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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 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 July 30, 2015, $0.01 par value per share: 64,507,233 shares

 

 

 


Table of Contents

EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q for the quarter ended June 30, 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 June 30, 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;

 

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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.

 

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Table of Contents

EXCEL TRUST, INC.

EXCEL TRUST, L.P.

FORM 10-Q — QUARTERLY REPORT

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2015

TABLE OF CONTENTS

 

PART I

  Financial Information     5   
Item 1.   Financial Statements of Excel Trust, Inc.     5   
  Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014     5   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (unaudited)     6   
  Condensed Consolidated Statements of Equity for the six months ended June 30, 2015 and 2014 (unaudited)     7   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)     9   
  Financial Statements of Excel Trust, L.P.  
  Condensed Consolidated Balance Sheets as of June 30, 2015 (unaudited) and December 31, 2014     10   
  Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2015 and 2014 (unaudited)     11   
  Condensed Consolidated Statements of Capital for the six months ended June 30, 2015 and 2014 (unaudited)     12   
  Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014 (unaudited)     13   
  Notes to Condensed Consolidated Financial Statements of Excel Trust, Inc. and Excel Trust, L.P. (unaudited)     14   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     40   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk     56   
Item 4.   Controls and Procedures     57   
PART II   Other Information     57   
Item 1.   Legal Proceedings     57   
Item 1A.   Risk Factors     57   
Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds     58   
Item 3.   Defaults Upon Senior Securities     58   
Item 4.   Mine Safety Disclosures     58   
Item 5.   Other Information     58   
Item 6.   Exhibits     59   
Signatures       60   

 

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Table of Contents

PART 1 — FINANCIAL INFORMATION

 

Item 1. Financial Statements

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share amounts)

 

     June 30, 2015
(unaudited)
    December 31,
2014
 

ASSETS:

    

Property:

    

Land

   $ 449,648      $ 455,112   

Buildings

     925,338        921,604   

Site improvements

     86,767        87,305   

Tenant improvements

     67,829        70,549   

Construction in progress

     22,265        8,819   

Less accumulated depreciation

     (98,740     (90,543
  

 

 

   

 

 

 

Property, net

     1,453,107        1,452,846   

Cash and cash equivalents

     8,274        6,603   

Restricted cash

     8,153        8,272   

Tenant receivables, net

     4,080        5,794   

Lease intangibles, net

     117,605        123,373   

Deferred rent receivable

     11,043        11,479   

Other assets

     19,173        32,081   

Real estate held for sale, net of accumulated depreciation

     16,286         

Investment in unconsolidated entities

     6,612        6,689   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,644,333      $ 1,647,137   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY:

    

Liabilities:

    

Mortgages payable, net

   $ 194,082      $ 192,748   

Notes payable

     257,000        238,000   

Unsecured notes

     348,824        398,758   

Accounts payable and other liabilities

     35,146        34,338   

Liabilities of real estate held for sale

     180         

Lease intangibles, net

     40,276        42,470   

Dividends/distributions payable

     13,582        12,857   
  

 

 

   

 

 

 

Total liabilities(2)

     889,090        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 June 30, 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 June 30, 2015 and December 31, 2014

     88,720        88,720   

Common stock, $.01 par value, 200,000,000 shares authorized; 63,415,748 and 61,113,372 shares issued and outstanding at June 30, 2015 and December 31, 2014, respectively

     633        610   

Additional paid-in capital

     625,186        597,723   

Retained Earnings

            

Accumulated other comprehensive gain

           168  
  

 

 

   

 

 

 

Total stockholders’ equity

     742,707        715,389   

Non-controlling interests

     12,536        12,577   
  

 

 

   

 

 

 

Total equity

     755,243        727,966   
  

 

 

   

 

 

 

Total liabilities and equity

   $ 1,644,333      $ 1,647,137   
  

 

 

   

 

 

 

 

 

(1) 

Excel Trust, Inc.’s consolidated total assets at June 30, 2015 and December 31, 2014 include $43,877 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 June 30, 2015 and December 31, 2014 include $1,688 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.

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per share data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  

Revenues:

    

Rental revenue

   $ 30,756      $ 25,179      $ 62,731      $ 50,086   

Tenant recoveries

     6,837        4,855        14,280        10,110   

Other income

     472        596        1,545        1,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     38,065        30,630        78,556        61,226   

Expenses:

    

Maintenance and repairs

     2,684        2,186        5,672        4,409   

Real estate taxes

     4,097        2,930        8,514        6,295   

Management fees

     590        519        1,233        1,037   

Other operating expenses

     2,114        1,615        4,846        3,346   

General and administrative

     5,448        4,158        9,796        7,973   

Depreciation and amortization

     17,386        11,411        34,652        23,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     32,319        22,819        64,713        46,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,746        7,811        13,843        14,959   

Interest expense

     (8,209 )     (5,981 )     (15,760 )     (10,970 )

Interest income

     52        54        103        103   

Income from equity in unconsolidated entities

     124        95        258        165   

Gain on sale of real estate assets

     5,885        —         25,546        —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,598        1,979        23,990        4,257   

Net income attributable to non-controlling interests

     (110 )     (74 )     (489 )     (157 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, Inc.

     3,488        1,905        23,501        4,100   

Preferred stock dividends

     (2,385 )     (2,744 )     (4,770 )     (5,488 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the common stockholders

   $ 1,103      $ (839 )   $ 18,731      $ (1,388 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic earnings (loss) per share

   $ 0.02      $ (0.02 )   $ 0.30      $ (0.03 )

Diluted earnings (loss) per share

   $ 0.02      $ (0.02 )   $ 0.30      $ (0.03 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding - basic and diluted

     62,937        48,567        62,707        48,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Dividends declared per common share

   $ 0.18      $ 0.175      $ 0.36      $ 0.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,598      $ 1,979      $ 23,990      $ 4,257   

Other comprehensive (loss) income:

    

Change in unrealized gain on investment in equity securities

     —         —         137        —    

Gain on sale of equity securities (reclassification adjustment)

     —         —         (308 )     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     3,598        1,979        23,819        4,257   

Comprehensive income attributable to non-controlling interests

     (110 )     (74 )     (486 )     (157 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, Inc.

