Item 1A. Risk Factors
Economic conditions in the U.S. economy in general, and any uncertainty in the credit markets and retail environment, could adversely affect our ability to continue to pay dividends or cause us to reduce further the amount of our dividends.
We paid dividends totaling $0.20 per share during each of 2014, 2013 and 2012. However, any downturn in the state of the U.S. economy, weakness in capital markets and/or difficult retail environment may cause us to reduce or suspend the payment of dividends.
Any volatility or instability in the credit markets could adversely affect our ability to obtain new financing or to refinance existing indebtedness.
Any instability in the credit markets may negatively impact our ability to access debt financing, to arrange property-specific financing or to refinance our existing debt as it matures on favorable terms or at all. As a result, we may be forced to seek potentially less attractive financings, including equity investments, on terms that may not be favorable to us. In doing so, we may be compelled to dilute the interests of existing shareholders that could also adversely reduce the trading price of our common stock.
Our properties consist primarily of grocery-anchored shopping centers. Our performance therefore is linked to economic conditions in the market for retail space generally.
Our properties consist primarily of grocery-anchored shopping centers, and our performance therefore is linked to economic conditions in the market for retail space generally. This also means that we are subject to the risks that affect the retail environment generally, including the levels of consumer spending, the willingness of retailers to lease space in our shopping centers, tenant bankruptcies, the impact of internet sales on the demand for retail space, ongoing consolidation in the retail sector, and changes in economic conditions and consumer confidence. A downturn in the U.S. economy and reduced consumer spending could impact our tenants’ ability to meet their lease obligations due to poor operating results, lack of liquidity or other reasons, and therefore decrease the revenue generated by our properties and/or the value of our properties. Our ability to lease space and negotiate and maintain favorable rents could also be negatively impacted by the state of the U.S. economy. Moreover, the demand for leasing space in our shopping centers could also significantly decline during a significant downturn in the U.S. economy that could result in a decline in our occupancy percentage and reduction in rental revenues. Any sustained levels of high unemployment can be expected to have a serious negative impact on consumer spending and sales by tenants at our shopping centers.
In addition, increases in energy costs in this country may cause shoppers to restrict their trips by automobile to shopping centers, reduce their purchases of gasoline and other products from the fuel service stations at several of our properties, as well as reduce their levels of discretionary spending, all of which, in turn, could adversely affect sales at our properties.
Our performance and value are subject to risks associated with real estate assets and with the real estate industry.
Our performance and value are subject to risks associated with real estate assets and with the real estate industry, including, among other things, risks related to adverse changes in national, regional and local economic and market conditions. Our continued ability to make expected distributions to our shareholders depends on our ability to generate sufficient revenues to meet operating expenses, future debt service and capital expenditure requirements. Events and conditions generally applicable to owners and operators of real property that are beyond our control may decrease cash available for distribution and the value of our properties. These events and conditions include, but may not be limited to, the following:
1. local oversupply, increased competition or declining demand for real estate;
2. local economic conditions, which may be adversely impacted by plant closings, business layoffs, industry slow-downs, weather conditions, natural disasters and other factors;
3. non-payment or deferred payment of rent or other charges by tenants, either as a result of tenant-specific financial ills, or general economic events or circumstances adversely affecting consumer disposable income or credit;
4. vacancies or an inability to rent space on acceptable terms;
5. increased operating costs, including real estate taxes, insurance premiums, utilities, and repairs and maintenance;
6. volatility and/or increases in interest rates, or the non-availability of funds in the credit markets in general;
7. increased costs of complying with current, new or expanded governmental regulations;
8. the relative illiquidity of real estate investments;
9. changing market demographics;
10. changing traffic patterns; and
11. an inability to refinance maturing debt in acceptable amounts and/or on acceptable terms.
The level of our indebtedness and any constraints on credit may impede our operating performance, and put us at a competitive disadvantage.
The level of our indebtedness may harm our business and operating results by (1) requiring us to use a substantial portion of our available liquidity to pay required debt service and/or repayments or establish additional reserves, which would reduce amounts available for distributions, (2) placing us at a competitive disadvantage compared to competitors that have less debt or debt at more favorable terms, (3) making us more vulnerable to economic and industry
downturns and reducing our flexibility in responding to changing business and economic conditions, and (4) limiting our ability to borrow more money for operations or capital expenditures. In addition, increases in interest rates may impede our operating performance and put us at a competitive disadvantage. Further, payments of required debt service or amounts due at maturity, or creation of additional reserves under loan agreements, could adversely affect our liquidity.
As substantially all of our revenues are derived from rental income, failure of tenants to pay rent or delays in arranging leases and occupancy at our properties could seriously harm our operating results and financial condition.
Substantially all of our revenues are derived from rental income from our properties. Our tenants may experience a downturn in their respective businesses and/or in the economy generally at any time that may weaken their financial condition. As a result, any such tenants may delay lease commencement, fail to make rental payments when due, decline to extend a lease upon its expiration, become insolvent, or declare bankruptcy. Any leasing delays, failure to make rental or other payments when due, or tenant bankruptcies, could result in the termination of tenants’ leases, which would have a negative impact on our operating results. In addition, adverse market and economic conditions and competition may impede our ability to renew leases or re-let space as leases expire, which could harm our business and operating results.
Our business may be seriously harmed if a major tenant fails to renew its lease(s) or vacates one or more properties and prevents us from re-leasing such premises by continuing to pay base rent for the balance of the lease terms. In addition, the loss of such a major tenant could result in lease terminations or reductions in rent by other tenants at the affected properties, as provided in their respective leases. No tenant leased more than 10% of GLA at December 31, 2014 or contributed more than 10% of total revenues during 2014, except for Giant Food Stores, LLC and Stop & Shop, Inc., each of which is owned by Ahold N.V., a Netherlands corporation, which leased an aggregate of approximately 11% of our GLA, excluding properties held for sale, at December 31, 2014, and accounted for an aggregate of approximately 14% of our total revenues, excluding properties held for sale, during 2014.
We may be restricted from re-leasing space based on existing exclusivity lease provisions with some of our tenants. In these cases, the leases contain provisions giving the tenant the exclusive right to sell particular types of merchandise or provide specific types of services within the particular retail center, which limits the ability of other tenants within that center to sell such merchandise or provide such services. When re-leasing space after a vacancy by one of such other tenants, such lease provisions may limit the number and types of prospective tenants for the vacant space. The failure to re-lease space or to re-lease space on satisfactory terms could harm operating results.
Any bankruptcy filings by, or relating to, one of our tenants or a lease guarantor would generally bar efforts by us to collect pre-bankruptcy debts from that tenant, or lease guarantor, unless we receive an order permitting us to do so from the bankruptcy court. A bankruptcy by a tenant or lease guarantor could delay efforts to collect past due balances, and could ultimately preclude full or, in fact, any collection of such sums. If a lease is affirmed by the tenant in bankruptcy, all pre-bankruptcy balances due under the lease must generally be paid in full. However, if a lease is disaffirmed by a tenant in bankruptcy, we would have only an unsecured claim for damages, which would be paid normally only to the extent that funds are available, and
only in the same percentage as is paid to all other members of the same class of unsecured creditors. It is possible, and indeed likely, that we would recover substantially less than, or in fact no portion of, the full value of any unsecured claims we hold, and would be required to write off any straight-line rent receivable recorded for such tenant, which may in turn harm our financial condition.
“New Technology” developments may negatively impact our tenants and our business.
We may be adversely affected by developments in new technology which may cause the business of certain of our tenants to become substantially diminished or functionally obsolete, with the result that such tenants may be unable to pay rent, become insolvent, file for bankruptcy protection, close their stores, or terminate their leases. Examples of the potentially adverse effects of new technology on retail businesses include, among other things, the effect of “e-books” and small screen readers on book stores, and increased sales of many products on-line.
Recent annual increases in on-line sales have also caused many retailers to sell products on-line on their websites with pick-ups at a store or warehouse or through deliveries, which may have the effect of decreasing the reported amount of their in-store sales and the amount of rent we are able to collect from them. With respect to grocer tenants, on-line grocery orders have become increasingly available, particularly in urban areas, but have not yet become a major factor affecting grocers in our portfolio. We cannot predict with certainty how growth in internet sales will impact the demand for space at our properties or how much revenue will be generated at “bricks and mortar” store locations in the future. If we are unable to anticipate and respond promptly to trends in retailer and consumer behavior, our occupancy levels and financial results could suffer.
