accounts payable and other liabilities, respectively, that do not have recourse to Excel Trust, Inc.

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

 

4


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  
     March 31, 2015     March 31, 2014  

Revenues:

    

Rental revenue

   $ 31,976      $ 24,908   

Tenant recoveries

     7,443        5,256   

Other income

     1,072        434   
  

 

 

   

 

 

 

Total revenues

     40,491        30,598   

Expenses:

    

Maintenance and repairs

     2,987        2,223   

Real estate taxes

     4,417        3,366   

Management fees

     643        518   

Other operating expenses

     2,732        1,731   

General and administrative

     4,348        3,815   

Depreciation and amortization

     17,266        11,796   
  

 

 

   

 

 

 

Total expenses

     32,393        23,449   
  

 

 

   

 

 

 

Operating income

     8,098        7,149   

Interest expense

     (7,551     (4,989

Interest income

     50        49   

Income from equity in unconsolidated entities

     134        69   

Gain on sale of real estate assets

     19,661        —    
  

 

 

   

 

 

 

Net income

     20,392        2,278   

Net income attributable to non-controlling interests

     (379     (83
  

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

     20,013        2,195   

Preferred stock dividends

     (2,385     (2,744
  

 

 

   

 

 

 

Net income (loss) attributable to the common stockholders

   $ 17,628      $ (549
  

 

 

   

 

 

 

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

    

Basic earnings (loss) per share

   $ 0.28      $ (0.01
  

 

 

   

 

 

 

Diluted earnings (loss) per share

   $ 0.28      $ (0.01
  

 

 

   

 

 

 

Weighted-average common shares outstanding:

    

Basic

     62,473        47,785   
  

 

 

   

 

 

 

Diluted

     64,987        47,785   
  

 

 

   

 

 

 

Dividends declared per common share

   $ 0.18      $ 0.175   
  

 

 

   

 

 

 

Net income

   $ 20,392      $ 2,278   

Other comprehensive income:

    

Change in unrealized gain on investment in equity securities

     137        —    

Gain on sale of equity securities (reclassification adjustment)

     (308     —    
  

 

 

   

 

 

 

Comprehensive income

     20,221        2,278   

Comprehensive income attributable to non-controlling interests

     (376     (83
  

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 19,845      $ 2,195   
  

 

 

   

 

 

 

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
    Cumulative
(Deficit)
Retained
Earnings
    Accumulated
other
Comprehensive
Gain (Loss)
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2015

  $ 28,168      $ 88,720        61,113,372      $ 610      $ 597,723      $ —        $ 168      $ 715,389      $ 12,577      $ 727,966   

Net proceeds from sale of common stock

    —          —          2,220,838        22        29,846        —          —          29,868        —          29,868   

Issuance of restricted common stock awards

    —          —          152,137        2        (2     —          —          —          —          —     

Forfeiture of restricted common stock awards

    —          —          (83,195     (1     1        —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          1,063        —          —          1,063        —          1,063   

Common stock dividends

    —          —          —          —          —          (11,413     —          (11,413     —          (11,413

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (335     (335

Net income

    —          —          —          —          —          20,013        —          20,013        379        20,392   

Preferred stock dividends

    —          —          —          —          —          (2,385     —          (2,385     —          (2,385

Change in unrealized gain on investment in equity securities

    —          —          —          —          —          —          (168     (168     (3     (171

Adjustment for non-controlling interests

    —          —          —          —          (114     —          —          (114     114        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

  $ 28,168      $ 88,720        63,403,152      $ 633      $ 628,517      $ 6,215      $ —        $ 752,253      $ 12,732      $ 764,985   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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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
Gain
    Total
Stockholders’
Equity
    Non-
controlling
Interests
    Total
Equity
 
      Shares     Amount              

Balance at January 1, 2014

  $ 47,703      $ 88,720        43,381,365      $ 482      $ 478,541      $ —        $ —        $ 615,446      $ 11,938      $ 627,384   

Repurchase of common stock

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

Forfeiture of restricted common stock awards

    —          —          (465,864     (4     4        —          —          —          —          —     

Issuance of restricted common stock awards

    —          —          645,460        6       (6     —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          574        —          —          574        —          574   

Common stock dividends

    —          —          —          —          (8,479     —          —          (8,479     —          (8,479

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (326     (326

Net income

    —          —          —          —          —          2,195        —          2,195        83        2,278   

Preferred stock dividends

    —          —          —          —          (549     (2,195     —          (2,744     —          (2,744

Adjustment for non-controlling interests

    —          —          —          —          80        —          —          80        (80     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

  $ 47,703      $ 88,720        48,455,186      $ 483      $ 468,759      $ —        $ —        $ 605,665      $ 11,615      $ 617,280   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

7


Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended
March 31, 2015
    Three Months Ended
March 31, 2014
 

Cash flows from operating activities:

    

Net income

   $ 20,392      $ 2,278   

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

    

Depreciation and amortization

     17,266        11,796   

Gain on sale of real estate assets

     (19,661     —     

Gain on sale of equity securities

     (308     —     

(Income) loss from equity in unconsolidated entities

     (134     (69

Deferred rent receivable

     (761     (602

Amortization of above- and below-market leases

     (619     (138

Amortization of deferred balances

     509        333   

Bad debt expense

     449        206   

Share-based compensation expense

     1,063        574   

Distributions from unconsolidated entities

     202        154   

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

    

Tenant and other receivables

     (531     1,205   

Other assets

     (1,289     (1,377

Accounts payable and other liabilities

     3,086        296   
  

 

 

   

 

 

 

Net cash provided by operating activities

     19,664        14,656   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Development of property and property improvements

     (8,410     (4,921

Receipt of master lease payments

     —          36   

Capitalized leasing costs

     (297     (269

Proceeds from the sale of equity securities

     10,820        —     

Restricted cash

     (681     (388
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,432        (5,542
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     30,544        —     

Common stock offering costs

     (626     —     

Repurchase of common stock

     —          (1,407

Payments on mortgages payable

     (956     (12,557

Proceeds from mortgages payable

     1,274        —     

Payments on notes payable

     (39,000     —     

Proceeds from notes payable

     —          18,500   

Distribution to non-controlling interests

     (329     (326

Preferred stock dividends

     (2,386     (2,744

Common stock dividends

     (10,695     (8,467

Deferred financing costs

     —          (51
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,174     (7,052
  

 

 

   

 

 

 

Net (decrease) increase

     (1,078     2,062   

Cash and cash equivalents, beginning of period

     6,603        3,245   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 5,525      $ 5,307   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized

   $ 4,303      $ 3,396   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Dispositions of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $19,661)

   $ 85,341      $ —     
  

 

 

   

 

 

 

Common stock dividends payable

   $ 11,412      $ 8,479   
  

 

 

   

 

 

 

Preferred stock dividends payable

   $ 1,984      $ 2,287   
  

 

 

   

 

 

 

OP unit distributions payable

   $ 184      $ 178   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 10,457      $ 3,971   
  

 

 

   

 

 

 

Change in unrealized gain on investment in equity securities

   $ 171      $ —     
  

 

 

   

 

 

 

Reclassification of assets to real estate held for sale

   $ 27,295      $ —     
  

 

 

   

 

 

 

Reclassification of liabilities to liabilities of real estate held for sale

   $ 2,207      $ —     
  

 

 

   

 

 

 

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)

 

     March 31, 2015
(unaudited)
    December 31,
2014
 

ASSETS:

    

Property:

    

Land

   $ 433,635      $ 455,112   

Buildings

     860,390        921,604   

Site improvements

     83,222        87,305   

Tenant improvements

     65,484        70,549   

Construction in progress

     16,927        8,819   

Less accumulated depreciation

     (92,993     (90,543
  

 

 

   

 

 

 

Property, net

     1,366,665        1,452,846   

Cash and cash equivalents

     5,525        6,603   

Restricted cash

     94,102        8,272   

Tenant receivables, net

     5,772        5,794   

Lease intangibles, net

     110,068        123,373   

Deferred rent receivable

     10,376        11,479   

Other assets

     20,404        32,081   

Real estate held for sale, net of accumulated depreciation

     27,295        —     

Investment in unconsolidated entities

     6,671        6,689   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,646,878      $ 1,647,137   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL:

    

Liabilities:

    

Mortgages payable, net

   $ 192,956      $ 192,748   

Notes payable

     199,000        238,000   

Unsecured notes

     398,791        398,758   

Accounts payable and other liabilities

     37,920        34,338   

Liabilities of real estate held for sale

     2,207        —     

Lease intangibles, net

     37,439        42,470   

Distributions payable

     13,580        12,857   
  

 

 

   

 

 

 

Total liabilities(2)

     881,893        919,171   

Commitments and contingencies

    

Capital:

    

Partners’ capital:

    

Preferred OP units, 50,000,000 units authorized

    

7.0% Series A cumulative convertible perpetual preferred units, $29,524 liquidation preference ($25.00 per unit), 1,180,975 units issued and outstanding at March 31, 2015 and December 31, 2014

     28,168        28,168   

8.125% Series B cumulative redeemable preferred units, $92,000 liquidation preference ($25.00 per unit), 3,680,000 units issued and outstanding at March 31, 2015 and December 31, 2014, respectively

     88,720        88,720   

Limited partners’ capital, 1,019,523 common OP units issued and outstanding at March 31, 2015 and December 31, 2014

     1,533        1,428   

General partner’s capital, 63,403,152 and 61,113,372 common OP units issued and outstanding at March 31, 2015 and December 31, 2014

     644,128        606,982   

Accumulated other comprehensive gain

     —          171  
  

 

 

   

 

 

 

Total partners’ capital

     762,549        725,469   

Non-controlling interests

     2,436        2,497   
  

 

 

   

 

 

 

Total capital

     764,985        727,966   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 1,646,878      $ 1,647,137   
  

 

 

   

 

 

 

  

 

(1) 

Excel Trust, L.P.’s consolidated total assets at March 31, 2015 and December 31, 2014 include $40,302 and $39,783, respectively, of assets (primarily real estate assets) of two VIEs that can only be used to settle the liabilities of those VIEs.