   $ 3,488      $ 1,905      $ 23,333      $ 4,100   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(Dollars in thousands)

(Unaudited)

 

    Series A
Preferred
Stock
    Series B
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
other
Comprehensive
Gain
    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        29,492        —          —          29,514        —          29,514   

Issuance of restricted common stock awards

    —          —          164,733        2        (2     —          —          —          —          —     

Forfeiture of restricted common stock awards

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

Noncash amortization of share-based compensation

    —          —          —          —          2,193        —          —          2,193        —          2,193   

Common stock dividends

    —          —          —          —          (4,097     (18,731     —          (22,828     —          (22,828

Distributions to non-controlling interests

    —          —          —          —          —          —          —          —          (651     (651

Net income

    —          —          —          —          —          23,501        —          23,501        489        23,990   

Preferred stock dividends

    —          —          —          —          —          (4,770     —          (4,770     —          (4,770

Change in unrealized gain on investment in equity securities

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

Adjustment for non-controlling interests

    —          —          —          —          (124     —          —          (124     124        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

  $ 28,168      $ 88,720        63,415,748      $ 633      $ 625,186      $ —        $ —        $ 742,707      $ 12,536      $ 755,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
    Series A
Preferred
Stock
    Series B
Preferred
Stock
    Common Stock     Additional
Paid-in
Capital
    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        48,381,365      $ 482      $ 478,541      $ —        $ —        $ 615,446      $ 11,938      $ 627,384   

Net proceeds from sale of common stock

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

Repurchase of common stock

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

Forfeiture of restricted common stock awards

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

Issuance of restricted common stock awards

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

Noncash amortization of share-based compensation

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

Common stock dividends

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

Distributions to non-controlling interests

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

Net income

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

Preferred stock dividends

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

Adjustment for non-controlling interests

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30, 2015
    Six Months Ended
June 30, 2014
 

Cash flows from operating activities:

    

Net income

   $ 23,990      $ 4,257   

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

    

Depreciation and amortization

     34,652        23,207   

Gain on sale of real estate assets

     (25,546     —    

Gain on sale of equity securities

     (308     —     

(Income) loss from equity in unconsolidated entities

     (258     (165

Deferred rent receivable

     (1,527     (1,154

Amortization of above- and below-market leases

     (1,264     (360

Amortization of deferred balances

     1,794        813   

Bad debt expense

     446        372   

Share-based compensation expense

     2,193        1,964   

Distributions from unconsolidated entities

     373        322   

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

    

Tenant and other receivables

     1,314        1,638   

Other assets

     (232     (482

Accounts payable and other liabilities

     1,400        2,707   
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,027        33,119   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property

     (30,936     (1,000

Development of property and property improvements

     (19,185     (11,935

Receipt of master lease payments

     —          507   

Dispositions of real estate assets

     31,722        —     

Capitalized leasing costs

     (937     (492

Proceeds from the sale of equity securities

     10,820        —     

Restricted cash

     119        1,174   
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,397     (11,746
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common stock

     30,544        160,908   

Common stock offering costs

     (532     (94

Repurchase of common stock

     —          (1,407

Payments on mortgages payable

     (2,177     (43,996

Proceeds from mortgages payable

     3,729        —     

Payments on notes payable

     (61,000     (222,000

Proceeds from notes payable

     80,000        42,500   

Payments on unsecured notes

     (50,000     —     

Proceeds from unsecured notes

     —          248,693   

Distribution to non-controlling interests

     (645     (630

Preferred stock dividends

     (4,771     (5,488

Common stock dividends

     (22,108     (16,946

Deferred financing costs

     —          (2,409
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (26,960     159,131   
  

 

 

   

 

 

 

Net increase

     1,671        180,504   

Cash and cash equivalents, beginning of period

     6,603        3,245   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,274      $ 183,749   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized

   $ 13,164      $ 6,287   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Liabilities assumed in connection with property acquisitions

   $ 123      $  
  

 

 

   

 

 

 

Dispositions of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $19,711)

   $ 85,390      $ —     
  

 

 

   

 

 

 

Acquisition of real estate assets classified as a 1031 exchange

   $ 85,390      $ —     
  

 

 

   

 

 

 

Common stock dividends payable

   $ 11,415      $ 10,695   
  

 

 

   

 

 

 

Preferred stock dividends payable

   $ 1,983      $ 2,287   
  

 

 

   

 

 

 

OP unit distributions payable

   $ 184      $ 178   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 9,008      $ 6,808   
  

 

 

   

 

 

 

Change in unrealized gain on investment in equity securities

   $ 171      $ —     
  

 

 

   

 

 

 

Reclassification of offering costs

   $ 499      $ —     
  

 

 

   

 

 

 

Accrued offering costs

   $ —        $ 81   
  

 

 

   

 

 

 

Reclassification of assets to real estate held for sale

   $ 16,286      $ —     
  

 

 

   

 

 

 

Reclassification of liabilities to liabilities of real estate held for sale

   $ 180      $ —    
  

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except unit and per unit amounts)

 

     June 30, 2015
(unaudited)
    December 31,
2014
 

ASSETS:

    

Property:

    

Land

   $ 449,648      $ 455,112   

Buildings

     925,338        921,604   

Site improvements

     86,767        87,305   

Tenant improvements

     67,829        70,549   

Construction in progress

     22,265        8,819   

Less accumulated depreciation

     (98,740     (90,543
  

 

 

   

 

 

 

Property, net

     1,453,107        1,452,846   

Cash and cash equivalents

     8,274        6,603   

Restricted cash

     8,153        8,272   

Tenant receivables, net

     4,080        5,794   

Lease intangibles, net

     117,605        123,373   

Deferred rent receivable

     11,043        11,479   

Other assets

     19,173        32,081   

Real estate held for sale, net of accumulated depreciation

     16,286        —     

Investment in unconsolidated entities

     6,612        6,689   
  

 

 

   

 

 

 

Total assets(1)

   $ 1,644,333      $ 1,647,137   
  

 

 

   

 

 

 

LIABILITIES AND CAPITAL:

    

Liabilities:

    

Mortgages payable, net

   $ 194,082      $ 192,748   

Notes payable

     257,000        238,000   

Unsecured notes

     348,824        398,758   

Accounts payable and other liabilities

     35,146        34,338   

Liabilities of real estate held for sale

     180        —     

Lease intangibles, net

     40,276        42,470   

Distributions payable

     13,582        12,857   
  

 

 

   

 

 

 

Total liabilities(2)

     889,090        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 June 30, 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 June 30, 2015 and December 31, 2014

     88,720        88,720   

Limited partners’ capital, 1,019,523 common OP units issued and outstanding at June 30, 2015 and December 31, 2014

     1,368        1,428   

General partner’s capital, 63,415,748 and 61,113,372 common OP units issued and outstanding at June 30, 2015 and December 31, 2014, respectively

     634,592        606,982   

Accumulated other comprehensive gain

     —          171  
  

 

 

   

 

 

 

Total partners’ capital

     752,848        725,469   

Non-controlling interests

     2,395        2,497   
  

 

 

   

 

 

 

Total capital

     755,243        727,966   
  

 

 

   

 

 

 

Total liabilities and capital

   $ 1,644,333      $ 1,647,137   
  

 

 

   

 

 

 

  

 

(1) 

Excel Trust, L.P.’s consolidated total assets at June 30, 2015 and December 31, 2014 include $43,877 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 June 30, 2015 and December 31, 2014 include $1,688 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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Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(In thousands, except per unit data)

(Unaudited)

 

     For the Three Months Ended     For the Six Months Ended  
     June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  

Revenues:

    

Rental revenue

   $ 30,756      $ 25,179      $ 62,731      $ 50,086   

Tenant recoveries

     6,837        4,855        14,280        10,110   

Other income

     472        596        1,545        1,030   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     38,065        30,630        78,556        61,226   

Expenses:

    

Maintenance and repairs

     2,684        2,186        5,672        4,409   

Real estate taxes

     4,097        2,930        8,514        6,295   

Management fees

     590        519        1,233        1,037   

Other operating expenses

     2,114        1,615        4,846        3,346   

General and administrative

     5,448        4,158        9,796        7,973   

Depreciation and amortization

     17,386        11,411        34,652        23,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expenses

     32,319        22,819        64,713        46,267   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     5,746        7,811        13,843        14,959   

Interest expense

     (8,209 )     (5,981 )     (15,760 )     (10,970 )

Interest income

     52        54        103        103   

Income from equity in unconsolidated entities

     124        95        258        165   

Gain on sale of real estate assets

     5,885        —          25,546        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     3,598        1,979        23,990        4,257   

Net income attributable to non-controlling interests

     (91 )     (90 )     (181 )     (183 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to Excel Trust, L.P.