We face risks relating to cybersecurity attacks, loss of confidential information and other business disruptions.
We rely extensively on computer systems to manage our business and process transactions. Our business is at risk from and may be impacted by cybersecurity attacks, including attempts to gain unauthorized access to our confidential data and other electronic security breaches. Such cyber-attacks can range from individual attempts to gain unauthorized access to our information technology systems to more sophisticated security threats. While we employ a number of measures to prevent, detect and mitigate these threats including password protection, backup servers and annual penetration testing, there is no guarantee such efforts will be successful in preventing a cyber-attack. Cybersecurity incidents, depending on their nature and scope, could potentially lead to the compromise of confidential information, improper use of our systems and networks, manipulation and destruction of data, system downtimes and operational disruptions, which in turn could adversely affect our reputation, competitiveness and results of operations. In the event a security breach or failure results in the disclosure of sensitive tenant or other third-party data, or the transmission of harmful/malicious code to third parties, we could be subject to liability or claims.
Competition may impede our ability to renew leases or re-let spaces as leases expire, which could harm our business and operating results.
We also face competition from similar retail centers within our respective trade areas that may affect our ability to renew leases or re-let space as leases expire. Certain national retail
chain bankruptcies and resulting store closings/lease disaffirmations have generally resulted in increased available retail space which, in turn, has resulted in increased competitive pressure to renew tenant leases upon expiration and to find new tenants for vacant space at such properties. In addition, any new competitive properties that are developed within the trade areas of our existing properties may result in increased competition for customer traffic and creditworthy tenants. Increased competition for tenants may require us to make tenant and/or capital improvements to properties beyond those that we would otherwise have planned to make. Any unbudgeted tenant and/or capital improvements we undertake may reduce cash that would otherwise be available for distributions to shareholders. Ultimately, to the extent we are unable to renew leases or re-let space as leases expire, our business and operations could be negatively impacted.
The financial covenants in our loan agreements may restrict our operating or acquisition activities, which may harm our financial condition and operating results.
The financial covenants in our loan agreements may restrict our operating or acquisition activities, which may harm our financial condition and operating results. Our unsecured credit facilities and the mortgages on our properties contain customary negative covenants, such as those that limit our ability, without the prior consent of the lender, to sell or otherwise transfer any ownership interest, to further mortgage the applicable property, to enter into leases, or to discontinue insurance coverage. Our ability to borrow under our unsecured revolving credit facility is subject to compliance with these financial and other covenants, including restrictions on the maximum availability, which is based on the adjusted net operating income of designated unencumbered properties, the payment of dividends, and overall restrictions on the amount of indebtedness we can incur. If we breach covenants in our debt agreements, the lenders could declare a default and require us to repay the debt immediately and, if the debt is secured, take possession of the property or properties securing the loan.
The geographic concentration of our properties in the Washington DC to Boston corridor exposes us to greater economic risks than if the distribution of our properties encompassed a broader region.
Our properties are located largely in the region that straddles the Washington DC to Boston corridor, which exposes us to greater economic risks than if our properties were more diversely located (in particular, 26 of our properties are located in Pennsylvania). Any adverse economic or real estate developments resulting from the regulatory environment, business climate, fiscal problems or weather in such regions could have an adverse impact on our prospects. In addition, the economic condition of each of our markets may be dependent on one or more industries. An economic downturn in one of these industry sectors may result in an increase in tenant vacancies, which may harm our performance in the affected markets.
Competition and saturation in our existing markets may limit our ability for further growth in these geographic regions.
Numerous commercial developers and real estate companies compete with us seeking properties for acquisition in our existing target markets. This competition may operate to reduce the properties available for acquisition in these markets, increase the cost of the properties we acquire, reduce the rate of return on these properties, and interfere with our ability to attract and retain tenants.
High barriers to entry in the Washington DC to Boston corridor due to mature economies, road patterns, density of population, restrictions on development, and high land costs, coupled with large numbers of often overlapping government jurisdictions, may make it difficult for us to continue to grow in these areas.
Our success depends on key personnel whose continued service is not guaranteed.
Our success depends on the efforts of key personnel, whose continued service is not guaranteed. Key personnel could be lost because we could not offer, among other things, competitive compensation programs. The loss of services of key personnel could materially and adversely affect our operations because of diminished relationships with lenders, sources of equity capital, construction companies, and existing and prospective tenants, and the ability to conduct our business and operations without material disruption.
Natural disasters and severe weather conditions could have an adverse impact on our cash flow and operating results.
Some of our properties could be subject to potential natural or other disasters. In addition, we may acquire properties that are located in areas which are subject to natural disasters. Properties could also be affected by increases in the frequency or severity of hurricanes or other storms, whether such increases are caused by global climate changes or other factors. The occurrence of natural disasters or severe weather conditions can increase investment costs to repair or replace damaged properties, increase operating costs, increase future property insurance costs, and/or negatively impact the tenant demand for lease space. If insurance is unavailable to us, or is unavailable on acceptable terms, or if our insurance is not adequate to cover business interruption or losses from such events, our earnings, liquidity and/or capital resources could be adversely affected.
Our redevelopment activities may not yield anticipated returns, which would harm our operating results and reduce funds available for distributions to shareholders.
Redevelopment projects entail considerable risks, including:
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Time lag between commencement and completion, leaving us exposed to higher-than-estimated construction costs, including labor and material costs;
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Failure or inability to obtain construction or permanent financing on favorable terms;
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Expenditure of money and time on projects that may never be completed;
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Inability to secure key anchor or other tenants;
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Inability to achieve projected rental rates or anticipated pace of lease-up; and
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Delays in completion relating to weather, labor disruptions, construction or zoning delays.
The failure of our redevelopment projects to yield their anticipated return could have a material adverse effect on our business and operating results.
Potential losses may not be covered by insurance.
Potential losses may not be covered by insurance. We carry comprehensive liability, fire, flood, extended coverage and rental loss insurance under a blanket policy covering all of our properties. We believe the policy specifications and insured limits are appropriate and adequate given the relative risk of loss, the cost of the coverage and industry practice. We do not carry insurance for losses related to war, nuclear accidents, and nuclear, biological and chemical occurrences from terrorist’s acts. Some of the insurance, such as those covering losses due to wind, floods and earthquakes, is subject to limitations involving large deductibles or co-payments and policy limits that may not be sufficient to cover losses. Additionally, certain tenants have termination rights in respect of certain casualties. If we receive casualty proceeds, we may not be able to reinvest such proceeds profitably or at all, and we may be forced to recognize taxable gain on the affected property. If we experience losses that are uninsured or that exceed policy limits, we could lose the capital invested in the damaged properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties are subject to recourse indebtedness, we would continue to be liable for the indebtedness, even if these properties were irreparably damaged.
Future terrorist attacks could harm the demand for, and the value of, our properties.
Future terrorist attacks, such as the attacks that occurred in New York, Pennsylvania and Washington DC on September 11, 2001, and other acts of terrorism or war, could harm the demand for, and the value of, our properties. Terrorist attacks could directly impact the value of our properties through damage, destruction, loss or increased security costs, and the availability of insurance for such acts may be limited or may be subject to substantial cost increases. To the extent that our tenants are impacted by future attacks, their ability to continue to honor obligations under their existing leases could be adversely affected.
We could incur significant costs related to government regulation and litigation over environmental matters and various other federal, state and local regulatory requirements.
All real property and the operations conducted on real property are subject to federal, state and local laws, ordinances and regulations relating to hazardous materials, environmental protection and human health and safety. Accordingly, we or our tenants may be required to investigate and clean up certain hazardous or toxic substances released on properties we own or operate, and also may be required to pay other related costs. Our leases typically impose obligations on our tenants to indemnify us for any compliance costs we may incur as a result of environmental conditions on the property caused by the tenant. If a tenant fails to or is unable to comply, we could be forced to pay these costs. If not addressed, environmental conditions could impair our ability to sell or re-lease the affected properties in the future, result in lower sales prices or rent payments, and restrict our ability to borrow funds using the affected properties as collateral.