(2) 

Excel Trust, L.P.’s consolidated total liabilities at March 31, 2015 and December 31, 2014 include $968 and $823 of accounts payable and other liabilities, 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  
     March 31, 2015     March 31, 2014  

Revenues:

    

Rental revenue

   $ 31,976      $ 24,908   

Tenant recoveries

     7,443        5,256   

Other income

     1,072        434   
  

 

 

   

 

 

 

Total revenues

     40,491        30,598   

Expenses:

    

Maintenance and repairs

     2,987        2,223   

Real estate taxes

     4,417        3,366   

Management fees

     643        518   

Other operating expenses

     2,732        1,731   

General and administrative

     4,348        3,815   

Depreciation and amortization

     17,266        11,796   
  

 

 

   

 

 

 

Total expenses

     32,393        23,449   
  

 

 

   

 

 

 

Operating income

     8,098        7,149   

Interest expense

     (7,551     (4,989

Interest income

     50        49   

Income (loss) from equity in unconsolidated entities

     134        69   

Gain on sale of real estate assets

     19,661        —     
  

 

 

   

 

 

 

Net income

     20,392        2,278   

Net income attributable to non-controlling interests

     (90     (93
  

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

     20,302        2,185   

Preferred operating unit distributions

     (2,385     (2,744
  

 

 

   

 

 

 

Net income (loss) attributable to the unitholders

   $ 17,917      $ (559
  

 

 

   

 

 

 

Net income (loss) per unit attributable to the unitholders:

    

Basic earnings (loss) per unit

   $ 0.28      $ (0.01
  

 

 

   

 

 

 

Diluted earnings (loss) per unit

   $ 0.28      $ (0.01
  

 

 

   

 

 

 

Weighted-average common operating partnership units outstanding:

    

Basic

     63,493        48,805   
  

 

 

   

 

 

 

Diluted

     66,006        48,805   
  

 

 

   

 

 

 

Distributions declared per common operating partnership unit

   $ 0.18      $ 0.175   
  

 

 

   

 

 

 

Net income

   $ 20,392      $ 2,278   

Other comprehensive income:

    

Change in unrealized gain on investment in equity securities

     137        —     

Gain on sale of equity securities (reclassification adjustment)

     (308     —     
  

 

 

   

 

 

 

Comprehensive income

     20,221        2,278   

Comprehensive (income) loss attributable to non-controlling interests

     (90     (93
  

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, L.P.

   $ 20,131      $ 2,185   
  

 

 

   

 

 

 

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
Gain
    Total
Partners’
Capital
    Non-
controlling
Interests
    Total
Capital
 

Balance at January 1, 2015

  $ 28,168      $ 88,720        1,019,523      $ 1,428        61,113,372      $ 606,982      $ 171      $ 725,469      $ 2,497      $ 727,966   

Net proceeds from issuance of common OP units

    —          —          —          —          2,220,838        29,868        —          29,868        —          29,868   

Forfeiture of restricted common OP unit awards

    —          —          —          —          (83,195     —          —          —          —          —     

Issuance of restricted common OP unit awards

    —          —          —          —          152,137        —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          —          1,063        —          1,063        —          1,063   

OP unit distributions

    (516     (1,869     —          (184     —          (11,413     —          (13,982     (151     (14,133

Net income

    516        1,869        —          289        —          17,628        —          20,302        90        20,392   

Change in unrealized loss on investment in equity securities

    —          —          —          —          —          —          (171     (171     —          (171
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2015

  $ 28,168      $ 88,720        1,019,523      $ 1,533        63,403,152      $ 644,128      $ —        $ 762,549      $ 2,436      $ 764,985   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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
Gain
    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   

Repurchase of common OP units

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

Forfeiture of restricted common OP unit awards

    —          —          —          —          (465,864     —          —          —          —          —     

Issuance of restricted common OP unit awards

    —          —          —          —          645,460        —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          —          574        —          574        —          574   

OP unit distributions

    (875     (1,869     —          (178     —          (8,479     —          (11,401     (148     (11,549

Net income (loss)

    875        1,869        —          (10     —          (549     —          2,185        93        2,278   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2014

  $ 47,703      $ 88,720        1,019,523      $ 1,978        48,455,186      $ 477,273      $ —        $ 615,674      $ 1,606      $ 617,280   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Three Months Ended
March 31, 2015
    Three Months Ended
March 31, 2014
 

Cash flows from operating activities:

    

Net income

   $ 20,392      $ 2,278   

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

    

Depreciation and amortization

     17,266        11,796   

Gain on sale of real estate assets

     (19,661     —     

Gain on sale of equity securities

     (308     —     

(Income) loss from equity in unconsolidated entities

     (134     (69

Deferred rent receivable

     (761     (602

Amortization of above- and below-market leases

     (619     (138

Amortization of deferred balances

     509        333   

Bad debt expense

     449        206   

Share-based compensation expense

     1,063        574   

Distributions from unconsolidated entities

     202        154   

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

    

Tenant and other receivables

     (531     1,205   

Other assets

     (1,289     (1,377

Accounts payable and other liabilities

     3,086        296   
  

 

 

   

 

 

 

Net cash provided by operating activities

     19,664        14,656   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Development of property and property improvements

     (8,410     (4,921

Receipt of master lease payments

     —          36   

Capitalized leasing costs

     (297     (269

Proceeds from the sale of equity securities

     10,820        —     

Restricted cash

     (681     (388
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     1,432        (5,542
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common OP units

     29,918        —     

Repurchase of common OP units

     —          (1,407

Payments on mortgages payable

     (956     (12,557

Proceeds from mortgages payable

     1,274        —     

Payments on notes payable

     (39,000     —     

Proceeds from notes payable

     —          18,500   

Distribution to non-controlling interests

     (151     (148

Preferred OP unit distributions

     (2,386     (2,744

Common OP unit distributions

     (10,873     (8,645

Deferred financing costs

     —          (51
  

 

 

   

 

 

 

Net cash used in financing activities

     (22,174     (7,052
  

 

 

   

 

 

 

Net (decrease) increase

     (1,078     2,062   

Cash and cash equivalents, beginning of period

     6,603        3,245   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 5,525      $ 5,307   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized

   $ 4,303      $ 3,396   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Disposition of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $19,661)

   $ 85,341      $ —     
  

 

 

   

 

 

 

Common OP unit distribution payable

   $ 11,596      $ 8,657   
  

 

 

   

 

 

 

Preferred OP unit distribution payable

   $ 1,984      $ 2,287   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 10,457      $ 3,971   
  

 

 

   

 

 

 

Change in unrealized gain on investment in equity securities

   $ 171      $ —     
  

 

 

   

 

 

 

Reclassification of assets to real estate held for sale

   $ 27,295      $ —     
  

 

 

   

 

 

 

Reclassification of liabilities to liabilities of real estate held for sale

   $ 2,207      $ —     
  

 

 

   

 

 

 

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 March 31, 2015, owned a 98.4% interest in the Operating Partnership. The remaining 1.6% 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, 2014. 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 three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. 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.

A variable interest holder is considered to be the primary beneficiary of a VIE if it 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.

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.

 

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Table of Contents

Restricted Cash:

Restricted cash is comprised of impound reserve accounts for property taxes, insurance, capital improvements and tenant improvements. The balance at March 31, 2015 also includes approximately $85.6 million of net proceeds from the disposition of the Family Center at Orem property on January 30, 2015 and the Promenade Corporate Center property on March 11, 2015 (see Note 13). The dispositions were classified as exchanges pursuant to section 1031 of the Internal Revenue Code of 1986, as amended (the “Code”); therefore, the funds are restricted as to their usage. The Company currently expects to utilize the funds to provide for a portion of the purchase price for the acquisition of a retail center property located in Turlock, California (see Note 3).

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities are deferred rents in the amount of $2.7 million and $3.0 million at March 31, 2015 and December 31, 2014, respectively.