     3,507        1,889        23,809        4,074   

Preferred operating unit distributions

     (2,385 )     (2,744 )     (4,770 )     (5,488 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Net (loss) income attributable to the unitholders

   $ 1,122      $ (855 )   $ 19,039      $ (1,414 )
  

 

 

   

 

 

   

 

 

   

 

 

 

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

        

Basic earnings (loss) per unit

     0.02        (0.02 )     0.30        (0.03 )

Diluted earnings (loss) per unit

   $ 0.02      $ (0.02 )   $ 0.30      $ (0.03 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common OP units outstanding - basic and diluted

     63,957        49,586        63,726        49,198   
  

 

 

   

 

 

   

 

 

   

 

 

 

Distributions declared per common OP unit

   $ 0.18      $ 0.175      $ 0.36      $ 0.35   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 3,598      $ 1,979      $ 23,990      $ 4,257   

Other comprehensive (loss) income:

    

Change in unrealized gain on investment in equity securities

     —          —          137        —     

Gain on sale of equity securities (reclassification adjustment)

     —          —          (308 )     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     3,598        1,979        23,819        4,257   

Comprehensive income attributable to non-controlling interests

     (91 )     (90 )     (181 )     (183 )
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income attributable to Excel Trust, L.P.

   $ 3,507      $ 1,889      $ 23,638      $ 4,074   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF 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        29,514        —          29,514        —          29,514   

Forfeiture of restricted common OP unit awards

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

Issuance of restricted common OP unit awards

    —          —          —          —          164,733        —          —          —          —          —     

Noncash amortization of share-based compensation

    —          —          —          —          —          2,193        —          2,193        —          2,193   

OP unit distributions

    (1,032     (3,738     —          (368     —          (22,828     —          (27,966     (283     (28,249

Net income

    1,032        3,738        —          308        —          18,731        —          23,809        181        23,990   

Change in unrealized loss on investment in equity securities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2015

  $ 28,168      $ 88,720        1,019,523      $ 1,368        63,415,748      $ 634,592      $ —        $ 752,848      $ 2,395      $ 755,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    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   

Net proceeds from sale of common OP units

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

Repurchase of common OP units

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

Forfeiture of restricted common OP unit awards

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

Issuance of restricted common OP unit awards

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

Noncash amortization of share-based compensation

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

OP unit distributions

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

Net income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

12


Table of Contents

EXCEL TRUST, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

 

     Six Months Ended
June 30, 2015
    Six Months Ended
June 30, 2014
 

Cash flows from operating activities:

    

Net income

   $ 23,990      $ 4,257   

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

    

Depreciation and amortization

     34,652        23,207   

Gain on sale of real estate assets

     (25,546     —     

Gain on sale of equity securities

     (308     —     

(Income) loss from equity in unconsolidated entities

     (258     (165

Deferred rent receivable

     (1,527     (1,154

Amortization of above- and below-market leases

     (1,264     (360

Amortization of deferred balances

     1,794        813   

Bad debt expense

     446        372   

Share-based compensation expense

     2,193        1,964   

Distributions from unconsolidated entities

     373        322   

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

    

Tenant and other receivables

     1,314        1,638   

Other assets

     (232     (482

Accounts payable and other liabilities

     1,400        2,707   
  

 

 

   

 

 

 

Net cash provided by operating activities

     37,027        33,119   
  

 

 

   

 

 

 

Cash flows from investing activities:

    

Acquisitions of property

     (30,936     (1,000

Development of property and property improvements

     (19,185     (11,935

Receipt of master lease payments

     —          507   

Dispositions of real estate assets

     31,722        —     

Capitalized leasing costs

     (937     (492

Proceeds from the sale of equity securities

     10,820        —     

Restricted cash

     119        1,174   
  

 

 

   

 

 

 

Net cash used in investing activities

     (8,397     (11,746
  

 

 

   

 

 

 

Cash flows from financing activities:

    

Issuance of common OP units

     30,012        160,814   

Repurchase of common OP units

     —          (1,407

Payments on mortgages payable

     (2,177     (43,996

Proceeds from mortgages payable

     3,729        —     

Payments on notes payable

     (61,000     (222,000

Proceeds from notes payable

     80,000        42,500   

Payments on unsecured notes

     (50,000     —     

Proceeds from unsecured notes

     —          248,693   

Distribution to non-controlling interests

     (283     (274

Preferred OP unit distributions

     (4,771     (5,488

Common OP unit distributions

     (22,470     (17,302

Deferred financing costs

     —          (2,409
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (26,960     159,131   
  

 

 

   

 

 

 

Net increase

     1,671        180,504   

Cash and cash equivalents, beginning of period

     6,603        3,245   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 8,274      $ 183,749   
  

 

 

   

 

 

 

Supplemental cash flow information:

    

Cash payments for interest, net of amounts capitalized

   $ 13,164      $ 6,287   
  

 

 

   

 

 

 

Non-cash investing and financing activity:

    

Liabilities assumed in connection with property acquisitions

   $ 123      $ —     
  

 

 

   

 

 

 

Dispositions of real estate assets classified as a 1031 exchange (including gain on sale of real estate assets of $19,711)

   $ 85,390      $ —     
  

 

 

   

 

 

 

Acquisitions of real estate assets classified as a 1031

   $ 85,390      $ —     
  

 

 

   

 

 

 

Common OP unit distribution payable

   $ 11,599      $ 10,873   
  

 

 

   

 

 

 

Preferred OP unit distribution payable

   $ 1,983      $ 2,287   
  

 

 

   

 

 

 

Accrued additions to operating and development properties

   $ 9,008      $ 6,808   
  

 

 

   

 

 

 

Change in unrealized gain on investment in equity securities

   $ 171      $ —    
  

 

 

   

 

 

 

Reclassification of offering costs

   $ 499      $ —    
  

 

 

   

 

 

 

Accrued offering costs

   $ —       $ 81   
  

 

 

   

 

 

 

Reclassification of assets to real estate held for sale

   $ 16,286      $ —    
  

 

 

   

 

 

 

Reclassification of liabilities to liabilities of real estate held for sale

   $ 180      $ —    
  

 

 

   

 

 

 

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

 

13


Table of Contents

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

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Organization:

Excel Trust, Inc., a Maryland corporation (the “Parent Company”), is a vertically integrated, self-administered, self-managed real estate firm with the principal objective of acquiring, financing, developing, leasing, owning and managing value oriented community and power centers, grocery anchored neighborhood centers and freestanding retail properties. It conducts substantially all of its business through its subsidiary, Excel Trust, L.P., a Delaware limited partnership (the “Operating Partnership” and together with the Parent Company referred to as the “Company”). The Company seeks investment opportunities throughout the United States, but focuses on the West Coast, East Coast and Sunbelt regions. The Company generally leases anchor space to national and regional supermarket chains, big-box retailers and select national retailers that frequently offer necessity and value oriented items and generate regular consumer traffic.