We could incur significant costs related to government regulations and litigation over environmental matters. Under various federal, state and local laws, ordinances and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances or other contaminants at property owned, leased, managed or otherwise operated by such person, and may be held liable to a governmental entity or to third parties for property damage, and for investigation, remediation and cleanup costs in connection with such
contamination. The cost of investigation, remediation or removal of such substances may be substantial, and the presence of such substances, or the failure to properly remediate such conditions, may adversely affect the owner’s, lessor’s or operator’s ability to sell or rent such property or to arrange financing using such property as collateral. We may be liable without regard to whether we knew of, or were responsible for, the environmental contamination and with respect to properties we have acquired, whether the contamination occurred before or after the acquisition.
We believe environmental studies conducted at the time of acquisition with respect to all of our properties did not reveal any material environmental liabilities for which the Company is responsible, and we are unaware of any subsequent environmental matters that would have created a material liability. If one or more of our properties were not in compliance with federal, state and local laws, including environmental laws, we could be required to incur additional costs to bring the property into compliance. If we incur substantial costs to comply with such requirements, our business and operations could be adversely affected. If we fail to comply with such requirements, we might additionally incur governmental fines or private damage awards. There can be no assurance that existing requirements will not change or that future requirements will not require us to make significant unanticipated expenditures that will adversely impact our business and operations.
The Americans with Disabilities Act of 1990 (the “ADA”) could require us to take remedial steps with respect to our properties.
We may incur significant costs to comply with the ADA, as amended, and similar laws, which require that all public accommodations meet federal requirements related to access and use by disabled persons, and with various other federal, state and local regulatory requirements, such as state and local fire and life safety requirements.
If we fail to continue as a REIT, our distributions will not be deductible, and our income will be subject to taxation, thereby reducing earnings available for distribution.
If we do not continue to qualify as a REIT, our distributions will not be deductible, and our income will be subject to taxation, reducing earnings available for distribution. We have elected to be taxed as a REIT under the Code. A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. In addition, if we did not continue to qualify as a REIT, we would likely be subject to state and local income taxes in certain of the jurisdictions in which our properties are located.
We intend to make distributions to shareholders to comply with the requirements of the Code. However, differences in timing between the recognition of taxable income and the actual receipt of cash could require us to sell assets, borrow funds or pay a portion of the dividend in common stock to meet the 90% distribution requirement of the Code. Certain assets generate substantial differences between taxable income and income recognized in accordance with accounting principles generally accepted in the United States (“GAAP”). Such assets include, without limitation, operating real estate that was acquired through structures that may limit or completely eliminate the depreciation deduction that would otherwise be available for income tax purposes. As a result, the Code requirement to distribute a substantial portion of our
otherwise net taxable income in order to maintain REIT status could cause us to (1) distribute amounts that could otherwise be used for future acquisitions, capital expenditures or repayment of debt, (2) borrow on unfavorable terms, (3) sell assets on unfavorable terms, or (4) if necessary, pay a portion of our common dividend in common stock. If we fail to obtain debt or equity capital in the future, it could limit our operations and our ability to grow, which could have a material adverse effect on the value of our common stock.
Dividends payable by REITs do not qualify for reduced tax rates under the Code. Currently, the maximum federal individual tax rate for nonqualified dividends payable is 39.6%; qualified dividends from most C corporations received by individuals are subject to a reduced federal rate of 20%. In addition to these rates, certain high income individuals may be subject to an additional 3.8% tax on certain investment income, including dividends and capital gains. The more favorable federal tax rates applicable to regular corporate dividends may result in the stock of REITs being perceived to be less attractive than the stock of corporations that pay dividends qualifying for reduced rates of tax, which may adversely affect the value of the stock of REITs.
Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction and depress our stock price.
Our charter and Maryland law contain provisions that may delay, defer or prevent a change of control transaction and depress the price of our common stock. The charter, subject to certain exceptions, authorizes directors to take such actions as are necessary and desirable relating to qualification as a REIT, and to limit any person to beneficial ownership of no more than 9.9% of the outstanding shares of our common stock. Our Board of Directors, in its sole discretion, may exempt a proposed transferee from the ownership limit, but may not grant an exemption from the ownership limit to any proposed transferee whose direct or indirect ownership could jeopardize our status as a REIT. These restrictions on transferability and ownership will not apply if our Board of Directors determines that it is no longer in our best interests to continue to qualify as, or to be, a REIT. This ownership limit may delay or impede a transaction or a change of control that might involve a premium price for our common stock or otherwise be in the best interests of shareholders. Based on our ability to determine the underlying beneficial ownership interests of the holders of our common stock, our Board of Directors has waived the ownership limit to permit companies affiliated with each of Inland American Real Estate Trust, Inc. (“Inland”), Blackrock, Inc. and Cohen and Steers Capital Management, Inc. to acquire up to 14%, 14.9% and 15%, respectively, of our common stock. In addition, Inland has agreed to various voting restrictions and standstill provisions.
We may authorize and issue stock and OP Units without shareholder approval. Our charter authorizes the Board of Directors to issue additional shares of common or preferred stock, to issue additional OP Units, to classify or reclassify any unissued shares of common or preferred stock, and to set the preferences, rights and other terms of such classified or unclassified shares. We have agreed not to use our preferred stock for anti-takeover purposes or in connection with a shareholder rights plan unless we obtain shareholder approval. Certain provisions of the Maryland General Corporation Law (the “MGCL”) may have the effect of inhibiting a third party from making a proposal to acquire us or of impeding a change of control under circumstances that otherwise could provide the holders of shares of our common stock with the opportunity to realize a premium over the then-prevailing market price of such shares, including:
1. “business combination” provisions that, subject to limitations, prohibit certain business combinations between us and an “interested stockholder” (defined generally as any person or an affiliate thereof who beneficially owns 10% or more of the voting power of our shares) for five years after the most recent date on which the stockholder becomes an interested stockholder, and thereafter imposes special appraisal rights and special stockholder voting requirements on these combinations; and
2. “control share” provisions that provide that our “control shares” (defined as shares that, when aggregated with other shares controlled by the stockholder, entitle the stockholder to exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share acquisition” (defined as the direct or indirect acquisition of ownership or control of control shares) have no voting rights except to the extent approved by our shareholders by the affirmative vote of at least two-thirds of all the votes entitled to be cast on the matter, excluding all interested shares.
We have opted out of these provisions of the MGCL. However, the Board of Directors may, by resolution, elect to opt in to the business combination provisions of the MGCL, and we may, by amendment to our bylaws, opt in to the control share provisions of the MGCL.
Item 1B.
Item 1B. Unresolved Staff Comments: None
Item 3.
Item 3. Legal Proceedings
The Company is not presently involved in any litigation, nor, to its knowledge, is any litigation threatened against the Company or its subsidiaries, which is either not covered by the Company’s liability insurance, or, in management’s opinion, would result in a material adverse effect on the Company’s financial position or results of operations.
Item 4.
Item 4. Mine Safety Disclosures: Not applicable
Directors and Executive Officers of the Company
Information regarding the Company’s directors and executive officers is set forth below:
Bruce J. Schanzer has been President, Chief Executive Officer and a director of the Company since June 2011. Prior thereto and since 2007, Mr. Schanzer was employed by Goldman Sachs & Co., with his last position being a managing director in their real estate investment banking group. From 2001 to 2007, he was employed by Merrill Lynch, with his last position being vice president in their real estate investment banking group. Earlier in his career, Mr. Schanzer practiced real estate law for six years in New York. Mr. Schanzer received a B.A. from Yeshiva College, where he is now a member of its board of trustees, an M.B.A. from the University of Chicago, and a J.D. from the Benjamin N. Cardozo School of Law, where he was a member of the Law Review.
Roger M. Widmann, a director since October 2003, the non-executive Chairman of the Board since June 2011, and a member of the Compensation and Nominating/Corporate Governance Committees, is an investment banker. He was a principal of the investment banking firm of Tanner & Co., Inc. from 1997 to 2004. From 1986 to 1995, Mr. Widmann was a senior managing director of Chemical Securities, Inc., a subsidiary of Chemical Banking Corporation (now JPMorgan Chase Corporation). Prior to joining Chemical Securities, Inc., Mr. Widmann was a founder and managing director of First Reserve Corporation, the largest independent energy investing firm in the U.S. Previously, he was senior vice president with the investment banking firm of Donaldson, Lufkin & Jenrette, responsible for the firm’s domestic and international investment banking business. He had also been a vice president with New Court Securities (now Rothschild, Inc.). He was a director of Lydall, Inc. (listed on the New York Stock Exchange), a manufacturer of thermal, acoustical and filtration materials, from 1974 to 2004, and its chairman from 1998 to 2004. He is a director of Standard Motor Products, Inc. (listed on the New York Stock Exchange), a manufacturer of automobile replacement parts, is Chairman of Keystone National Group, a fund of private equity funds, and is Chairman and CEO of Cutwater Associates LLC, a corporate advisory firm. He is also a senior moderator of the Aspen Seminar at The Aspen Institute and a director of Oxfam America. Mr. Widmann received a B.A. from Brown University and a J.D. from the Columbia University School of Law.