Revenue Recognition:

The Company commences revenue recognition on its leases based on a number of factors. In most cases, revenue recognition under a lease begins when the lessee takes possession of or controls the physical use of the leased asset. Generally, this occurs on the lease commencement date. In determining what constitutes the leased asset, the Company evaluates whether the Company or the lessee is the owner, for accounting purposes, of the tenant improvements. If the Company is the owner, for accounting purposes, of the tenant improvements, then the leased asset is the finished space and revenue recognition begins when the lessee takes possession of the finished space, typically when the improvements are substantially complete. If the Company concludes that it is not the owner, for accounting purposes, of the tenant improvements (the lessee is the owner), then the leased asset is the unimproved space and any 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 $761,000 and $602,000 in the three months ended March 31, 2015 and 2014, respectively, due to the straight-line rent adjustment. Percentage rent is recognized after tenant sales have exceeded defined thresholds (if applicable) and was $263,000 and $215,000 in the three months ended March 31, 2015 and 2014, 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.

The Company has agreed to provide the developer/manager for development projects at the Plaza at Rockwall, Southlake Park Village, Cedar Square and Chimney Rock properties with a profit participation interest based on a percentage interest in the positive cash flows of the completed project after the Company has received distributions returning all of its capital investment plus a required rate of return (ranging from an 8% to 12% annualized rate of return). The Company initially records the profit participation interests at

 

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the estimated fair value of the obligation at the time of execution of the related agreement. The obligation is adjusted at each reporting date to the greater of the initial fair value at execution, or the amount that would be owed if the obligation were to be settled as of the reporting date. As of March 31, 2015, the Company has recorded $3.2 million for payments expected to be made related to the grants of these profit participation interests within construction in progress for the respective projects under development. The Company recognized a charge to earnings of approximately $327,000 related to changes in the estimated amount owed as of March 31, 2015, which is included in other operating expenses on the accompanying condensed consolidated statements of operations and comprehensive income.

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

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

 

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

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

The Company reviews long-lived assets and certain identifiable intangible assets for impairment whenever events or circumstances indicate that the carrying amount of an asset may not be recoverable. This assessment considers expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such factors include the tenants’ ability to perform their duties and pay rent under the terms of the leases. The determination of recoverability is made based upon the estimated undiscounted future net cash flows, excluding interest expense, expected to result from the long-lived asset’s use and eventual disposition. The Company’s evaluation as to whether impairment may exist, including estimates of future anticipated cash flows, are highly subjective and could differ materially from actual results in future periods. The amount of impairment loss, if any, is determined by comparing the fair value, as determined by a discounted cash flows analysis, with the carrying value of the related assets. Although the Company’s strategy is to hold its properties over a long-term period, if the strategy changes or market conditions dictate that the sale of properties at an earlier date would be preferable, 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 three months ended March 31, 2015 or for the year ended December 31, 2014.

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.

 

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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.

Investments in Equity Securities:

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

During the year ended December 31, 2014, the Company purchased approximately 436,000 shares of preferred stock in public companies within the real estate industry for an initial cost basis of approximately $10.5 million. During the three months ended March 31, 2015, the Company sold all of its investments in equity securities based on a specific identification of the shares sold. The sales resulted in net proceeds of approximately $10.8 million and the recognition of a gain on sale of approximately $308,000, which is included in other income in the accompanying condensed consolidated statements of operations and comprehensive income.

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

 

     March 31,
2015
     December 31,
2014
 

Equity securities, initial cost basis

   $ —        $ 10,512   

Gross unrealized gains

     —          185   

Gross unrealized losses

     —          (14
  

 

 

    

 

 

 

Equity securities, fair value(1)

   $ —        $ 10,683   
  

 

 

    

 

 

 

 

(1) 

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

Share-Based Payments:

All share-based payments to employees are recognized in earnings based on their fair value on the date of grant. Through March 31, 2015, 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.

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.

 

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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 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 March 31, 2015 and December 31, 2014, the Company had $936,000 and $521,000, 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 March 31, 2015 and 2014, $449,000, and $206,000, 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.

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.

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 months ended March 31, 2015 and 2014, no tenant accounted for more than 10% of revenues.

At March 31, 2015, the Company’s gross real estate assets in the states of California, Florida, Arizona, Virginia, Texas and Utah represented approximately 24.4%, 14.0%, 13.1%, 12.4%, 12.0% and 10.2%, respectively, of the Company’s total assets. At December 31, 2014, the Company’s gross real estate assets in the states of California, Florida, Arizona, Virginia, Texas and Utah represented approximately 23.8%, 14.2%, 12.5%, 12.4%, 11.7% and 11.4% of the Company’s total assets, respectively. For the three months ended March 31, 2015, the Company’s revenues derived from properties located in the states of California, Arizona, Florida, Texas and Utah represented approximately 20.8%, 16.4%, 14.3%, 11.6% and 10.5%, respectively, of the Company’s total revenues. For the three months ended March 31, 2014, the Company’s revenues derived from properties located in the states of California, Arizona, Texas and Virginia represented approximately 27.7%, 19.2%, 15.9% and 13.1%, respectively, of the Company’s total revenues.

 

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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. 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.

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

Derivative Instruments:

The Company is exposed to certain 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.

 

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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.

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 three months ended March 31, 2015 and 2014 (dollars in thousands):

 

     Parent Company      Operating Partnership  
     Three Months Ended      Three Months Ended  
     March 31,
2015
     March 31,
2014
     March 31,
2015
     March 31,
2014
 

Balance – January 1

   $ 168       $ —        $ 171       $ —    

Unrealized gain on investment in equity securities:

           

Amount reclassified and recognized in net income(1)

     (171      —          (171      —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Net change in other comprehensive income (loss)

     (3      —          —          —    

Total other comprehensive loss allocable to non-controlling interests

     3         —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Balance – March 31

   $ —        $ —        $ —        $ —    
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Amounts reclassified from unrealized gain on investment in equity securities are included in other income in the condensed consolidated statements of operations ($171,000 was recognized as part of the overall gain realized from the liquidation of the Company’s investments for the three months ended March 31, 2015 – see discussion of changes in investments in equity securities above).

Recent Accounting Pronouncements:

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. In April 2015, the FASB proposed deferring the effective date of ASU 2014-09 by one year to December 15, 2017 for annual reporting periods beginning after that date. The FASB also proposed permitting early adoption of the standard, but not before the original effective date of December 15, 2016. The Company is currently assessing the impact, if any, of the adoption of ASU 2014-09 on its consolidated financial position and results of operations.

 

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In February 2015, the FASB issued ASC 2015-02, Consolidation – Amendment to the Consolidation Analysis (“ASU 2015-2”). This standard (1) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (2) eliminates the presumption that a general partner should consolidate a limited partnership, (3) affects the consolidation analysis of reporting entities that are involved in VIEs, particularly those that have fee arrangements and related party relationships and (4) provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements similar to those in Rule 2a-7 under the Investment Company Act of 1940. The standard is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2015-02 on its consolidated financial position.

In April 2015, the FASB issued ASU No. 2015-03, Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). This standard amends existing guidance to require the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge. It is effective for annual reporting periods beginning after December 15, 2015, but early adoption is permitted. The Company is currently assessing the impact of the adoption of ASU 2015-03 on its consolidated financial position.

3. Acquisitions:

During the fourth quarter of 2014, the Company acquired the Riverpoint Marketplace and Highland Reserve properties and recorded preliminary allocations of the purchase prices to the assets acquired and liabilities assumed based on provisional measurements of fair value. During the three months ended March 31, 2015, the Company finalized the allocations of the purchase prices and made certain measurement period adjustments. The adjustments did not have a significant impact on the Company’s consolidated financial statements. Therefore, the adjustments were not retrospectively applied to the consolidated financial statements contained herein. The following table summarizes the preliminary allocations of the purchase prices of these properties as recorded as of December 31, 2014 and the finalized allocations as adjusted as of March 31, 2015 (dollars in thousands):

 

     Original Purchase
Price Allocations
     Adjustments      Final Purchase
Price Allocations
 

Land

   $ 16,450       $ (240    $ 16,210   

Building

     75,199         (576      74,623   

Above-Market Leases

     962         (6      956   

Below-Market Leases

     (5,927      1,918         (4,009

In-Place Leases

     9,636         (1,096      8,540   
  

 

 

    

 

 

    

 

 

 

Total Purchase Price

   $ 96,320       $ —        $ 96,320   
  

 

 

    

 

 

    

 

 

 

In March 2015, the Company entered into a purchase agreement to acquire a retail property, located in Turlock, California for approximately $129.0 million. The property comprises approximately 410,000 square feet of gross leasable area (“GLA”). The acquisition of this property is expected to close during the second quarter of 2015, but is subject to due diligence and other customary closing conditions. There can be no assurances that due diligence or other 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 March 31, 2015 and December 31, 2014:

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

In-place leases, net of accumulated amortization of $30.2 million and $31.1 million as of March 31, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 75 and 74 months as of March 31, 2015 and December 31, 2014, respectively)

   $ 68,910       $ 78,336   

Above-market leases, net of accumulated amortization of $8.5 million and $8.8 million as of March 31, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 71 and 69 months as of March 31, 2015 and December 31, 2014, respectively)

     15,319         16,436   

Leasing commissions, net of accumulated amortization of $8.7 million as of March 31, 2015 and December 31, 2014 (with a weighted-average remaining life of 92 and 93 months as of March 31, 2015 and December 31, 2014, respectively)

     25,839         28,601   
  

 

 

    

 

 

 
   $     110,068       $ 123,373   
  

 

 

    

 

 

 

 

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Estimated amortization of lease intangible assets as of March 31, 2015 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining nine months)

   $ 19,012   

2016

     19,025   

2017

     15,904   

2018

     13,397   

2019

     10,311   

Thereafter

     32,419   
  

 

 

 

Total

   $ 110,068   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended March 31, 2015 and 2014 was $8.4 million and $5.3 million, respectively. Included in these amounts are $1.1 million and $1.0 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 March 31, 2015 and December 31, 2014:

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Below-market leases, net of accumulated amortization of $11.0 million as of March 31, 2015 and December 31, 2014 (with a weighted-average remaining life of 107 and 116 months as of March 31, 2015 and December 31, 2014, respectively)

   $     37,439       $ 42,470   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended March 31, 2015 and 2014 was $1.7 million and $1.1 million, respectively. These amounts were recorded as rental revenue in the Company’s condensed consolidated statements of operations.