The Parent Company is the sole general partner of the Operating Partnership and, as of June 30, 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 six months ended June 30, 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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Restricted Cash:

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

Accounts Payable and Other Liabilities:

Included in accounts payable and other liabilities are deferred rents in the amount of $2.4 million and $3.0 million at June 30, 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 $767,000 and $552,000 in the three months ended June 30, 2015 and 2014, respectively, and by $1.5 million and $1.2 million in the six months ended June 30, 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 $202,000 and $183,000 in the three months ended June 30, 2015 and 2014, respectively, and $465,000 and $398,000 in the six months ended June 30, 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.

 

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The Company has agreed to provide the developer/manager for development projects at the Plaza at Rockwall, Southlake Park Village 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 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 estimated amount that would be owed if the obligation were to be settled as of the reporting date. As of June 30, 2015, the Company has recorded $2.4 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 made a payment of approximately $1.1 million to the developer as a result of the disposition of the Cedar Square property in May 2015 and the final distribution of funds. The Company recognized a charge to earnings of approximately $560,000 related to changes in the estimated amount owed for the six months ended June 30, 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 six months ended June 30, 2015 or 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.

 

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

For all investments in unconsolidated entities, if a decline in the fair value of an investment below its carrying value is determined to be other-than-temporary, such investment is written down to its estimated fair value with a non-cash charge to earnings. The factors that the Company considers in making these assessments include, but are not limited to, severity and duration of the unrealized loss, market prices, market conditions, the occurrence of ongoing financial difficulties, available financing, new product initiatives and new collaborative agreements.

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):

 

     June 30,
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 June 30, 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 or performance vesting conditions and utilizing a graded vesting method (an accelerated vesting method in which the majority of compensation expense is recognized in earlier periods) for awards that include one or more market vesting conditions, adjusted for anticipated forfeitures.

 

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Purchase Accounting:

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

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

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

Tenant Receivables:

Tenant receivables and deferred rent are carried net of the allowances for uncollectible current tenant receivables and deferred rent. An allowance is maintained for estimated losses resulting from the inability of certain tenants to meet the contractual obligations under their lease agreements. The Company maintains an allowance for deferred rent receivable arising from the straight-lining of rents. Such allowances are charged to bad debt expense which is included in other operating expenses on the accompanying condensed consolidated statement of operations. The Company’s determination of the adequacy of these allowances is based primarily upon evaluations of historical loss experience, the tenant’s financial condition, security deposits, letters of credit, lease guarantees, current economic conditions and other relevant factors. At June 30, 2015 and December 31, 2014, the Company had $706,000 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 June 30, 2015 and 2014, ($3,000) and $165,000, respectively, of receivables were charged to bad debt expense. During the six months ended June 30, 2015 and 2014, $446,000 and $372,000, 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 June 30, 2015 and 2014, no tenant accounted for more than 10% of revenues.

At June 30, 2015, the Company’s real estate assets in the states of California, Florida, Virginia, Texas and Utah represented approximately 30.0%, 13.7%, 12.5%, 11.9% and 10.1%, respectively, of the Company’s total assets. At December 31, 2014, the Company’s 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 six months ended June 30, 2015, the Company’s revenues derived from properties located in the states of California, Florida, Texas, Arizona and Utah represented approximately 25.9%, 14.5%, 11.9%, 10.8% and 10.7%, respectively, of the Company’s total revenues. For the six months ended June 30, 2014, the Company’s revenues derived from properties located in the states of California, Arizona, Texas and Virginia represented approximately 23.9%, 17.4%, 14.1% and 11.4%, respectively, of the Company’s total revenues.

 

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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.

 

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Derivative Instruments:

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

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

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

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

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

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

Changes in Accumulated Other Comprehensive Loss:

The following table reflects amounts that were reclassified from accumulated other comprehensive loss and included in earnings for the six months ended June 30, 2015 and 2014 (dollars in thousands):

 

     Parent Company      Operating Partnership  
     Six Months Ended      Six Months Ended  
     June 30,
2015
     June 30,
2014
     June 30,
2015
     June 30,
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 – June 30

   $ —         $ —         $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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, which were fully liquidated as of March 31, 2015 – see discussion of changes in investments in equity securities above).

 

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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 July 2015, the FASB deferrred 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.

In February 2015, the FASB issued ASU No. 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:

The Company completed the following acquisition (within the Retail property operating segment) in the six months ended June 30, 2015, which was acquired for cash:

 

Property

   Date Acquired    Location    Debt
Assumed
 

Monte Vista Crossing

   June 23, 2015    Turlock, CA    $ —    

The following provides a summary of the recorded purchase price for the 2015 acquisition (dollars in thousands).

 

Consolidated Property

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

Monte Vista Crossing (1)

   $ 82,665       $ 20,620       $ 4,074       $ (4,456 )   $ 12,169       $ —        $ 1,377      $ 116,449   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Remaining useful life(2)

           84         99        64            

 

(1) 

The purchase price noted includes the estimated fair value of a master lease agreement between the Company and the seller in the amount of $1.4 million (included in other assets on the accompanying consolidated balance sheets) based on the estimated fair value of funds expected to be received from the seller in connection with the acquisition. Monthly payments of $76,500 commenced upon completion of the acquisition and will continue during the construction and leasing of an additional approximately 59,400 square feet of gross leasable area (“GLA”) until tenant rental payments at the property exceed $76,500. The seller will be reimbursed up to a maximum of $12.5 million for construction and other costs incurred in connection with the development. As of June 30, 2015, the purchase price allocation related to the acquisition of this property was preliminary and the final purchase price allocation will be determined pending the receipt of information necessary to complete the valuation of assets and liabilities, which may result in a change from these initial estimates.

 

(2)

Weighted-average remaining useful life (months) for recorded intangible assets and liabilities.

For the three and six months ended June 30, 2015, the Company recorded revenues and a net loss of $212,000 and $41,000, respectively, related to the 2015 acquisition.