James J. Burns, a director since 2001 and a member of the Audit (Chair) and Nominating/Corporate Governance Committees, was chief financial officer and senior vice president of Reis, Inc. (formerly Wellsford Real Properties, Inc.) from December 2000 until
March 2006, and vice chairman from April 2006 until March 2009, when he entered into a consulting role at that company (where he continues to have the primary responsibility for income tax reporting and compliance). He joined Reis in October 1999 as chief accounting officer upon his retirement from Ernst & Young LLP in September 1999. At Ernst & Young LLP, Mr. Burns was a senior audit partner in the E&Y Kenneth Leventhal Real Estate Group for 22 years. Since 2000, Mr. Burns has also served as a director of One Liberty Properties, Inc., a real estate investment trust listed on the New York Stock Exchange. Mr. Burns is a certified public accountant and a member of the American Institute of Certified Public Accountants. Mr. Burns received a B.A. and M.B.A. from Baruch College of the City University of New York.
Pamela N. Hootkin, a director since June 2008 and a member of the Audit and Compensation (Chair) Committees, retired at the end of April 2012 from her position as senior vice president at PVH Corp. (formerly Phillips-Van Heusen Corporation), a position she held since May 2010. She joined PVH Corp. in 1988 as vice president, treasurer and corporate secretary; in 1999 she became vice president, treasurer and director of investor relations, and in June 2007 she became senior vice president, treasurer and director of investor relations. From 1986 to 1988, Ms. Hootkin was vice president and chief financial officer of Yves Saint Laurent Parfums, Inc. From 1975 to 1986, she was employed by Squibb Corporation in various capacities, with her last position being vice president and treasurer of a division of Squibb. Ms. Hootkin is a board member of Safe Horizon, New York (a not-for-profit organization) where she also serves on the executive, finance (chair) and development committees. Ms. Hootkin received a B.A. from the State University of New York at Binghamton and a M.A. from Boston University.
Paul G. Kirk, Jr., a director from 2005 to September 2009 when he resigned to accept his appointment as a United States Senator for Massachusetts to succeed the late Senator Edward M. Kennedy, and re-elected to the Board in June 2010, is a member of the Compensation and Nominating/Corporate Governance (Chair) Committees, and is a retired partner of the law firm of Sullivan & Worcester, LLP of Boston, MA. He was a member of the firm from 1977 through 1990. He also serves as Chairman and CEO of Kirk & Associates, Inc., a business advisory and consulting firm. He has previously served on the Boards of Directors of Rayonier, Incorporated (a real estate investment trust listed on the New York Stock Exchange) (1994 to 2011), Hartford Financial Services Group, Inc. (1995 to 2014 excluding his term in the United States Senate), ITT Corporation (1989 to 1997) and Bradley Real Estate, Inc. (1991 to 2000), a real estate investment trust that was subsequently acquired by Heritage Property Investment Trust, Inc. Mr. Kirk was a founding Director of the John F. Kennedy Library Foundation and served as its Chairman from 1992 to 2009. He was a founding Director of the Commission on Presidential Debates and served as its Co-Chairman from 1987 to 2009 and a founding Director of the Edward M. Kennedy Institute for the United States Senate serving from 2007 to 2009. From 1985 to 1989, Mr. Kirk served as Chairman of the Democratic Party of the United States, and from 1983 to 1985 as its Treasurer. He is Chairman Emeritus of the National Democratic Institute for International Affairs whose Board he Chaired from 1990 to 2000. A graduate of Harvard College and Harvard Law School, Mr. Kirk is past-Chairman of the Harvard Board of Overseers’ Nominating Committee and of the Harvard Board of Overseers’ Committee to Visit the Department of Athletics. He has received many awards for civic leadership and public service, including honorary doctors of law degrees from Stonehill College and the Southern New England School of Law.
Everett B. Miller, III, a director since 1998 and a member of the Audit and Compensation Committees, has been since July 2012 the Director of the Real Estate Bureau of the New York State Common Retirement Fund. In July 2012, Mr. Miller resigned his position as a member of the Real Estate Advisory Committee for the New York State Common Retirement Fund, a position he held since March 2003, in order to accept his current position. He retired at the end of 2011 from his position as vice president of alternative investments at the YMCA Retirement Fund, a position he held since September 2003. Prior to his retirement in May 2002 from Commonfund Realty, Inc., a registered investment advisor, Mr. Miller was the chief operating officer of that company from 1997 until May 2002. From January 1995 through March 1997, Mr. Miller was the Principal Investment Officer for Real Estate and Alternative Investment at the Office of the Treasurer of the State of Connecticut. Prior thereto, Mr. Miller was employed for eighteen years at affiliates of Travelers Realty Investment Co., at which his last position was senior vice president. Mr. Miller received a B.S. from Yale University.
Philip R. Mays has been Chief Financial Officer of the Company since June 2011. From May 2005 until June 2011, Mr. Mays was employed by Federal Realty Investment Trust, a publicly-traded equity REIT specializing in shopping centers, where he initially served as Controller, was subsequently promoted to Chief Accounting Officer in September 2006, and to Vice President, Chief Accounting Officer in February 2007. Prior to joining Federal Realty, he was Vice President of Finance and Corporate Controller for CRIIMI MAE, Inc. from June 2004 until May 2005. Earlier in his career, Mr. Mays held various accounting and finance positions, including seven years as an accountant at Ernst & Young, LLP, with his last position being senior manager, and where he supervised audits and assisted clients in the real estate, construction and hospitality industries, including publicly-traded REITs. Mr. Mays is a certified public accountant and a member of the American Institute of Certified Public Accountants. Mr. Mays received a B.S. from Jacksonville University, Florida.
Nancy H. Mozzachio was elected Chief Operating Officer effective January 1, 2015. Ms. Mozzachio has been involved in the shopping center industry for more than 25 years. She joined the Company in August 2003 as Director of Leasing and has been Vice President of Leasing of the Company since September 2004. Prior to joining the Company, she served as Vice President of Leasing and Development for American Continental Properties Group from 1988 to 2003 where she assisted in bringing the first Walmart store to the State of New Jersey. From 1986 to 1988, Ms. Mozzachio was a leasing and development manager for Kode Development Group of Philadelphia. She is a member of the Commercial Real Estate Women (CREW), Urban Land Institute and Retail Network, and International Council of Shopping Centers, and has served as a mentor with the Zell-Lurie Real Estate program at The University of Pennsylvania-Wharton School. Ms. Mozzachio received a B.A. from Rutgers University.
Part II.
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Dividend Information
A corporation electing REIT status is required to distribute at least 90% of its “REIT taxable income”, as defined in the Code, to continue qualification as a REIT. In keeping with its stated goal of reducing overall leverage, and in order to maximize financial flexibility, the
Company paid dividends totaling $0.20 per share during 2014, 2013 and 2012. While the Company intends to continue paying regular quarterly dividends, future dividend declarations will continue to be at the discretion of the Board of Directors, and will depend on the cash flow and financial condition of the Company, capital requirements, annual distribution requirements under the REIT provisions of the Code, and such other factors as the Board of Directors may deem relevant.
Market Information
The Company had 79,212,941 shares of common stock outstanding held by approximately 700 shareholders of record at December 31, 2014. The Company believes it has more than 4,100 beneficial holders of its common stock. The Company’s shares trade on the NYSE under the symbol “CDR”. The following table sets forth, for each quarter for the last two years, (1) the high, low, and closing prices of the Company’s common stock, and (2) dividends paid:
Stockholder Return Performance Presentation
The following line graph sets forth for the period January 1, 2010 through December 31, 2014, a comparison of the percentage change in the cumulative total stockholder return on the Company’s common stock compared to the cumulative total return of the Russell 2000 index and the National Association of Real Estate Investment Trusts Equity REIT Total Return Index. The graph assumes that the shares of the Company’s common stock were bought at the price of $100 per share and that the value of the investment in each of the Company’s common stock and the indices was $100 at the beginning of the period. The graph further assumes the reinvestment of dividends when paid.