Estimated amortization of lease intangible liabilities as of March 31, 2015 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining nine months)

   $ 4,344   

2016

     5,075   

2017

     4,708   

2018

     4,297   

2019

     3,785   

Thereafter

     15,230   
  

 

 

 

Total

   $ 37,439   
  

 

 

 

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 GLA located in Dothan, Alabama.

Also included within the condensed consolidated financial statements is the 80% owned joint venture with West Broad Marketplace, 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 are expected to principally consist of owning and developing a vacant land parcel and then operating a retail shopping center expected to contain approximately 405,000 square feet of GLA upon completion, located in Richmond, Virginia.

 

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As of March 31, 2015 and December 31, 2014, the combined total carrying amount of assets of the Company’s VIEs was approximately $40.3 million and $39.8 million, respectively, which includes approximately $38.3 million and $37.1 million, respectively, of real estate assets at the end of each period. As of March 31, 2015 and December 31, 2014, the total carrying amount of liabilities was approximately $38.6 million and $37.9 million, respectively.

7. 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 March 31, 2015 and December 31, 2014 consist of the following (dollars in thousands):

 

     Carrying Amount of
Mortgage Notes
     Contractual
Interest Rate
(March 31, 2015)
    Effective
Interest Rate
(March 31, 2015)
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   March 31,
2015
     December 31,
2014
           

The Promenade

   $ 45,645       $ 46,125         4.80     4.80     344         November 2015   

5000 South Hulen

     13,110         13,174         5.60     6.90     83         April 2017   

Lake Pleasant Pavilion

     27,418         27,513         6.09     5.00     143         October 2017   

West Broad Marketplace(2)

     3,045         1,772         2.49     2.49     2         January 2018   

Rite Aid — Vestavia Hills

     785         833         7.25     7.25     21         October 2018   

Living Spaces-Promenade

     6,667         6,667         7.88     4.59     80         November 2019   

West Broad Village

     39,700         39,700         3.33     3.33     110         May 2020   

Downtown at the Gardens

     42,276         42,545         4.60     4.00     253         July 2022   

Northside Mall(3)

     12,000         12,000         0.03     1.03     1         November 2035   
  

 

 

    

 

 

           
     190,646         190,329             

Plus: premium(4)

     2,310         2,419             
  

 

 

    

 

 

           

Mortgage notes payable, net

   $ 192,956       $ 192,748             
  

 

 

    

 

 

           

 

(1) 

Amount represents the monthly payment of principal and interest at March 31, 2015.

 

(2) 

In December 2014, the Company entered into a $58.0 million construction loan in connection with its acquisition of a developable land parcel at the West Broad Marketplace property. The maturity date of the construction loan is January 2018, but may be extended for two additional one-year periods through January 2020 upon the payment of an extension fee. The construction loan bears interest at the rate of LIBOR plus a margin of 230 basis points (interest rate of 2.49% at both March 31, 2015 and December 31, 2014).

 

(3) 

The debt represents redevelopment revenue bonds to be used for the redevelopment of this property, which mature in November 2035. Interest is reset weekly and determined by the bond remarketing agent based on the market value of the bonds (interest rate of 0.03% at March 31, 2015 and 0.05% at December 31, 2014). 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 $99,000 and $100,000 at March 31, 2015 and December 31, 2014, respectively, is being amortized as additional interest expense through November 2035.

 

(4) 

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

Total interest cost capitalized for the three months ended March 31, 2015 and 2014 was $265,000 and $195,000, respectively.

 

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The Company’s mortgage debt maturities at March 31, 2015 for each of the next five years and thereafter are as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining nine months)

   $ 47,650   

2016

     3,070   

2017

     42,192   

2018

     5,995   

2019

     6,390   

Thereafter

     85,349   
  

 

 

 
   $ 190,646   
  

 

 

 

Term Loan

The Operating Partnership’s term loan agreement (the “Term Loan”) entered into in December 2014 has a borrowing capacity of up to $50.0 million. The Term Loan bears interest at the rate of LIBOR plus a margin of 115 basis points and has an initial maturity date of June 30, 2015, which may be extended for an additional five months at the Operating Partnership’s option and upon the payment of an extension fee. Outstanding borrowings may be prepaid by the Operating Partnership in whole or in part at any time prior to the maturity date with three days prior notice. Under the Term Loan, the Operating Partnership is subject to the same covenants as those required under the Company’s unsecured revolving credit facility (as noted below). Borrowings under the Term Loan were $50.0 million (included in the balance of notes payable in the accompanying condensed consolidated balance sheets) at both March 31, 2015 and December 31, 2014, with an interest rate of 1.33% and 1.32% at March 31, 2015 and December 31, 2014, respectively. At March 31, 2015, the Operating Partnership believes that it was in compliance with all financial covenants in the Term Loan.

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 nine months at the Operating Partnership’s option. The Operating Partnership is subject to covenants requiring, among other things, the maintenance of (1) maximum leverage ratios on unsecured, secured and overall debt and (2) minimum fixed coverage ratios. At March 31, 2015, the Operating Partnership believes that it was in compliance with all financial covenants in the credit agreement.

As of March 31, 2015, the unsecured revolving credit facility bore interest at the rate of LIBOR plus a margin of 90 to 170 basis points (margin of 130 basis point at March 31, 2015), depending on the Parent Company’s credit rating. As of March 31, 2015, the Operating Partnership was responsible for paying a fee of 0.25% or 0.30% on the full capacity of the facility. Borrowings under the unsecured revolving credit facility were $199.0 million and $238.0 million with a weighted-average interest rate of 1.48% and 1.47% at March 31, 2015 and December 31, 2014, 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 March 31, 2015, there was approximately $84.1 million available for borrowing under the unsecured revolving credit facility.

Unsecured Notes

Unsecured Senior Notes due 2020 and 2023

As of March 31, 2015, 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.

 

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Unsecured Senior Notes due 2024

As of March 31, 2015, the Operating Partnership had outstanding $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 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.

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 carrying value of the Notes due 2024 as of March 31, 2015 and December 31, 2014 was as follows (in thousands):

 

     March 31,
2015
     December 31,
2014
 
     (in thousands)  

Principal amount

   $ 250,000       $ 250,000   

Unamortized debt discount

     (1,209      (1,242
  

 

 

    

 

 

 
   $ 248,791       $ 248,758   
  

 

 

    

 

 

 

Certain of the instruments evidencing the above-described indebtedness of the Operating Partnership contain certain covenants that, among other things, limit the Company’s ability to consummate a merger (including, in some cases, the Mergers described below in Note 19), consolidation or sale of all or substantially all of its assets or incur additional indebtedness.