 

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The following unaudited pro forma information for the three and six months ended June 30, 2015 and 2014 has been prepared to reflect the incremental effect of the property acquired in 2015, as if such acquisition had occurred on January 1, 2014 (dollars in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,
2015
     June 30,
2014
     June 30,
2015
     June 30,
2014
 

Revenues

   $ 40,591       $ 33,399       $ 83,850       $ 66,764   

Net income (loss)(1)

   $ 3,984       $ 2,097       $ 24,577       $ 4,705   

Earnings per share

   $ 0.02      $ (0.02    $ 0.31      $ (0.02

 

(1) 

Pro forma results for the three and six months ended June 30, 2015 were adjusted to exclude non-recurring acquisition costs of approximately $213,000 related to the 2015 acquisition (included in general and administrative expense in the accompanying condensed consolidated statements of operations). Pro forma results for the three and six months ended June 30, 2014 were adjusted to include these costs relating to the 2015 acquisition.

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   
  

 

 

    

 

 

    

 

 

 

4. Lease Intangible Assets, Net

Lease intangible assets, net consisted of the following at June 30, 2015 and December 31, 2014:

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  

In-place leases, net of accumulated amortization of $31.7 million and $31.1 million as of June 30, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 73 and 74 months as of June 30, 2015 and December 31, 2014, respectively)

   $ 72,483       $ 78,336   

Above-market leases, net of accumulated amortization of $9.0 million and $8.8 million as of June 30, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 71 and 69 months as of June 30, 2015 and December 31, 2014, respectively)

     18,157         16,436   

Leasing commissions, net of accumulated amortization of $9.4 million and $8.7 million as of June 30, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 89 and 93 months as of June 30, 2015 and December 31, 2014, respectively)

     26,965         28,601   
  

 

 

    

 

 

 
   $     117,605       $ 123,373   
  

 

 

    

 

 

 

 

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Estimated amortization of lease intangible assets as of June 30, 2015 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining six months)

   $ 14,290   

2016

     22,690   

2017

     18,669   

2018

     14,842   

2019

     11,358   

Thereafter

     35,756   
  

 

 

 

Total

   $ 117,605   
  

 

 

 

Amortization expense recorded on the lease intangible assets for the three months ended June 30, 2015 and 2014 was $8.9 million and $4.8 million, respectively. Included in these amounts are $965,000 and $909,000, respectively, of amortization of above-market lease intangible assets recorded against rental revenue. Amortization expense recorded on the lease intangible assets for the six months ended June 30, 2015 and 2014 was $17.3 million and $10.1 million, respectively. Included in these amounts are $2.1 million and $1.9 million, respectively, of amortization of above-market lease intangible assets recorded against rental revenue.

5. Lease Intangible Liabilities, Net

Lease intangible liabilities, net consisted of the following at June 30, 2015 and December 31, 2014:

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Below-market leases, net of accumulated amortization of $11.9 and $11.0 million as of June 30, 2015 and December 31, 2014, respectively (with a weighted-average remaining life of 105 and 116 months as of June 30, 2015 and December 31, 2014, respectively)

   $     40,276       $ 42,470   
  

 

 

    

 

 

 

Amortization recorded on the lease intangible liabilities for the three months ended June 30, 2015 and 2014 was $1.6 million and $1.2 million, respectively. Amortization recorded on the lease intangible liabilities for the six months ended June 30, 2015 and 2014 was $3.3 million for both periods. These amounts were recorded as rental revenue in the Company’s condensed consolidated statements of operations.

Estimated amortization of lease intangible liabilities as of June 30, 2015 for each of the next five years and thereafter is as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining six months)

   $ 3,187   

2016

     5,709   

2017

     5,314   

2018

     4,843   

2019

     4,310   

Thereafter

     16,913   
  

 

 

 

Total

   $ 40,276   
  

 

 

 

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 June 30, 2015 and December 31, 2014, the combined total carrying amount of assets of the Company’s VIEs was approximately $43.9 million and $39.8 million, respectively, which includes approximately $41.9 million and $37.1 million, respectively, of real estate assets at the end of each period. As of June 30, 2015 and December 31, 2014, the total carrying amount of liabilities was approximately $41.7 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 letters of credit issued thereunder) and the Operating Partnership’s senior unsecured notes.

Debt of the Operating Partnership

Mortgages Payable

Mortgages payable held by the Operating Partnership at June 30, 2015 and December 31, 2014 consist of the following (dollars in thousands):

 

     Carrying Amount of
Mortgage Notes
     Contractual
Interest Rate
(June 30,
2015)
    Effective
Interest Rate
(June 30,
2015)
    Monthly
Payment(1)
     Maturity
Date
 

Property Pledged as Collateral

   June 30,
2015
     December 31,
2014
           

The Promenade

   $ 45,165         46,125         4.80     4.80     344         November 2015   

5000 South Hulen

     13,045         13,174         5.60     6.90     83         April 2017   

Lake Pleasant Pavilion

     27,327         27,513         6.09     5.00     143         October 2017   

West Broad Marketplace(2)

     5,501         1,772         2.49     2.49     2         January 2018   

Rite Aid — Vestavia Hills

     737         833         7.25     7.25     21         October 2018   

Living Spaces-Promenade

     6,402         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

     42,003         42,545         4.60     4.00     253         July 2022   

Northside Mall(3)

     12,000         12,000         0.09     1.09     1         November 2035   
  

 

 

    

 

 

           
     191,880         190,329             

Plus: premium(4)

     2,202         2,419             
  

 

 

    

 

 

           

Mortgage notes payable, net

   $ 194,082       $ 192,748             
  

 

 

    

 

 

           

 

(1) 

Amount represents the monthly payment of principal and interest at June 30, 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 June 30, 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 0.09% at June 30, 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 $98,000 and $100,000 at June 30, 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 June 30, 2015 and 2014 was $305,000 and $264,000, respectively, and for the six months ended June 30, 2015 and 2014 was $570,000 and $459,000, respectively.

 

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Table of Contents

The Company’s mortgage debt maturities at June 30, 2015 for each of the next five years and thereafter are as follows (dollars in thousands):

 

Year Ending December 31,

   Amount  

2015 (remaining six months)

   $ 46,424   

2016

     3,070   

2017

     42,196   

2018

     8,451   

2019

     6,390   

Thereafter

     85,349   
  

 

 

 
   $ 191,880   
  

 

 

 

Term Loan

The Operating Partnership’s term loan agreement (the “Term Loan”) matured and was repaid on June 30, 2015. The Term Loan had a borrowing capacity of up to $50.0 million and bore interest at the rate of LIBOR plus a margin of 115 basis points. Borrowings under the Term Loan at the time of repayment were $50.0 million.

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 June 30, 2015, the Operating Partnership believes that it was in compliance with all financial covenants in the credit agreement.

As of June 30, 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 June 30, 2015), depending on the Parent Company’s credit rating. As of June 30, 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 $257.0 million and $238.0 million with a weighted-average interest rate of 1.49% and 1.47% at June 30, 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 June 30, 2015, there was approximately $26.1 million available for borrowing under the unsecured revolving credit facility.