Item 6.
Item 6. Selected Financial Data (a)
Item 6. Selected Financial Data (a) (continued)
(a) Reflects reclassifications, relating to certain properties, from “real estate held for sale/conveyance” to “real estate held for use” and from “discontinued operations” to continuing operations”. The reclassifications had no impact on the previously-reported net income (loss) attributable to common shareholders or earnings per share.
(b) See Item 7
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion should be read in conjunction with the Company’s consolidated financial statements and related notes thereto included elsewhere in this report.
Executive Summary
Cedar Realty Trust, Inc. (the “Company”) is a fully-integrated real estate investment trust that focuses primarily on ownership and operation of grocery-anchored shopping centers straddling the Washington DC to Boston corridor. At December 31, 2014, the Company owned and managed a portfolio of 59 operating properties (excluding properties “held for sale/conveyance”) totaling approximately 9.2 million square feet of gross leasable area (“GLA”). The portfolio was 93.3% leased and 92.9% occupied at December 31, 2014.
The Company, organized as a Maryland corporation, has established an umbrella partnership structure through the contribution of substantially all of its assets to Cedar Realty Trust Partnership L.P. (the “Operating Partnership”), organized as a limited partnership under the laws of Delaware. The Company conducts substantially all of its business through the Operating Partnership. At December 31, 2014, the Company owned 99.5% of the Operating Partnership and is its sole general partner. The 393,000 limited Operating Partnership Units (“OP Units”) are economically equivalent to the Company’s common stock and are convertible into the Company’s common stock at the option of the holders on a one-to-one basis.
The Company derives substantially all of its revenues from rents and operating expense reimbursements received pursuant to long-term leases. The Company’s operating results therefore depend on the ability of its tenants to make the payments required by the terms of their leases. The Company focuses its investment activities on grocery-anchored shopping centers. The Company believes that, because of the need of consumers to purchase food and other staple goods and services generally available at such centers, its type of “necessities-based” properties should provide relatively stable revenue flows even during difficult economic times.
Significant Transactions - 2014
Acquisition
On March 21, 2014, the Company acquired Quartermaster Plaza located in Philadelphia, Pennsylvania. The purchase price for the property was approximately $92.3 million, of which approximately $53.4 million was funded from the assumption of (1) a $42.1 million mortgage loan payable, bearing interest at the rate of 5.3% per annum and maturing in October 2015, and (2) an $11.3 million mortgage loan payable, bearing interest at the rate of 5.5% per annum and payable in October 2014 (repaid in June 2014), with the remainder being funded from the Company’s unsecured revolving credit facility. The Company incurred costs of $2.9 million in connection with this acquisition.
Dispositions
During 2014, the Company sold or conveyed the following properties:
(a) Lender accepted a deed-in-lieu of foreclosure on the property. Sales price represents mortgage loan payable, accrued interest and other expenses forgiven upon title transfer.
Debt
On February 11, 2014, the Company closed $150 million of unsecured term loans consisting of a five-year $75 million term loan, all of which was borrowed at closing, maturing on February 11, 2019, and a seven-year $75 million term loan, all of which was borrowed on June 24, 2014, maturing on February 11, 2021. See “Liquidity and Capital Resources” below for additional details.
During 2014, the Company repaid the following mortgage loans payable:
Equity
In January 2014, the Company concluded a public offering of 6,900,000 shares of its common stock (including 900,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.3 million.
The Company has at-the-market offering programs, under which it may offer and sell, from time-to-time, shares of its common and preferred stock. During 2014, there were no shares sold under these programs.
Significant Transactions - Early 2015
On January 12, 2015, the Company concluded a public offering of 5,750,000 shares of its common stock (including 750,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.9 million.
On February 5, 2015, the Company amended its existing $310 million unsecured credit facility. In addition, the Company closed $100 million of new unsecured term loans. See “Liquidity and Capital Resources” below for additional details.
Summary of Critical Accounting Policies
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires the Company to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis,
management evaluates its estimates, including those related to revenue recognition and the allowance for doubtful accounts receivable, real estate investments and purchase accounting allocations related thereto, asset impairment, and derivatives used to hedge interest-rate risks. Management’s estimates are based both on information that is currently available and on various other assumptions management believes to be reasonable under the circumstances. Actual results could differ from those estimates and those estimates could be different under varying assumptions or conditions.
The Company has identified the following critical accounting policies, the application of which requires significant judgments and estimates:
Revenue Recognition
Rental income with scheduled rent increases is recognized using the straight-line method over the respective terms of the leases. The aggregate excess of rental revenue recognized on a straight-line basis over base rents under applicable lease provisions is included in straight-line rents receivable on the consolidated balance sheet. Leases also generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred; such income is recognized in the periods earned. In addition, certain operating leases contain contingent rent provisions under which tenants are required to pay a percentage of their sales in excess of a specified amount as additional rent. The Company defers recognition of contingent rental income until those specified targets are met.
The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, expense reimbursements and other revenues. Management analyzes accounts receivable by considering tenant creditworthiness, current economic conditions, and changes in tenants’ payment patterns when evaluating the adequacy of the allowance for doubtful accounts receivable. These estimates have a direct impact on net income, because a higher bad debt allowance would result in lower net income, whereas a lower bad debt allowance would result in higher net income.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for depreciation is calculated using the straight-line method based on estimated useful lives. Expenditures for maintenance, repairs and betterments that do not materially prolong the normal useful life of an asset are charged to operations as incurred. Expenditures for betterments that substantially extend the useful lives of real estate assets are capitalized.
Real estate investments include costs of development and redevelopment activities, and construction in progress. Capitalized costs, including interest and other carrying costs during the construction and/or renovation periods, are included in the cost of the related asset and charged to operations through depreciation over the asset’s estimated useful life. The Company is required to make subjective estimates as to the useful lives of its real estate assets for purposes of determining the amount of depreciation to reflect on an annual basis. These assessments have a direct impact on net income. A shorter estimate of the useful life of an asset would have the effect of increasing depreciation expense and lowering net income, whereas a longer estimate of the useful life of an asset would have the effect of reducing depreciation expense and increasing net income.
A variety of costs are incurred in the acquisition, development and leasing of a property, such as pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs, and other costs incurred during the period of development. After a determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. The Company ceases capitalization on the portions substantially completed and occupied, or held available for occupancy, and capitalizes only those costs associated with the portions under construction. The Company considers a construction project as substantially completed and held available for occupancy upon the completion of tenant improvements, but not later than one year from cessation of major development activity. Determination of when a development project is substantially complete and capitalization must cease involves a degree of judgment. The effect of a longer capitalization period would be to increase capitalized costs and would result in higher net income, whereas the effect of a shorter capitalization period would be to reduce capitalized costs and would result in lower net income.
The Company allocates the fair value of real estate acquired to land, buildings and improvements. In addition, the fair value of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the fair values of such assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.
The values of acquired above-market and below-market leases are recorded based on the present values (using discount rates which reflect the risks associated with the leases acquired) of the differences between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of the acquisitions. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal period(s). The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The values of above-market leases are amortized to rental income over the terms of the respective non-cancelable lease periods. The portion of the values of below-market leases associated with the original non-cancelable lease terms are amortized to rental income over the terms of the respective non-cancelable lease periods. The portion of the values of the leases associated with below-market renewal options that are likely of exercise are amortized to rental income over the respective renewal periods. The value of other intangible assets (including leasing commissions, tenant improvements, etc.) is amortized to expense over the applicable terms of the respective leases. If a lease were to be terminated prior to its stated expiration or not renewed, all unamortized amounts relating to that lease would be recognized in operations at that time.
Management is required to make subjective assessments in connection with its valuation of real estate acquisitions. These assessments have a direct impact on net income, because (1) above-market and below-market lease intangibles are amortized to rental income, and (2) the
value of other intangibles is amortized to expense. Accordingly, higher allocations to below-market lease liability and other intangibles would result in higher rental income and amortization expense, whereas lower allocations to below-market lease liability and other intangibles would result in lower rental income and amortization expense.
Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These estimates of cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value. A real estate investment held for sale is carried at the lower of its carrying amount or estimated fair value, less the cost of a potential sale. Depreciation and amortization are suspended during the period the property is held for sale. Management is required to make subjective assessments as to whether there are impairments in the value of its real estate properties. These assessments have a direct impact on net income, because an impairment loss is recognized in the period that the assessment is made.