8. 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 months ended March 31, 2015 does not include 1,019,523 OP units, as the effect of including these equity securities was anti-dilutive to net income attributable to the common stockholders. The calculation of diluted earnings per share for the three months ended March 31, 2014 does not include 225,675 shares of unvested restricted common stock or 1,019,523 OP units, as the effect of including these equity securities was anti-dilutive to net loss attributable to the common stockholders. In addition, 3,367,200 shares of common stock, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (“Series A preferred stock”) for the three months ended March 31, 2014, respectively, 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 months ended March 31, 2015 and 2014 (in thousands, except share data) were as follows:

 

     Three Months Ended  
     March 31,
2015
     March 31,
2014
 

Basic earnings per share:

     

Net income (loss) attributable to the common stockholders

   $ 17,628       $ (549

Allocation to participating securities

     (131      (132
  

 

 

    

 

 

 

Income (loss) applicable to the common stockholders

   $ 17,497       $ (681
  

 

 

    

 

 

 

Diluted earnings per share:

     

Income (loss) applicable to the common stockholders

   $ 17,497       $ (681

Series A preferred stock dividend

     516         —     

Allocation to participating securities

     131         —     
  

 

 

    

 

 

 

Income (loss) available to the common stockholders

   $ 18,144       $ (681
  

 

 

    

 

 

 

Weighted-average common shares outstanding:

     

Basic

     62,473,343         47,785,100   

Common stock issuable upon conversion of the Series A preferred stock

     2,010,735         —     

Restricted common stock

     502,476         —     
  

 

 

    

 

 

 

Diluted

     64,986,554         47,785,100   
  

 

 

    

 

 

 

Basic and diluted earnings per share:

     

Net income (loss) share available to the common stockholders - basic

   $ 0.28       $ (0.01
  

 

 

    

 

 

 

Net income (loss) share available to the common stockholders - diluted

   $ 0.28       $ (0.01
  

 

 

    

 

 

 

9. 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 months ended March 31, 2014 does not include 225,675 unvested restricted OP units 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, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Units (“Series A preferred units”) for the three months ended March 31, 2015 and 2014, respectively, 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 months ended March 31, 2015 and 2014 (in thousands, except unit data) were as follows:

 

     Three Months Ended  
     March 31,
2015
     March 31,
2014
 

Basic earnings per unit:

     

Net income (loss) attributable to the unitholders

   $ 17,917       $ (559

Allocation to participating securities

     (131      (132
  

 

 

    

 

 

 

Income (loss) applicable to the unitholders

   $ 17,786       $ (691
  

 

 

    

 

 

 

Diluted earnings per unit:

     

Income (loss) applicable to the unitholders

   $ 17,786       $ (691

Series A preferred unit dividend

     516         —     

Allocation to participating securities

     131         —     
  

 

 

    

 

 

 

Income (loss) available to the unitholders

   $ 18,433       $ (691
  

 

 

    

 

 

 

Weighted-average common OP units outstanding:

     

Basic

     63,492,866         48,804,623   

OP units issuable upon conversion of the Series A preferred units

     2,010,735         —     

Restricted OP units

     502,476         —     
  

 

 

    

 

 

 

Diluted

     66,006,077         48,804,623   
  

 

 

    

 

 

 

Basic and diluted earnings per share:

     

Net income (loss) per unit available to the unitholders - basic

   $ 0.28       $ (0.01
  

 

 

    

 

 

 

Net income (loss) per unit available to the unitholders - diluted

   $ 0.28       $ (0.01
  

 

 

    

 

 

 

10. Equity of the Parent Company

The Parent Company has issued restricted stock awards to senior executives, directors and employees totaling 1,393,451 shares of common stock (net of forfeitures and unvested awards of 576,059 shares), which are included in the total shares of common stock outstanding as of March 31, 2015.

As of March 31, 2015, the Parent Company had outstanding 1,180,975 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 March 27, 2015 (the ex-dividend date), the conversion rate was adjusted to 1.7041 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 March 31, 2015, 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. Since April 1, 2014, the Parent Company has had the option to convert some or all of the Series A preferred stock into common 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 March 31, 2015, 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

 

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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.

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). During the three months ended March 31, 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. No stock was repurchased during the three months ended March 31, 2015. As of March 31, 2015, approximately $20.9 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 permit the Parent Company to issue and sell shares of its common stock 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 three months ended March 31, 2014, the Parent Company did not issue any shares pursuant to the Equity Distribution Agreements. During the three months ended March 31, 2015, the Parent Company issued 2,227,456 shares of common stock pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $30.2 million at an average stock issuance price of $13.75 per share. The net proceeds of $30.2 million were contributed to the Operating Partnership in exchange for 2,227,456 OP units. As of March 31, 2015, approximately $64.4 million remained available under the Equity Distribution Agreements to issue and sell shares of the Parent Company’s common stock.

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. 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 March 31, 2015, the Parent Company accrued for a dividend of $11.4 million payable to the common stockholders of record, a dividend of $2.4 million payable to the preferred stockholders of record and a distribution of $184,000 payable to the holders of OP units of record as of March 31, 2015, each of which was paid in April 2015.

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 1,456,549 shares of common stock remained available for issuance as of March 31, 2015).

 

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The following shares of restricted common stock were issued during the three months ended March 31, 2015:

 

Grant Date

   Price at Grant
Date
     Number      Vesting
Period (yrs.)
 

January 14, 2015(1)

   $ 13.90         122,862         1, 3   

February 9, 2015(2)

   $ 13.81         24,275         1, 3   

March 3, 2015(3)

   $ 13.79         5,000         3   

 

(1) 

Shares issued to senior management and other employees of the Company. A portion of the stock grants (102,962 shares of restricted common stock) vest over a one-year period and 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, 2015 based on the achievement of the Company’s objectives during the year ended December 31, 2015. The remaining stock grants (19,900 shares of restricted common stock) vest in equal annual installments on December 31, 2015, 2016 and 2017 and include service conditions.

 

(2) 

Shares issued to certain of the Company’s employees. A portion of the stock grants (4,575 shares of restricted common stock) vested immediately upon grant and a portion (11,000 shares of restricted common stock) vest over a one-year period and include performance or service conditions. The remaining stock grants (8,700 shares of restricted common stock) vest in equal annual installments on December 31, 2015, 2016 and 2017 and include service conditions.

 

(3) 

Shares issued to certain of the Company’s employees. These shares vest in equal annual installments on December 31, 2015, 2016 and 2017.

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 months ended March 31, 2015 and 2014 of $1.1 million and $574,000, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has estimated $0 in forfeitures for all periods presented. Stock compensation expense is included in general and administrative expense in the accompanying condensed consolidated statements of operations.

As of March 31, 2015 and December 31, 2014, there was approximately $5.3 million and $5.1 million, respectively; of total unrecognized compensation expense related to the non-vested shares of the Parent Company’s restricted common stock. As of March 31, 2015 and December 31, 2014, this expense was expected to be recognized over a weighted-average remaining period of 1.4 and 1.8 years, respectively.

 

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

Balance - January 1, 2015

     427,580       $ 12.78   

Grants

     152,137       $ 13.88   

Forfeitures/Expirations(1)

     (83,195    $ 12.96   

Vested

     (28,541    $ 12.43   
  

 

 

    

 

 

 

Balance - March 31, 2015

     467,981       $ 13.10   
  

 

 

    

 

 

 

 

(1) 

During the three months ended March 31, 2015, 6,618 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 common shares or common operating partnership units issued during each period presented.

Profit Participation Interests

Agreements to provide profit participation interests related to development projects at certain properties are treated as stock-based compensation awards granted to a non-employee, which are classified as liabilities. The liability awards are carried at the greater of the grant date fair value or the estimated amount that would be owed if the obligation were to be settled as of the reporting date. There were no new profit participation interests awards granted during the three months ended March 31, 2015. The current estimated settlement values for each of the profit participation interests are based on discounted cash flow models for each of the individual development projects subject to the awards. The critical assumptions utilized in those models at March 31, 2015 were the discount rates

 

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(ranging from 14.1% to 14.6%) and terminal capitalization rates (ranging from 7.85% to 8.25%). Other relevant assumptions in the models included estimates of remaining costs to complete construction and rental rate and lease-up assumptions. At March 31, 2015, obligations related to profit participation interests in the amount of approximately $3.2 million are included in other liabilities in the accompanying condensed consolidated balance sheets.

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 December 31, 2014. Costs related to the matching portion of the plan for the three months ended March 31, 2015 and 2014 were approximately $45,000 and $39,000, respectively.

11. Equity of the Operating Partnership

As of March 31, 2015, the Operating Partnership had outstanding 64,422,675 OP units. The Parent Company owned 98.4% of the partnership interests in the Operating Partnership at March 31, 2015, 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.

As of March 31, 2015, the Operating Partnership had outstanding 1,180,975 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).

During the three months ended March 31, 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 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 three months ended March 31, 2015.

During the year ended December 31, 2014, the Operating Partnership did not issue any OP units to the Parent Company in connection with the Equity Distribution Agreements. During the three months ended March 31, 2015, the Operating Partnership issued 2,227,456 OP units to the Parent Company in exchange for net proceeds of approximately $30.2 million in connection with the Equity Distribution Agreements.

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.

 

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The following table shows the vested partnership interests in the Operating Partnership as of March 31, 2015 and December 31, 2014:

 

     March 31, 2015     December 31, 2014  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     62,935,171         98.4     60,685,792         98.3

Non-controlling interests consisting of:

          

OP units held by employees and third parties

     1,019,523         1.6     1,019,523         1.7
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     63,954,694         100.0     61,705,315         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

12. Investment in Unconsolidated Entities

The Company 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 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 Bay Hill property as of March 31, 2015 is as follows:

 

Unconsolidated Investment

   Partner      Ownership Interest     Formation/
Acquisition Date
   Property

Bay Hill(1)

     MDC         50   October 19, 2012    The Fountains at Bay Hill

 

(1) 

At March 31, 2015, Bay Hill had real estate assets of $36.2 million, total assets of $39.2 million, mortgages payable of $23.8 million and total liabilities of $25.7 million. At December 31, 2014, Bay Hill had real estate assets of $36.4 million, total assets of $39.4 million, mortgages payable of $24.0 million and total liabilities of $25.8 million. Total revenues were $905,000, total expenses were $637,000 (including interest expense) and net income was $268,000 for the three months ended March 31, 2015. Total revenues were $964,000, total expenses were $721,000 (including interest expense) and net income was $244,000 for the three months ended March 31, 2014. The outstanding mortgage note was refinanced in October 2014 with a notional amount of $24.0 million, which bears interest at a fixed rate of 3.75%. The new mortgage note has a maturity date of December 1, 2021.