Unsecured Notes

Unsecured Senior Notes due 2020 and 2023

As of June 30, 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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Table of Contents

Unsecured Senior Notes due 2024

As of June 30, 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 June 30, 2015 and December 31, 2014 was as follows (in thousands):

 

     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Principal amount

   $ 250,000       $ 250,000   

Unamortized debt discount

     (1,176      (1,242
  

 

 

    

 

 

 
   $ 248,824       $ 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 and six months ended June 30, 2015 does not include 473,813 and 488,066 shares of unvested restricted common stock, respectively, or 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 and six months ended June 30, 2014 does not include 747,365 and 487,961 shares, respectively, of unvested restricted common stock or 1,019,523 OP units, as the effect of including these equity securities was anti-dilutive to the net loss attributable to the common stockholders. In addition, 2,012,707 and 2,010,552 shares of common stock for the three and six months ended June 30, 2015, respectively, and 3,367,200 shares of common stock for the three and six months ended June 30, 2014, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Stock (“Series A preferred stock”) were anti-dilutive and were not included in the calculation of diluted earnings per share based on the “if converted” method.

 

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Table of Contents

Computations of basic and diluted earnings per share for the three and six months ended June 30, 2015 and 2014 (in thousands, except share data) were as follows:

 

    Three Months Ended     Six Months Ended  
    June 30, 2015     June 30, 2014     June 30, 2015     June 30, 2014  

Basic earnings per share:

       

Net income (loss) attributable to the common stockholders

  $ 1,103      $ (839   $ 18,731      $ (1,388

Allocation to participating securities

    (86     (129     (171     (257
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) applicable to the common stockholders

  $ 1,017      $ (968   $ 18,560      $ (1,645
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted earnings per share:

       

Income (loss) applicable to the common stockholders

  $ 1,017      $ (968   $ 18,560      $ (1,645

Series A preferred stock dividend

    —          —          —          —     

Allocation to participating securities

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) available to the common stockholders

  $ 1,017      $ (968   $ 18,560      $ (1,645
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted-average common shares outstanding:

       

Basic

    62,937,367        48,566,816        62,706,636        48,178,118   

Common stock issuable upon conversion of the Series A preferred stock

    —          —          —          —     

Restricted common stock

    —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Diluted

    62,937,367        48,566,816        62,706,636        48,178,118   
 

 

 

   

 

 

   

 

 

   

 

 

 

Basic and diluted earnings per share:

       

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

  $ 0.02      $ (0.02   $ 0.30      $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

 

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

  $ 0.02      $ (0.02   $ 0.30      $ (0.03
 

 

 

   

 

 

   

 

 

   

 

 

 

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 and six months ended June 30, 2015 does not include 473,813 and 488,066 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to net income attributable to the unitholders. The calculation of diluted earnings per unit for the three and six months ended June 30, 2014 does not include 747,365 and 487,961 unvested restricted OP units, respectively, as the effect of including these equity securities was anti-dilutive to the net loss attributable to the unitholders. In addition, 2,012,707 and 2,010,552 OP units for the three and six months ended June 30, 2015, respectively, and 3,367,200 OP units for the three and six months ended June 30, 2014, which were issuable upon settlement of the conversion feature of the 7.00% Series A Cumulative Convertible Perpetual Preferred Units (“Series A preferred units”) were anti-dilutive and were not included in the calculation of diluted earnings per unit based on the “if converted” method.

 

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Computations of basic and diluted earnings per unit for the three and six months ended June 30, 2015 and 2014 (in thousands, except unit data) were as follows:

 

     Three Months Ended      Six Months Ended  
     June 30, 2015      June 30, 2014      June 30, 2015      June 30, 2014  

Basic earnings per unit:

           

Net income (loss) attributable to the unitholders

   $ 1,122       $ (855    $ 19,039       $ (1,414

Allocation to participating securities

     (86      (129      (171      (257
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) applicable to the unitholders

   $ 1,036       $ (984    $ 18,868       $ (1,671
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted earnings per unit:

           

Income (loss) applicable to the unitholders

   $ 1,036       $ (984    $ 18,868       $ (1,671

Series A preferred unit distribution

     —           —           —           —     

Allocation to participating securities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Income (loss) available to the unitholders

   $ 1,036       $ (984    $ 18,868       $ (1,671
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted-average common OP units outstanding:

           

Basic

     63,956,890         49,586,339         63,726,159         49,197,641   

OP units issuable upon conversion of the Series A preferred units

     —           —           —           —     

Restricted OP units

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted

     63,956,890         49,586,339         63,726,159         49,197,641   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic and diluted earnings per unit:

           

Net income (loss) share available to the unitholders - basic

   $ 0.02       $ (0.02    $ 0.30       $ (0.03
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) share available to the unitholders - diluted

   $ 0.02       $ (0.02    $ 0.30       $ (0.03
  

 

 

    

 

 

    

 

 

    

 

 

 

10. Equity of the Parent Company

The Parent Company has issued restricted stock awards to senior executives, directors and employees totaling 1,406,047 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 June 30, 2015.

As of June 30, 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 June 26, 2015 (the ex-dividend date), the conversion rate was adjusted to 1.7073 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 June 30, 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.

 

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As of June 30, 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 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 six months ended June 30, 2014, the Parent Company repurchased 105,775 shares of its common stock for an aggregate cost of approximately $1.4 million (including transaction costs) at a weighted-average purchase price of $12.52 per share. The repurchased shares of common stock were subsequently retired by the Parent Company. No stock was repurchased during the six months ended June 30, 2015. As of June 30, 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 six months ended June 30, 2014, the Parent Company did not issue any shares pursuant to the Equity Distribution Agreements. During the six months ended June 30, 2015, the Parent Company issued 2,227,456 shares of common stock pursuant to the Equity Distribution Agreements, resulting in net proceeds of approximately $29.5 million at an average stock issuance price of $13.75 per share. The net proceeds of $29.5 million were contributed to the Operating Partnership in exchange for 2,227,456 OP units. As of June 30, 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 June 30, 2015, the Parent Company accrued for a dividend of $11.4 million payable to the common stockholders of record, a dividend of $2.0 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 June 30, 2015, each of which was paid in July 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 June 30, 2015).

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

May 4, 2015(4)

   $ 15.89         12,596         1   

 

(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.

 

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(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.

 

(4) 

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

Shares of the Parent Company’s restricted common stock generally may not be sold, pledged, assigned or transferred in any manner other than by will or the laws of descent and distribution or, subject to the consent of the administrator of the 2010 Plan, a domestic relations order, unless and until all restrictions applicable to such shares have lapsed. Such restrictions expire upon vesting. Shares of the Parent Company’s restricted common stock have full voting rights and rights to dividends upon grant. The Company recognized compensation expense during the three and six months ended June 30, 2015 of $1.1 million and $2.2 million, respectively, for the three and six months ended June 30, 2014 of $1.4 million and $2.0 million, respectively, related to the restricted common stock grants ultimately expected to vest. ASC Topic 718, Compensation — Stock Compensation, requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company has estimated $0 in forfeitures for all periods presented. Stock compensation expense is included in general and administrative expense in the accompanying condensed consolidated statements of operations.