New Accounting Pronouncements
See Note 2 of Notes to Consolidated Financial Statements included in Item 8 below for information relating to new accounting pronouncements.
Results of Operations
Comparison of 2014 to 2013
Revenues were higher primarily as a result of (1) an increase of $8.9 million in rental revenues and expense recoveries for properties acquired in the first quarter of 2014 and the fourth quarter of 2013, (2) an increase of $1.4 million in rental revenues and expense recoveries at the Company’s same-property portfolio, and (3) an increase of $0.6 million in rental revenues and expense recoveries at the Company’s redevelopment properties, partially offset by (1) a decrease of $2.0 million in rental revenues and expense recoveries at properties classified in 2014 as real estate held for sale/conveyance, both sold and still held for sale, and (2) a decrease of $0.2 million in management fee income related to the Cedar/RioCan joint venture; the management agreement was terminated effective January 31, 2013.
Property operating expenses were higher primarily as a result of (1) an increase of $1.5 million in property operating expenses at properties acquired in the first quarter of 2014 and the fourth quarter of 2013, (2) a $0.7 million increase in snow removal costs, and (3) a $0.6 million increase in other operating expenses, primarily repairs and maintenance and non-billable expenses.
Acquisition costs in 2014 relate to the purchase of Quartermaster Plaza, located in Philadelphia, Pennsylvania. Acquisition costs in 2013 relate to the purchase of Big Y Shopping Center, located in Fairfield County, Connecticut.
Depreciation and amortization expenses were lower primarily as a result of (1) accelerated depreciation of $6.7 million in 2013 relating to the redevelopment and lease up of vacant spaces which required the demolition of certain existing buildings resulting in accelerated depreciation expense, and (2) a reduction of $1.5 million in depreciation and amortization expense related to properties classified in 2014 as real estate held for sale/conveyance as the carrying values of these properties are now measured at the lower of depreciated cost or fair value, less cost to sell, partially offset by an increase of $2.5 million in depreciation and amortization expenses relating to properties acquired in the first quarter of 2014 and the fourth quarter of 2013.
Gain on sales in 2014 relates to the sales of properties treated as “held for sale/conveyance” subsequent to December 31, 2013. Gain on sales in 2013 relates to the sales of land parcels treated as “held for sale/conveyance”.
Impairment (charges)/reversals, net in 2014 relate to the impairments of properties classified in 2014 as real estate held for sale/conveyance. Impairment charges/(reversals) in 2013 relates to the $1.1 million partial cash recovery on a loan receivable previously written off, partially offset by $0.9 million of impairments relating to a property and land parcels.
Interest expense was lower primarily as a result of (1) $1.7 million as a result of a lower weighted average interest rate, and (2) $0.9 million as a result of a decrease in the overall outstanding principal balance of debt.
Early extinguishment of debt costs in 2014 and 2013 relates to defeasement fees and the write-off of unamortized fees associated with the prepayment of certain mortgage loans payable.
Discontinued operations for 2014 and 2013 include the results of operations, impairment reversals/(charges), net, gain on extinguishment of debt obligations, and gain on sales for properties sold or treated as “discontinued operations” on or before December 31, 2013, as more fully discussed elsewhere in this report.
Comparison of 2013 to 2012
Revenues were higher primarily as a result of (1) an increase of $5.7 million in rental revenues and expense recoveries at properties acquired in 2013 and 2012, (2) an increase of $2.3 million in rental revenues and expense recoveries at other operating properties, (3) an increase of $1.0 million in revenues at redevelopment properties, and (4) an increase of $0.2 million in rental revenues and expense recoveries at properties classified in 2014 as real estate held for sale/conveyance, partially offset by (1) a decrease of $3.0 million in lease termination income and (2) a decrease of $2.4 million in management fee income related to the Cedar/RioCan joint venture; the management agreement was terminated effective January 31, 2013.
Property operating expenses were higher primarily as a result of (1) an increase of $1.5 million in property operating expenses at properties acquired in 2013 and 2012, (2) an increase of $1.2 million in snow removal costs, and (3) an increase of $0.7 million in other operating expenses, partially offset by a decrease of $0.4 million in payroll and related benefits and costs.
Employee termination costs in 2012 reflect separation arrangements and terminations of employment agreements relating primarily to employee headcount reductions instituted in connection with property dispositions and the exit from the Cedar/RioCan joint venture. Such costs consist of (1) $0.7 million in severance and benefits, (2) $0.4 million in the accelerated vesting of share-based compensation grants, and (3) $0.1 million of other costs.
Acquisition costs in 2013 relate to the purchase of Big Y Shopping Center located in Fairfield County, Connecticut. Acquisition costs in 2012 relate to the purchases of (1) Meadows Marketplace, located in Hershey, Pennsylvania, (2) Fieldstone Marketplace, located in New Bedford, Massachusetts, and (3) Franklin Village Plaza, located in Franklin, Massachusetts.
Depreciation and amortization expenses were higher primarily as a result of (1) an increase of $2.3 million relating to properties acquired in 2013 and 2012, (2) an increase of $0.5 million in depreciation relating to the redevelopment and lease up of vacant spaces which required the demolition of certain existing buildings resulting in accelerated depreciation expense (2013 - $6.7 million and 2012 - $6.2 million), offset by a $1.8 million reduction due to the completion of scheduled depreciation and amortization.
Gain on sales in 2013 and 2012 relate principally to sales of land parcels treated as “held for sale/conveyance”.
Impairment reversals/(charges), net in 2013 relates to the $1.1 million partial cash recovery on a loan receivable previously written off, partially offset by $0.9 million of impairments relating to a property and land parcels. Impairment reversals/(charges), net in 2012 relates to (1) the $4.4 million write-off of the aforementioned loan receivable, and (2) $1.1 million of impairments relating to certain land parcels treated as “held for sale/conveyance”.
Interest expense was lower primarily as a result of (1) $4.0 million as a result of a lower weighted average interest rate, and (2) $0.3 million relating to a decrease in amortization expense of deferred financing costs, partially offset by a (1) a $0.4 million decrease in capitalized interest, and (2) a $0.2 million increase due to the overall outstanding principal balance of debt.
Early extinguishment of debt costs in 2013 relate to the write-off of unamortized fees associated with prepaid mortgage loans payable. Early extinguishment of debt costs in 2012 relates to the write-off of unamortized fees associated with the Company’s terminated stabilized property and development property credit facilities.
Equity in income of unconsolidated joint venture in 2012 relates to the Cedar/RioCan joint venture, which the Company exited in October 2012.
Gain on exit from unconsolidated joint venture in 2012 relates to the exit from the Cedar/RioCan joint venture.
Discontinued operations for 2013 and 2012 include the results of operations, impairment charges, net, gain on extinguishment of debt obligations, and gain on sales for properties sold or treated as “discontinued operations” on or before December 31, 2013, as more fully discussed elsewhere in this report.
Same-Property Net Operating Income
Same-property net operating income (“same-property NOI”) is a widely-used non-GAAP financial measure for REITs that the Company believes, when considered with financial statements prepared in accordance with GAAP, is useful to investors as it provides an indication of the recurring cash generated by the Company’s properties by excluding certain non-cash revenues and expenses, as well as other infrequent items such as lease termination income which tends to fluctuate more than rents from year to year. Properties are included in same-property NOI if they are owned and operated for the entirety of both periods being compared, except for properties undergoing significant redevelopment and expansion until such properties have stabilized, and properties classified as “held for sale/conveyance”. Consistent with the capital treatment of such costs under GAAP, tenant improvements, leasing commissions and other direct leasing costs are excluded from same-property NOI.
Same-property NOI should not be considered as an alternative to net income prepared in accordance with GAAP or as a measure of liquidity. Further, same-property NOI is a measure for which there is no standard industry definition and, as such, it is not consistently defined or reported on among the Company’s peers, and thus may not provide an adequate basis for comparison between REITs. The following table reconciles same-property NOI to the Company’s consolidated operating income:
Same-property NOI for the comparative periods increased by 1.8%. The results reflect an increase in average base rent of $0.16 per square foot, partially offset by a reduction in occupancy of 50 basis points (“bps”). Same-property NOI increased 1.2% excluding the re-tenanting impact from replacing the dark anchor at Oakland Commons with a Walmart Neighborhood Market.