13. Property Dispositions and Property Held for Sale

On January 30, 2015, the Company completed the disposition of The Family Center at Orem property (part of the retail properties reporting segment) for a sales price of approximately $21.5 million, excluding closing costs. On March 11, 2015, the Company completed the disposition of its Promenade Corporate Center property (part of the office properties reporting segment) for a sales price of approximately $65.0 million, excluding closing costs. As a result of these sales, the Company recognized a gain on sale of real estate assets of approximately $19.7 million, which is reflected in the accompanying condensed consolidated statements of operations and comprehensive income as gain on sale of real estate assets.

The Promenade Corporate Center property did not represent a significant portion of the Company’s operating portfolio of properties, but it constituted a significant portion of the office properties reporting segment – comprising approximately 98.2% and 58.5% of the net income generated by that reporting segment for the three months ended March 31, 2015 and 2014 (the primary reason for the increase in the Promenade Corporate Center property’s proportionate share of net income for the segment was the recognition of a gain on sale of approximately $15.2 million for the three months ended March 31, 2015).

The results of operations for the Promenade Corporate Center property (partial period for the three months ended March 31, 2015) were as follows (dollars in thousands):

 

     Three Months
Ended

March 31,
 
     2015      2014  

Total revenues

   $ 1,129       $ 1,389   

Property operating expenses

     (533      (672
  

 

 

    

 

 

 

Property net operating income

     596        717   

 

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     Three Months
Ended

March 31,
 
     2015      2014  

General and administrative

     (7      (3

Depreciation and amortization

     (356      (583

Gain on sale of real estate assets

     15,198         —     
  

 

 

    

 

 

 

Net income

   $ 15,431       $ 131   
  

 

 

    

 

 

 

As of March 31, 2015, the Company had executed agreements for the sale of two of its retail properties (part of the retail properties reporting segment), the Rosewick Crossing property (located in La Plata, Maryland) and the Cedar Square property (located in Duncanville, Texas) for a combined sales price of approximately $33.5 million (the sale of the Rosewick Crossing property was completed subsequent to quarter-end – see Note 19). As a result, the properties have been classified as held for sale on the accompanying condensed consolidated balance sheets.

The major classes of assets and liabilities of the properties classified as held for sale as of March 31, 2015 were as follows (dollars in thousands):

 

     March 31,
2015
 

Real estate held for sale:

  

Land

   $ 12,310   

Buildings

     10,025   

Site/Tenant improvements

     3,428   

Accumulated depreciation

     (2,100
  

 

 

 

Property, net

     23,663   

Restricted cash

     192   

Tenant receivables, net

     73   

Lease intangibles, net

     1,839   

Deferred rent receivable

     492   

Other assets

     1,036   
  

 

 

 

Real estate held for sale, net of accumulated depreciation

   $ 27,295   
  

 

 

 

Liabilities of real estate held for sale:

  

Accounts payable and other liabilities

   $ 1,400   

Lease intangibles, net

     807   
  

 

 

 

Liabilities of real estate held for sale

   $ 2,207   
  

 

 

 

The sales of The Family Center at Orem and Promenade Corporate Center properties during the three months ended March 31, 2015 and the classification of the Rosewick Crossing and Cedar Square properties as held for sale as of March 31, 2015 did not meet the criteria for classification as discontinued operations as these properties did not individually or collectively constitute a significant component of the Company or represent a strategic shift that would have a major impact on the Company’s operations and financial results.

14. Related Party Transactions

Subsequent to the Parent Company’s initial public offering, many of the employees of Excel Realty Holdings, LLC (“ERH”) became employees of the Company. ERH reimburses the Company for estimated time the Company employees spend on ERH related matters. For the three months ended March 31, 2015 and 2014, approximately $96,000 and $76,000, respectively, was reimbursed to the Company from ERH and included in other income in the accompanying condensed consolidated statements of operations.

15. 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

 

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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 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.

16. 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.

On April 22, 2015, a purported class action was filed in the Superior Court of the State of California, County of San Diego, against the Company, the Operating Partnership, Blackstone, BRE Retail Centers Holdings LP, BRE Retail Centers Corp, BRE Retail Centers LP and the members of our board of directors alleging, among other things, that the directors breached their fiduciary duties to the stockholders of the company in connection with the proposed Mergers. In addition, the lawsuit alleges that the Company, the Operating Partnership, Blackstone, BRE Retail Centers Holdings LP, BRE Retail Centers Corp and BRE Retail Centers LP aided and abetted the purported breaches of fiduciary duty. The complaint seeks, among other things, to enjoin the completion of the Mergers.

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, West Broad Marketplace and Southlake Park Village).

17. 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.

 

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The following table reflects the fair values of the Company’s financial assets and liabilities that were required to be measured at fair value on a recurring basis at March 31, 2014 (dollars in thousands):

 

    Balance at
March 31, 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

  $ 471      $ —        $ —        $ 471   

 

(1) Amount reflected the fair value of funds expected to be received as of March 31, 2014 pursuant to master lease agreements executed in connection with the Promenade Corporate Center acquisition. The Company 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 was 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 occurred. The remaining balance was fully collected during 2014 and no balance remained as of March 31, 2015.

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 March 31, 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

     (36
  

 

 

 

Ending balance, March 31, 2014

   $ 471   
  

 

 

 

 

(1) 

The change of $36,000 for other assets related to business combinations during the three months ended March 31, 2014 was comprised of cash payments received on the master lease asset.

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 three months ended March 31, 2015 and 2014.

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

The fair values of certain additional financial assets and liabilities at March 31, 2015 and December 31, 2014 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (dollars in thousands):

 

     March 31, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial liabilities:

           

Mortgage notes payable

   $ 192,956       $ 197,080       $ 192,748       $ 195,729   

Notes payable

     199,000         197,395         238,000         235,940   

Unsecured notes

     348,791         365,764         348,758         353,662   

Term loan

     50,000         50,000         50,000         50,000   

 

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18. 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.

The following tables reconcile the Company’s segment activity to its consolidated results of operations and financial position for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

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     For the Three Months Ended  
     March 31,
2015
    March 31,
2014
 

Office Properties:

    

Total revenues

   $ 1,901      $ 2,161   

Property operating expenses

     (717     (853
  

 

 

   

 

 

 

Property operating income, as defined

     1,184        1,308   

General and administrative costs

     (18     (5

Depreciation and amortization

     (656     (892

Interest expense

     —          (187

Gain on sale of real estate assets

     15,198        —     
  

 

 

   

 

 

 

Net income

   $ 15,708      $ 224   
  

 

 

   

 

 

 

Multi-family Properties:

    

Total revenues

   $ 1,350      $ 1,401   

Property operating expenses

     (462     (453 )
  

 

 

   

 

 

 

Property operating income, as defined

     888        948   

General and administrative costs

     (14     (14 )

Depreciation and amortization

     (463     (463 )
  

 

 

   

 

 

 

Net income

   $ 411      $ 471   
  

 

 

   

 

 

 

Retail Properties:

    

Total revenues

   $ 37,240      $ 27,036   

Property operating expenses

     (9,600     (6,532
  

 

 

   

 

 

 

Property operating income, as defined

     27,640        20,504   

General and administrative costs

     (4,316     (3,796

Depreciation and amortization

     (16,147     (10,441

Interest expense

     (7,551     (4,802

Interest income

     50        49   

Income (loss) from equity in unconsolidated entities

     134        69   

Gain on sale of real estate assets

     4,463        —     
  

 

 

   

 

 

 

Net income

   $ 4,273      $ 1,583   
  

 

 

   

 

 

 

Total Reportable Segments:

    

Total revenues

   $ 40,491      $ 30,598   

Property operating expenses

     (10,779     (7,838
  

 

 

   

 

 

 

Property operating income, as defined

     29,712        22,760   

General and administrative costs

     (4,348     (3,815

Depreciation and amortization

     (17,266     (11,796

Interest expense

     (7,551     (4,989

Interest income

     50        49   

Income (loss) from equity in unconsolidated entities

     134        69   

Gain on sale of real estate assets

     19,661        —     
  

 

 

   

 

 

 

Net income

   $ 20,392      $ 2,278   
  

 

 

   

 

 

 

Reconciliation to Consolidated Net Income Attributable to the Common Stockholders (Parent Company):

    

Total net income for reportable segments

   $ 20,392      $ 2,278   

Net income attributable to non-controlling interests

     (379 )     (83
  

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

   $ 20,013      $ 2,195   
  

 