As of June 30, 2015 and December 31, 2014, there was approximately $4.8 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 June 30, 2015 and December 31, 2014, this expense was expected to be recognized over a weighted-average remaining period of 1.1 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

     164,733       $ 14.04   

Forfeitures/Expirations(1)

     (83,195    $ 12.96   

Vested

     (33,484    $ 12.52   
  

 

 

    

 

 

 

Balance - June 30, 2015

     475,634       $ 13.17   
  

 

 

    

 

 

 

 

(1) 

During the six months ended June 30, 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 six months ended June 30, 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 June 30, 2015 were the discount rate (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 June 30, 2015, obligations related to profit participation interests in the amount of approximately $2.4 million are included in other liabilities in the accompanying condensed consolidated balance sheets.

 

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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 and six months ended June 30, 2015 were approximately $45,000 and $90,000, respectively. Costs related to the matching portion of the plan for the three and six months ended June 30, 2014 were approximately $41,000 and $80,000, respectively.

11. Equity of the Operating Partnership

As of June 30, 2015, the Operating Partnership had outstanding 64,435,271 OP units. The Parent Company owned 98.4% of the partnership interests in the Operating Partnership at June 30, 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 June 30, 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 six months ended June 30, 2014, the Operating Partnership repurchased 105,775 common OP units from the Parent Company (in connection with the Parent Company’s repurchase of its common stock) for an aggregate cost of approximately $1.4 million 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 six months ended June 30, 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 six months ended June 30, 2015, the Operating Partnership issued 2,227,456 OP units to the Parent Company in exchange for net proceeds of approximately $29.5 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.

The following table shows the vested partnership interests in the Operating Partnership as of June 30, 2015 and December 31, 2014:

 

     June 30, 2015     December 31, 2014  
     OP
Units
     Percentage
of Total
    OP
Units
     Percentage
of Total
 

Excel Trust, Inc.

     62,940,114         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

     63,959,637         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.

 

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General information on the Bay Hill property as of June 30, 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 June 30, 2015, Bay Hill had real estate assets of $36.1 million, total assets of $39.0 million, mortgages payable of $23.7 million and total liabilities of $25.6 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 $894,000 and $1.8 million, total expenses were $639,000 and $1.3 million (including interest expense) and net income was $255,000 and $523,000 for the three and six months ended June 30, 2015, respectively. Total revenues were $950,000 and $1.9 million, total expenses were $683,000 and $1.4 million (including interest expense) and net income was $267,000 and $511,000 for the three and six months ended June 30, 2014, respectively. 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. On April 2, 2015, the Company completed the disposition of the Rosewick Crossing property (part of the retail properties reporting segment) for a sales price of $25.0 million, excluding closing costs. On May 19, 2015, the Company completed the disposition of the Cedar Square property (part of the retail properties reporting segment) for a sales price of approximately $8.5 million, excluding closing costs. As a result of these sales, the Company recognized a gain on sale of real estate assets of approximately $25.5 million in the six months ended June 30, 2015, 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 six months ended June 30, 2015) were as follows (dollars in thousands):

 

     Three Months Ended      Six Months Ended  
     June 30,
2015
     June 30,
2014
     June 30,
2015
     June 30,
2014
 

Total revenues

   $ —         $ 1,459       $ 1,128       $ 2,848   

Operating expenses

     1        (700      (533      (1,371

General and administrative

     (4      —           (11      (3

Depreciation and amortization

     —           (602      (356      (1,186

Gain on sale of real estate assets

     50        —           15,248         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income

   $ 47      $ 157       $ 15,476       $ 288   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2015, the Company had executed agreements and the buyer had completed due diligence activities related to the sale of three retail properties (part of the retail properties reporting segment), the Merchant Central property (located in Milledgeville, Georgia), the Mariner’s Point property (located in St. Marys, Georgia) and the Newport Towne Center property (located in Newport, Tennessee) for a combined sales price of approximately $17.8 million. As a result, the properties have been classified as held for sale on the accompanying condensed consolidated balance sheets.

 

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The major classes of assets and liabilities of the properties classified as held for sale as of June 30, 2015 were as follows (dollars in thousands):

 

     June 30,
2015
 
Real estate held for sale:   

Land

   $ 4,595   

Buildings

     12,720   

Site/Tenant improvements

     2,441   

Accumulated depreciation

     (3,581
  

 

 

 

Property, net

     16,175   

Lease intangibles, net

     60   

Deferred rent receivable

     38   

Other assets

     13   
  

 

 

 

Real estate held for sale, net of accumulated depreciation

   $ 16,286   
  

 

 

 
Liabilities of real estate held for sale:   

Accounts payable and other liabilities

   $ 180   
  

 

 

 

Liabilities of real estate held for sale

   $ 180   
  

 

 

 

The sales of The Family Center at Orem, Promenade Corporate Center, Rosewick Crossing and Cedar Square properties during the six months ended June 30, 2015 and the classification of the Merchant Central, Mariner’s Point and Newport Towne Center properties as held for sale as of June 30, 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 retail properties reporting segment of the Company or represent a strategic shift from owning and operating retail operating properties 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 and six months ended June 30, 2015, approximately $89,000 and $184,000, respectively, was reimbursed to the Company from ERH and included in other income in the accompanying condensed consolidated statements of operations. For the three and six months ended June 30, 2014, approximately $84,000 and $160,000, 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 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.

 

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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, Topic 740 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.

In connection with the sale of the Cedar Square property on May 19, 2015 (see Note 13), which was held in the TRS, the Company recognized a provision for income taxes in the amount of approximately $800,000. The corresponding expense was recorded as a reduction of the gain recognized on the sale of the property.

16. Commitments and Contingencies

Litigation:

On April 22, 2015, a purported class action related to the Merger Agreement (as such term is defined below in Note 19), Laborers’ Local #231 Pension Fund v. Excel Trust, Inc. et al., was filed in the Superior Court of the State of California, County of San Diego, against the Parent Company, the Operating Partnership, The Blackstone Group L.P., Blackstone Property Partners L.P., BRE Retail Centers Holdings LP (“BRE Retail Centers”), BRE Retail Centers Corp (“Merger Sub”), BRE Retail Centers LP (“Merger Partnership”) and the members of our board of directors, alleging, among other things, that our directors breached their fiduciary duties in connection with the Merger Agreement (including, but not limited to, various alleged breaches of duties of good faith, loyalty, due care and candor). On June 19, 2015, the Court dismissed this action in its entirety, without prejudice.