Leasing Activity
The following is a summary of the Company’s leasing activity during 2014:
(a) Includes both tenant allowance and landlord work. Excludes first generation space.
(b) For 2014, legal fees and lease commissions averaged a combined total of $2.05 per square foot.
Liquidity and Capital Resources
The Company funds operating expenses and other short-term liquidity requirements, including debt service, tenant improvements, leasing commissions, preferred and common dividend distributions and distributions to minority interest partners, if made, primarily from its operations. The Company may also use its revolving credit facility for these purposes. The Company expects to fund long-term liquidity requirements for property acquisitions, redevelopment costs, capital improvements, and maturing debt initially with its revolving credit facility, and ultimately through a combination of issuing and/or assuming additional debt, the sale of equity securities, the issuance of additional OP Units, and/or the sale of properties. Although the Company believes it has access to secured and unsecured financing, there can be no assurance that the Company will have the availability of financing on completed development projects, additional construction financing, or proceeds from the refinancing of existing debt.
On February 5, 2015, the Company amended its existing $310 million unsecured credit facility, which consists of (1) a $260 million revolving credit facility, expiring on February 5, 2019, and (2) a $50 million term loan, expiring on February 5, 2020. The revolving credit facility may be extended, at the Company’s option, for an additional one-year period, subject to customary conditions. Under an accordion feature, the facility can be increased to $750 million, subject to customary conditions and lending commitments. Borrowings under the revolving credit facility component can range from LIBOR plus 135 bps to 195 bps (150 bps on February 5, 2015) and borrowing under the term loan component can range from 130 to 190 bps (145 bps on February 5, 2015), based on the Company’s leverage ratio. As of December 31, 2014, the Company had $187.7 million available for additional borrowings under the revolving credit facility.
On February 11, 2014, the Company closed $150 million of unsecured term loans comprised of a five-year $75 million term loan, maturing on February 11, 2019, and a seven-year $75 million term loan, maturing on February 11, 2021. As amended on February 5, 2015, borrowing under the five-year $75 million term loan can range from LIBOR plus 130 bps to 190 bps (145 bps on February 5, 2015) and borrowings under the seven-year $75 million term loan can range from LIBOR plus 170 bps to 230 bps (180 bps on February 5, 2015), each based on the Company’s leverage ratio. Additionally, the Company has entered into forward interest rate swap agreements which convert the LIBOR rates to fixed rates for these term loans beginning July 1, 2014 through their maturities. Reflecting the February 5, 2015 amendment, the new effective fixed interest rates are 3.1% for the five-year $75 million term loan and 4.1% for the seven-year $75 million term loan.
On February 5, 2015, the Company closed $100 million of new unsecured term loans comprised of a five-year $50 million term loan maturing February 5, 2020 (all of which was borrowed at closing), and a seven-year $50 million term loan maturing February 5, 2022. Proceeds from the seven-year term loan can be drawn at any time from closing until July 1, 2015. Borrowings under the five-year $50 million term loan can range from 130 to 190 bps (145 bps on February 5, 2015) and borrowing under the seven-year $50 million term loan can range from LIBOR plus 155 bps to 215 bps (170 bps as of February 5, 2015), each based on the Company’s leverage ratio. Additionally, the Company entered into forward interest rate swap agreements which converted the LIBOR rates to fixed rates for these term loans beginning July 1, 2015 through their maturities. As a result, the effective fixed interest rates will be 2.9% for the five-year $50 million term loan and 3.4% for the seven-year $50 million term loan.
The Company’s unsecured credit facility and term loans contain financial covenants including, but not limited to, maximum debt leverage, maximum secured debt, minimum fixed charge coverage, and minimum net worth. In addition, the facility contains restrictions including, but not limited to, limits on indebtedness, certain investments and distributions. The Company’s failure to comply with the covenants or the occurrence of an event of default under the loan agreements could result in the acceleration of the related debt. As of December 31, 2014, the Company is in compliance with all financial covenants.
Debt is comprised of the following at December 31, 2014:
For 2015, the Company has approximately $6.1 million of scheduled debt principal amortization payments and $104.4 million of scheduled balloon payments. Substantially all 2015 debt requirements will be refinanced from the proceeds of the $100 million unsecured term loans which closed on February 5, 2015 (see above).
Property-specific mortgage loans payable mature at various dates through 2029. The terms of several of the Company’s mortgage loans payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established, and is not available to fund other property-level or Company-level obligations.
On January 13, 2014, the Company concluded a public offering of 6,900,000 shares of its common stock (including 900,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.3 million.
The Company has at-the-market offering programs, under which it may offer and sell, from time-to-time, shares of its common and preferred stock. During 2014, there were no shares sold under these programs.
On January 12, 2015, the Company concluded a public offering of 5,750,000 shares of its common stock (including 750,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.9 million.
In order to continue qualifying as a REIT, the Company is required to distribute at least 90% of its “REIT taxable income”, as defined in the Internal Revenue Code of 1986, as amended (the “Code”). The Company paid common and preferred stock dividends during 2014 and 2013. While the Company intends to continue paying regular quarterly dividends, future dividend declarations will continue to be at the discretion of the Board of Directors, and will depend on the cash flow and financial condition of the Company, capital requirements, annual distribution requirements under the REIT provisions of the Code, and such other factors as the Board of Directors may deem relevant.
Contractual obligations and commercial commitments
The following table sets forth the Company’s significant debt repayment, interest and operating lease obligations at December 31, 2014:
(a) Substantially all 2015 debt requirements will be refinanced from the proceeds of the unsecured term loans which closed on February 5, 2015.
(b) As amended on February 5, 2015, the 2019 amount is subject to a one-year extension option, and was originally due in 2016.
(c) As amended on February 5, 2015, the “Thereafter” amount includes a $50 million term loan originally due in 2018.
(d) Represents interest payments expected to be incurred on the Company’s debt obligations as of December 31, 2014, including interest that may subsequently be capitalized. For variable-rate debt, the rate in effect at December 31, 2014 is assumed to remain in effect until the maturities of the respective obligations.
Net Cash Flows
Operating Activities
Net cash provided by operating activities, before net changes in operating assets and liabilities, was $57.3 million and $53.2 million for 2014 and 2013, respectively. The $4.1 million increase was primarily attributable to a reduction in interest expense of $3.8 million, as property operating income contributed by acquisitions, net of acquisition costs, was substantially offset by a reduction in property operating income associated with properties sold. The net change in operating assets and liabilities from 2014 to 2013 was $2.7 million, primarily due from the timing of collections of receivables and payments of accounts payable and accrued liabilities.
Net cash provided by operating activities, before net changes in operating assets and liabilities, was $53.2 million and $53.2 million for 2013 and 2012, respectively. These results remained consistent, as property operating income contributed by acquisitions, net of acquisition costs, and reductions in interest expense and property-level and general administrative overhead savings resulting from employee headcount reductions implemented by management in the latter part of 2012 was substantially offset by a reduction in property operating income associated with properties sold. The net change in operating assets and liabilities from 2013 to 2012 was a $0.9 million decrease, primarily due from the timing of collections of receivables and payments of accounts payable and accrued liabilities.
Investing Activities
Net cash flows provided (used) by investing activities were primarily the result of the Company’s property disposition activities, property acquisitions and expenditures for property improvements. During 2014, the Company received $102.1 million in proceeds from sales of properties classified as held for sale/conveyance and received $2.1 million in construction escrows and other, offset by the purchase of a shopping center for $38.9 million, and expenditures of $16.3 million for property improvements. During 2013, the Company purchased a shopping center for $32.8 million, had expenditures of $20.3 million for property improvements, offset by $34.7 million in proceeds from sales of properties classified as held for sale/conveyance, $2.2 million in proceeds from construction escrows and other, and a $1.1 million repayment of a note receivable. During 2012, the Company received $41.6 million in proceeds from the exit of the Cedar/RioCan unconsolidated joint venture, $34.9 million from sales of properties classified as held for sale/conveyance, $2.8 million in distributions from the Cedar/RioCan unconsolidated joint venture, and $2.4 million in construction escrows and other, offset by expenditures of $31.3 million for property improvements.