 

   

 

 

 

Reconciliation to Consolidated Net Income Attributable to the Unitholders (Operating Partnership):

    

Total net income for reportable segments

   $ 20,392      $ 2,278   

Net income attributable to non-controlling interests

     (90     (93
  

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

   $ 20,302      $ 2,185   
  

 

 

   

 

 

 

 

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     March 31,      December 31,  
     2015      2014  

Assets:

     

Office Properties:

     

Total assets

   $ 13,052       $ 62,747   

Multi-family Properties:

     

Total assets

     68,561         68,982   

Retail Properties:

     

Total assets

     1,565,265         1,515,408   
  

 

 

    

 

 

 

Total Reportable Segments & Consolidated Assets:

     

Total assets

   $ 1,646,878       $ 1,647,137   
  

 

 

    

 

 

 

19. Subsequent Events

Merger Agreement

On April 9, 2015, the Parent Company and the Operating Partnership entered into an Agreement and Plan of Merger (the “Merger Agreement”) with BRE Retail Centers Holdings LP (“BRE Retail Centers”), BRE Retail Centers Corp and BRE Retail Centers LP, which are affiliates of Blackstone Property Partners L.P. The Merger Agreement provides that, upon the terms and subject to the conditions set forth in the Merger Agreement, the Parent Company will merge with and into BRE Retail Centers Corp (the “Company Merger”), and BRE Retail Centers LP will merge with and into the Operating Partnership (the “Partnership Merger” and, together with the Company Merger, the “Mergers”). Upon completion of the Company Merger, BRE Retail Centers Corp will survive and the separate corporate existence of the Parent Company will cease. Upon completion of the Partnership Merger, the Operating Partnership will survive and the separate existence of BRE Retail Centers LP will cease. The Merger Agreement, the Mergers and the other transactions contemplated thereby were unanimously approved by the Parent Company’s board of directors.

Pursuant to the terms and conditions in the Merger Agreement, at the effective time of the Company Merger, each share of the Parent Company’s common stock issued and outstanding immediately prior to the effective time of the Company Merger will be converted into the right to receive an amount in cash equal to $15.85 per share, without interest (the “Merger Consideration”). The Parent Company will be permitted to pay one additional common stock dividend of $0.18 per share payable in July 2015, but, under the terms of the Merger Agreement, not for any quarter thereafter.

In addition, immediately prior to the effective time of the Company Merger, each restricted share granted under the 2010 Plan will be fully vested and non-forfeitable, and all shares of the Parent Company’s common stock represented thereby will be considered outstanding and subject to the right to receive the Merger Consideration.

At BRE Retail Centers’ request, the Parent Company will deliver a notice of fundamental change and a notice of redemption to the holders of the Series A preferred stock in accordance with the Articles Supplementary relating to the Series A preferred stock (the “Series A Articles Supplementary”). The redemption notice will state that, if a holder of the Series A preferred stock chooses not to exercise the special conversion right described in the notice of fundamental change, each share of Series A preferred stock held by such holder immediately prior to the effective time of the Company Merger will be redeemed in the Company Merger through the payment of an amount, without interest, equal to the greater of (1) the Fundamental Change Redemption Price (as defined in the Series A Articles Supplementary) and (2) the product of (x) the Merger Consideration multiplied by (y) the number of shares of the Parent Company’s common stock issuable if a holder of Series A preferred stock converted such share of Series A preferred stock at the applicable conversion rate on the fundamental change conversion date specified in the fundamental change notice.

In addition, at BRE Retail Centers’ request, the Parent Company will deliver a notice of redemption to the holders of the Series B preferred stock in accordance with the Articles Supplementary relating to the Series B preferred stock. The redemption notice will state that each share of Series B preferred stock held by such holder immediately prior to the effective time of the Company Merger will be redeemed in the Company Merger through the payment of an amount, without interest, equal to $25.00 per share plus accrued and unpaid dividends, if any, to, but not including, the date of completion of the Mergers.

At the effective time of the Partnership Merger, each common OP unit issued and outstanding immediately prior to the effective time of the Partnership Merger (other than common OP units held by the Parent Company) will be converted into, and will be cancelled in exchange for, the right to receive an amount in cash equal to the Merger Consideration, without interest; provided that, in lieu of receiving the Merger Consideration, a qualifying holder of common OP units may elect to receive one newly created 5.50% Series C Preferred Unit in the surviving partnership for each common OP unit.

 

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The Merger Agreement also contains customary representations, warranties and covenants, including, among others, covenants by the Parent Company to conduct its business in all material respects in the ordinary course of business consistent with past practice, subject to certain exceptions, during the period between the execution of the Merger Agreement and the consummation of the Mergers. The obligations of the parties to consummate the Mergers are not subject to any financing condition or the receipt of any financing by BRE Retail Centers.

The consummation of the Mergers is subject to certain customary closing conditions, including, among others, approval of the Company Merger and the Merger Agreement by the affirmative vote of a majority of the outstanding shares of the Parent Company’s common stock as of the record date for the special meeting of the Parent Company’s common stockholders and that all material approvals, authorizations and consents of any governmental authority have been obtained.

The Merger Agreement requires the Parent Company to convene a stockholders’ meeting for purposes of obtaining the approval of the holders of a majority of the outstanding shares of the Parent Company’s common stock and to prepare and file a proxy statement with the Securities and Exchange Commission with respect to such meeting as promptly as practicable after the date of the Merger Agreement, which proxy statement will contain, subject to certain exceptions, the Parent Company’s board of directors’ recommendation that the Parent Company’s stockholders vote in favor of the Company Merger.

The Parent Company has agreed not to solicit or enter into an agreement regarding an Acquisition Proposal (as defined in the Merger Agreement). However, the Parent Company may participate in discussions or negotiations with, and provide certain nonpublic information to, third parties related to any unsolicited Acquisition Proposal until 11:59 p.m., New York City time, on May 9, 2015, and thereafter, may participate in such discussions or negotiations and provide such nonpublic information, if the Parent Company’s board of directors concludes after consultation with advisors that failure to do so would be inconsistent with its legal duties and that such Acquisition Proposal constitutes, or could reasonably be expected to result in, a Superior Proposal (as defined in the Merger Agreement).

Prior to the approval of the Company Merger and the Merger Agreement by the Parent Company’s common stockholders, the Parent Company’s board of directors may in certain circumstances effect a Change in Recommendation (as defined in the Merger Agreement), subject to complying with specified notice and other conditions set forth in the Merger Agreement.

In connection with the closing of the transaction, the parties intend that the Notes due 2020 and 2023 will be repaid. The Notes due 2024 are intended to remain outstanding following the closing.

The Merger Agreement may be terminated under certain circumstances by the Parent Company, including prior to the approval of the Company Merger and the Merger Agreement by the Parent Company’s common stockholders, if, after following certain procedures and adhering to certain restrictions, the Parent Company’s board of directors has approved, and concurrently with the termination of the Merger Agreement, the Parent Company enters into, a definitive agreement providing for the implementation of a Superior Proposal. In addition, BRE Retail Centers may terminate the Merger Agreement under certain circumstances and subject to certain restrictions, including if the Parent Company’s board of directors effects a Change in Recommendation. Upon a termination of the Merger Agreement, under certain circumstances, the Parent Company will be required to pay a termination fee to BRE Retail Centers of $25 million. In certain other circumstances, BRE Retail Centers will be required to pay the Parent Company a termination fee of $250 million upon termination of the Merger Agreement.

Dispositions

On April 2, 2015, the Company completed the disposition of the Rosewick Crossing property located in La Plata, Maryland for a sales price of approximately $25.0 million, excluding closing costs.

On April 14, 2015, the Company entered into a sales agreement for the sale of the Mariner’s Point (located in St. Mary’s, Georgia), Merchant’s Central (located in Milledgeville, Georgia) and Newport Towne Center (located in Newport, Tennessee) properties for a combined sales price of approximately $17.8 million. The sale of these properties is subject to due diligence and other customary closing conditions. There can be no assurances that due diligence or other conditions will be satisfied or that the sale will close on the terms described herein, or at all.

 

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

As used herein, the terms “we,” “us,” “our” or the “Company” refer to Excel Trust, Inc., a Maryland corporation, and any of our subsidiaries, including Excel Trust, L.P., a Delaware limited partnership of which Excel Trust, Inc. is the parent company and general partner, which may be referred to herein as the “Operating Partnership.”