Five other lawsuits, Branagan v. Excel Trust, Inc., et al., Sciabacucchi v. Excel Trust, Inc., et al., Gonzalez v. Excel Trust, Inc., et al., Werbowsky v. Excel Trust, Inc. et al. and Berkman v. Excel Trust, Inc., et al., raising similar purported class claims, were filed in the Circuit Court for Baltimore City, Case Nos. 24-C-15-002142, 24-C-15-002305, 24-C-15-002412, 24-C-15-002832 and 24-15-002924 on April 29, 2015, May 7, 2015, May 12, 2015, May 29, 2015 and June 2, 2015, respectively. These lawsuits generally allege breaches of fiduciary duties by our directors in connection with the Merger Agreement. More specifically, the complaints allege that the defendants failed to take appropriate steps to maximize stockholder value and improperly favored themselves in connection with the proposed transaction. The complaints further assert that the Merger Agreement contains several deal protection provisions that are unnecessarily preclusive. The five complaints also allege that some or all of the Parent Company, the Operating Partnership, The Blackstone Group L.P., Blackstone Property Partners L.P., BRE Retail Centers, Merger Sub and Merger Partnership aided and abetted the directors’ purported breaches of fiduciary duty. The Werbowsky action also alleges aiding and abetting claims against the Parent Company’s financial advisor, Morgan Stanley & Co., LLC (“Morgan Stanley”), and a derivative claim on behalf of the Parent Company. The lawsuits seek equitable and injunctive relief, including an order enjoining the completion of the proposed Mergers (as such term is defined below in Note 19), rescission of any consummated transaction, attorneys’ fees and expenses, and unspecified damages. The Werbowsky lawsuit also seeks a constructive trust in favor of the plaintiffs in that action. On June 18, 2015, the Court consolidated the Branagan, Sciabacucchi, Gonzalez, Werbowsky and Berkman actions, and the consolidated cases are captioned Branagan, et al. v. Excel Trust, Inc., et al., Case No. 24-C-15-002142.

On July 10, 2015, the Court granted in part and denied in part the motions to dismiss the Branagan action, dismissing the claims against Blackstone and Morgan Stanley, and the derivative claim, with prejudice. On July 15, 2015, Plaintiff Branagan filed a motion for a preliminary injunction, which sought to enjoin the vote of the Parent Company’s common stockholders to approve the Merger Agreement and the Company Merger (as such term is defined below in Note 19) based on alleged disclosure deficiencies in the definitive proxy statement filed by the Parent Company on June 1, 2015. On July 23, 2015, the Court denied plaintiff’s motion for a preliminary injunction, declining to enjoin the vote of the Parent Company’s stockholders to approve the Merger Agreement and the Company Merger, which vote was held on July 28, 2015 and which approval was received, as further described in Note 20 below. We believe the remaining consolidated lawsuit is wholly without merit, we intend to continue to vigorously defend against it and we believe that the impact of the lawsuit would be immaterial to our consolidated financial position, results of operations or cash flows.

Environmental Matters:

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

Other:

The Company’s other commitments and contingencies include the usual obligations of real estate owners and operators in the normal course of business. In management’s opinion, these matters are not expected to have a material adverse effect on its condensed consolidated balance sheets, results of operations or cash flows. In addition, the Company expects to incur construction costs relating to development projects on portions of existing operating properties and at its non-operating properties (Chimney Rock Phase II, Plaza at Rockwell Phase III, West Broad Marketplace, Monte Vista Crossing Phase II 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.

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 June 30, 2015 (dollars in thousands):

 

    Balance at
June 30, 2015
    Quoted Prices in
Active Markets
(Level 1)
    Significant Other
Observable
Inputs (Level 2)
    Significant
Unobservable Inputs
(Level 3)
 

Fair value measurements on a recurring basis:

       

Assets:

       

Other assets related to business combinations(1)

  $ 1,377      $ —       $ —       $ 1,377   

 

(1) Amount reflects the fair value of funds expected to be received as of June 30, 2015 pursuant to a master lease agreement executed in connection with the Monte Vista crossing acquisition (see Note 3). The Company has estimated the fair value of the asset based on its expectations of the timing of construction and lease-up of GLA to be constructed at the property by the seller (including corresponding estimates for time required to lease and construct building shell and tenant improvements). This amount was included in other assets in the accompanying condensed consolidated balance sheets. Subsequent changes in the fair value of the asset will be recorded as a gain (loss) in earnings in the period in which the change occurs.

 

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The following table reconciles the beginning and ending balances of financial instruments that are remeasured on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2015 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
 

Beginning balance, January 1, 2015

   $ —    

Total gains: Included in earnings

     —    

Purchases, issuances or settlements

     1,377   
  

 

 

 

Ending balance, June 30, 2015

   $ 1,377   
  

 

 

 

 

(1) 

The change of $1.4 million for other assets related to business combinations during the six months ended June 30, 2015 was comprised of an initial estimate of funds to be received pursuant to a master lease agreement executed in connection with the acquisition of the Monte Vista Crossing property in June 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 June 30, 2014 (dollars in thousands):

 

     Other Assets
Related to Business
Combinations (1)
 

Beginning balance, January 1, 2014

   $ 507   

Total gains: Included in earnings

     —    

Purchases, issuances or settlements

     (507
  

 

 

 

Ending balance, June 30, 2014

   $ —    
  

 

 

 

 

(1) 

The change of $507,000 for other assets related to business combinations during the six months ended June 30, 2014 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 six months ended June 30, 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 June 30, 2015 and December 31, 2014 (fair value measurements categorized as Level 3 of the fair value hierarchy) are as follows (dollars in thousands):

 

     June 30, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial liabilities:

           

Mortgage notes payable

   $ 194,082       $ 195,424       $ 192,748       $ 195,729   

Notes payable

     257,000         255,068         238,000         235,940   

Unsecured notes

     348,824         341,726         348,758         353,662   

Term loan(1)

     —          —          50,000         50,000   

 

(1) 

The Company’s term loan matured and was repaid on June 30, 2015.

 

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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 and six months ended June 30, 2015 and 2014 (dollars in thousands):

 

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     Three Months Ended     Six Months Ended  
     June 30,
2015
    June 30,
2014
    June 30,
2015
    June 30,
2014
 

Office Properties:

        

Total revenues

   $ 771      $ 2,233      $ 2,673      $ 4,394   

Property operating expenses

     (191     (890     (908     (1,743
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     580        1,343        1,765        2,651   

General and administrative costs

     (6     —          (24     (5

Depreciation and amortization

     (300     (911     (956     (1,803

Interest expense

     —          (4     —          (191

Gain on sale of real estate assets

     50        —          15,248        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 324      $ 428      $ 16,033      $ 652   
  

 

 

   

 

 

   

 

 

   

 

 

 

Multi-family Properties:

        

Total revenues

   $ 1,348      $ 1,382      $ 2,698      $ 2,783   

Property operating expenses

     (514     (505     (976     (958
  

 

 

   

 

 

   

 

 

   

 

 

 

Property operating income, as defined

     834        877        1,722        1,825   

General and administrative costs

     (10     (11     (24     (25

Depreciation and amortization

     (463     (463     (926     (926
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 361      $ 403      $ 772      $ 874   
  

 

 

   

 

 

   

 

 

   

 

 

 

Retail Properti