The following discussion should be read in conjunction with the condensed consolidated financial statements and notes thereto appearing elsewhere in this report. We make statements in this report that constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In particular, statements pertaining to our capital resources, portfolio performance and results of operations contain forward-looking statements. Forward-looking statements involve numerous risks and uncertainties, and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise, and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategy, plans or intentions. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: the failure to satisfy conditions to completion of the Mergers, including receipt of stockholder approval; the failure of the Mergers to close for any other reason; the occurrence of any change, effect, event, circumstance, occurrence or state of facts that could give rise to the termination of the Merger Agreement; the outcome of the legal proceedings that have been, or may be, instituted against us and others following announcement of our entering into the Merger Agreement; risks that the proposed merger transaction disrupts current plans and operations including potential difficulties in relationships with employees, tenants and partners; the amount of the costs, fees, expenses and charges related to the Mergers; our exclusive remedy against the counterparties to the Merger Agreement with respect to any breach of the Merger Agreement being to seek payment by BRE Retail Centers of a termination fee in the amount of $250 million (which amount is guaranteed by Blackstone Property Partners Lower Fund 1 L.P.), which may not be adequate to cover our damages; our limited ability to pay dividends to the holders of our common stock pursuant to the Merger Agreement; adverse economic or real estate developments in the retail industry or the markets in which we operate; changes in local, regional and national economic conditions; our inability to compete effectively; our inability to collect rent from tenants; defaults on or non-renewal of leases by tenants; increased interest rates and operating costs; decreased rental rates or increased vacancy rates; our failure to obtain necessary outside financing on favorable terms or at all; changes in the availability of additional acquisition opportunities; our inability to successfully complete real estate acquisitions; our failure to successfully operate acquired properties and operations; our failure to qualify or maintain our status as a REIT; our inability to attract and retain key personnel; government approvals, actions and initiatives, including the need for compliance with environmental requirements; financial market fluctuations; our failure to maintain our credit ratings or a downgrade in our credit ratings from one or more of the rating agencies; changes in real estate and zoning laws and increases in real property tax rates; risks associated with security breaches and other disruptions to our information technology networks and related systems; the effects of earthquakes and other natural disasters; and lack of or insufficient amounts of insurance. While forward-looking statements reflect our good faith beliefs (or those of the indicated third parties), they are not guarantees of future performance. We disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this report. In addition to the risk factors discussed below under the heading “Part II – Other Information – Item 1A. Risk Factors” and elsewhere in this report, we discussed a number of material risks in our Annual Report on Form 10-K for the year ended December 31, 2014. Those risks continue to be relevant to our performance and financial condition. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors, nor can it assess the impact of all such risk factors on our company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Pending Merger

See Note 19 to the condensed consolidated financial statements included elsewhere herein for a discussion of the pending merger transaction to which the Company and the Operating Partnership are parties. The Mergers are expected to close during the second half of 2015, although closing is subject to various conditions, including the approval of the Company Merger by our common stockholders, and therefore, we cannot provide any assurance that the Mergers will close in a timely manner or at all.

Our ability to execute on our business plan could be adversely impacted by operating restrictions included in the Merger Agreement with BRE Retail Centers, including restrictions on acquiring new assets and raising additional capital. We have incurred and will incur a variety of merger-related costs which while not recurring in nature will not be recoverable if the Mergers are not consummated.

 

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Management’s Overview and Summary

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

The following table reflects our total portfolio at March 31, 2015 (a property is reclassified from development to the operating portfolio at the earlier of 85% occupancy or one year from completion and delivery of the space):

 

     Gross Leasable
Area (GLA)
     % Occupied     % Leased     Number of
Properties
 

Operating Portfolio:

       

Retail properties

     7,063,620         93.2     94.4     37   

Multi-family properties(1)

     339 units         93.5     95.6     n/a   

Office properties

     82,157         90.4     90.4     1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total/weighted-average operating portfolio

     7,145,777         93.1     94.4     38   
  

 

 

    

 

 

   

 

 

   

 

 

 

Development properties(2)

     689,039         16.5     61.7     n/a   

Unconsolidated properties(3)

     103,767         92.4     92.4     1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total Portfolio:

         

Total/weighted-average total portfolio

     7,938,583         86.5     91.5     39   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) 

Includes the 339 apartment units on the upper levels of our West Broad Village retail shopping center (the number of apartment units and leased percentage are not included in the total/weighted-average).

 

(2) 

Our non-operating/development properties consisted of Phase II of our Chimney Rock and Phase III of our Plaza at Rockwall properties and undeveloped land parcels at our West Broad Marketplace and Southlake Park Village properties, which are currently under development and are expected to contain approximately 689,000 square feet of GLA upon completion. Phase I of our Chimney Rock property and Phases I and II of our Plaza at Rockwall property are classified as operating properties.

 

(3) 

Includes The Fountains at Bay Hill property in which we hold a 50% ownership interest.

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

Critical Accounting Policies

A complete discussion of our critical accounting policies can be found in our Annual Report on Form 10-K for the year ended December 31, 2014, which was filed with the Securities and Exchange Commission, or SEC, and is accessible on the SEC’s website at www.sec.gov.

New Accounting Standards

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

Results of Operations

We operate through three reportable business segments: retail properties, multi-family properties and office properties. At March 31, 2015, we owned 37 consolidated retail operating properties with a total of approximately 7.1 million square feet of GLA. The multi-family segment consists of apartment units at one retail property, West Broad Village, which is located in Richmond, Virginia. The office segment consists of one property, Excel Centre, a portion of which is utilized as our headquarters (which contains 82,157 square feet of GLA).

The following table reflects leasing activity at our consolidated retail and office operating properties for comparable leases (leases executed for spaces in which there was a tenant at some point during the previous twelve-month period) and non-comparable leases during the three months ended March 31, 2015:

 

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     Number
of
Leases
     GLA      Weighted-
Average
Lease Rate
     Weighted-
Average
Prior Lease
Rate
     %
Increase
(Decrease)
    Tenant
Improvement
Allowance
(sf)
     Leasing
Commission (sf)
 

Comparable leases

     35         190,588       $ 14.43       $ 14.31         0.8   $ 0.16       $ 0.33   

Non-comparable leases

     10         49,970       $ 17.73         n/a         n/a      $ 6.05       $ 2.59   
  

 

 

    

 

 

               

Total leasing activity

     45         240,558                 
  

 

 

    

 

 

               

 

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Comparison of the Three Months Ended March 31, 2015 to the Three Months Ended March 31, 2014

The following table sets forth historical financial information for properties contained in our operating portfolio, which are classified as same properties (all properties that we consolidated, owned and operated for the entirety of both periods being compared, except for properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared), new properties (properties that were not owned during the entirety of the periods being compared, including properties that were sold during any of the periods being compared that are not classified as discontinued operations), redevelopment/development properties (properties that were entirely or primarily under redevelopment or development during either or both of the periods being compared) and corporate entities (legal entities performing general and administrative functions) (dollars in thousands, except on a per square foot basis):

 

    Same Properties(1)     New Properties(2)     Redevelopment/
Development Properties
    Corporate     Total  
    As of March 31,  
    2015     2014     2015     2014     2015     2014     2015     2014     2015     2014  

Rentable GLA

    5,761,681        5,761,681        1,394,096        75,550        —         —         —         —         7,155,777        5,837,231   

Percent leased

    93.7     92.7     97.5     94.7     —         —         —         —         94.4     92.7

Number of properties

    33        33        5        1        —         —         —         —         38        34   

Percent of total portfolio

    80.5     98.7     19.5     1.3     —         —         —         —         100.0     100.0
    Same Properties     New Properties     Redevelopment/
Development Properties(3)
    Corporate     Total  
    Three Months Ended March 31,  
    2015     2014     2015     2014     2015     2014     2015     2014     2015     2014  

Rental revenue

  $ 23,285      $ 23,197      $ 8,340      $ 1,707      $ 410      $ 63      $ (59   $ (59   $ 31,976      $ 24,908   

Tenant recoveries

    5,193        5,190        2,187        55        63        11        —         —         7,443        5,256   

Other income

    138        122        375        121        —         —         559        191        1,072        434   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    28,616        28,509        10,902        1,883        473        74        500        132        40,491        30,598   

Rental operations

    7,328        7,366        3,405        702        370        17        (324     (247     10,779        7,838   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income

  $ 21,288      $ 21,143      $ 7,497      $ 1,181      $ 103      $ 57      $ 824      $ 379      $ 29,712      $ 22,760   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Excludes any properties (or portions thereof), which were sold during 2014 or 2015 (the rentable GLA is excluded from the comparable information presented above for same properties).

 

(2)

Excludes two properties – Southlake Park Village and West Broad Marketplace, which were acquired in 2013 and 2014, respectively, which are currently under development and are considered non-operating properties. Includes (a) additional parcels at two operating properties – The Promenade and Brandywine Crossing, which were acquired in 2013 and 2014, respectively, and (b) the Cedar Square property (a portion of which was sold in 2014).

 

(3)

Includes the results of operations for development properties (or development activities on portions of operating properties) that are not considered part of the operating portfolio (Chimney Rock Phase II and the South Lake Park Village and West Broad Marketplace properties) the partial results of operations for properties that were sold during 2014 or 2015 (Lowe’s, Cedar Square, The Family Center at Orem and Promenade Corporate Center properties).

 

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The following table provides a reconciliation of property operating income (as defined in the table above) to net income for the three months ended March 31, 2015 and 2014 (dollars in thousands):

 

     Three Months Ended         
     March 31,
2015
     March 31,
2014
     Change      Percent
Change
 

Property operating income

   $ 29,712       $ 22,760       $ 6,952         30.5