Financing Activities
During 2014, the Company made $177.1 million of repayments of mortgage loans payable, $81.5 million of net repayments under the revolving credit facility, $30.2 million of preferred and common stock distributions, $1.3 million in payments of debt financing costs, $1.0 million of distributions to consolidated joint venture minority interests and limited partners, and a $0.4 million payment for the redemption of OP Units, offset by borrowings of $150.0 million under new term loans and net proceeds of $41.2 million from the sale of common stock. During 2013, the Company made $77.1 million of repayments of mortgage loans payable, a $75.0 million repayment of a term loan, $35.0 million for the redemption of the 8.875% Series A Cumulative Redeemable Preferred Stock, $28.9 million of preferred and common stock distributions, $1.9 million in payments of debt financing costs, a $1.6 million payment for the purchase of the remaining minority interest in a consolidated joint venture, $0.7 million of distributions to consolidated joint venture minority interests and limited partners, and a $0.2 million payment for the redemption of OP Units, offset by $72.5 million of net advances under the revolving credit facility, $59.8 million of net proceeds from the sale of shares of its 7.25% Series B Cumulative Redeemable Preferred Stock, and a $50.0 million advance under a term loan. During 2012, the Company paid $124.9 million for redemptions and repurchases of shares of its 8.875% Series A cumulative Redeemable Preferred Stock, made $85.3 million of net repayments under the revolving credit facility, $79.6 million of repayments of mortgage loans payable, $29.2 million of preferred and common stock distributions, a $6.1 million payment for the purchase of the remaining minority interest in a consolidated joint venture, $4.9 million in payments of debt financing costs, and $4.3 million of distributions to consolidated joint venture minority interests and limited partners, offset by $124.4 million of net proceeds from the sale of shares of its 7.25% Series B Cumulative Redeemable Preferred Stock, a $75.0 million advance under a term loan, and $30.0 million in proceeds from mortgage refinancings.
Funds From Operations
Funds From Operations (“FFO”) is a widely-recognized non-GAAP financial measure for REITs that the Company believes, when considered with financial statements prepared in accordance with GAAP, is useful to investors in understanding financial performance and
providing a relevant basis for comparison among REITs. In addition, FFO is useful to investors as it captures features particular to real estate performance by recognizing that real estate generally appreciates over time or maintains residual value to a much greater extent than do other depreciable assets. Investors should review FFO, along with GAAP net income, when trying to understand a REIT’s operating performance. The Company considers FFO an important supplemental measure of its operating performance and believes that it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs.
The Company computes FFO in accordance with the “White Paper” published by the National Association of Real Estate Investment Trusts (“NAREIT”), which defines FFO as net income applicable to common shareholders (determined in accordance with GAAP), excluding impairment charges, gains or losses from debt restructurings and sales of properties, plus real estate-related depreciation and amortization, and after adjustments for partnerships and joint ventures (which are computed to reflect FFO on the same basis). FFO does not represent cash generated from operating activities and should not be considered as an alternative to net income applicable to common shareholders or to cash flow from operating activities. FFO is not indicative of cash available to fund ongoing cash needs, including the ability to make cash distributions. Although FFO is a measure used for comparability in assessing the performance of REITs, as the NAREIT White Paper only provides guidelines for computing FFO, the computation of FFO may vary from one company to another. The following table sets forth the Company’s calculations of FFO for 2014, 2013 and 2012:
Inflation
Inflation has been relatively low in recent years and has not had a significant detrimental impact on the Company’s results of operations. Should inflation rates increase in the future, substantially all of the Company’s tenant leases contain provisions designed to partially mitigate the negative impact of inflation in the near term. Such lease provisions include clauses that require tenants to reimburse the Company for real estate taxes and many of the operating expenses it incurs. Significant inflation rate increases over a prolonged period of time may have a material adverse impact on the Company’s business.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
One of the principal market risks facing the Company is the risk of interest rate changes, primarily through its variable-rate revolving credit facility and term loans. The Company’s objectives with respect to interest rate risk are to limit the impact of interest rate changes on operations and cash flows, and to lower its overall borrowing costs. To achieve these objectives, the Company may borrow at either fixed rates or at variable rates and enter into derivative financial instruments, such as interest rate swaps, to mitigate its interest rate risk. The Company does not enter into derivative or interest rate transactions for speculative purposes. The Company is not subject to foreign currency risk.
On February 11, 2014, the Company closed $150 million of unsecured term loans. The Company has entered into forward interest rate swap agreements which convert the LIBOR rates to fixed rates for the new term loans beginning July 1, 2014 through their maturities. As a result, the effective fixed interest rates are 3.2% for the $75.0 million five-year term loan and 4.1% for the $75.0 million seven-year term loan at December 31, 2014, based on the Company’s current leverage ratio. At December 31, 2014, the Company had $2,777,000 included in accounts payable and accrued liabilities on the consolidated balance sheet relating to the fair value of the interest rate swaps applicable to the $150 million unsecured term loans.
On February 5, 2015, the Company closed $100 million of additional unsecured term loans. The Company also entered into forward interest rate swap agreements which convert the LIBOR rates to fixed rates for the new term loans beginning July 1, 2015 through their maturities. As a result, the effective fixed interest rates will be 2.9% for the $50.0 million five-year term loan and 3.4% for the $50.0 million seven-year term loan, based on the Company’s leverage ratio at closing.
At December 31, 2014, long-term debt consisted of fixed-rate mortgage loans payable, unsecured term loans, and the Company’s unsecured variable-rate credit facility. The average interest rate on the $543.4 million of fixed-rate indebtedness outstanding was 4.9%, with maturities at various dates through 2029. The average interest rate on the $122.0 million of unsecured variable-rate revolving credit facility and term loan was 1.9%. With respect to the $122.0 million of variable-rate debt outstanding at December 31, 2014, if contractual interest rates either increase or decrease by 100 bps, the Company’s interest cost would increase or decrease respectively by approximately $1.2 million per annum.
Item 8.
Item 8. Financial Statements and Supplementary Data
All other schedules have been omitted because the required information is not present, is not present in amounts sufficient to require submission of the schedule, or is included in the consolidated financial statements or notes thereto.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Cedar Realty Trust, Inc.
We have audited the accompanying consolidated balance sheets of Cedar Realty Trust, Inc. (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cedar Realty Trust, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements, the Company changed its method for reporting discontinued operations effective January 1, 2014.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Cedar Realty Trust, Inc.’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated February 19, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 19,
CEDAR REALTY TRUST, INC.
CONSOLIDATED BALANCE SHEETS
See accompanying notes to consolidated financial statements.
CEDAR REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to consolidated financial statements.
CEDAR REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
See accompanying notes to consolidated financial statements.
CEDAR REALTY TRUST, INC.
CONSOLIDATED STATEMENT OF EQUITY
Years ended December 31, 2014, 2013 and 2012
See accompanying notes to consolidated financial statements
CEDAR REALTY TRUST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to consolidated financial statements.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 1. Business and Organization
Cedar Realty Trust, Inc. (the “Company”) is a real estate investment trust (“REIT”) that focuses primarily on ownership and operation of grocery-anchored shopping centers straddling the Washington, DC to Boston corridor. At December 31, 2014, the Company owned and managed a portfolio of 59 operating properties (excluding properties “held for sale/conveyance”).
Cedar Realty Trust Partnership, L.P. (the “Operating Partnership”) is the entity through which the Company conducts substantially all of its business and owns (either directly or through subsidiaries) substantially all of its assets. At December 31, 2014, the Company owned a 99.5% economic interest in, and was the sole general partner of, the Operating Partnership. The limited partners’ interest in the Operating Partnership (0.5% at December 31, 2014) is represented by Operating Partnership Units (“OP Units”). The carrying amount of such interest is adjusted at the end of each reporting period to an amount equal to the limited partners’ ownership percentage of the Operating Partnership’s net equity. The 393,000 OP Units outstanding at December 31, 2014 are economically equivalent to the Company’s common stock. The holders of OP Units have the right to exchange their OP Units for the same number of shares of the Company’s common stock or, at the Company’s option, for cash.
As used herein, the “Company” refers to Cedar Realty Trust, Inc. and its subsidiaries on a consolidated basis, including the Operating Partnership or, where the context so requires, Cedar Realty Trust, Inc. only.
Note 2. Summary of Significant Accounting Policies
Principles of Consolidation/Basis of Preparation
The consolidated financial statements include the accounts and operations of the Company, the Operating Partnership, its subsidiaries, and certain joint venture partnerships in which it participates. The Company consolidates all variable interest entities (“VIEs”) for which it is the primary beneficiary. Generally, a VIE is an entity with one or more of the following characteristics: (1) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (2) as a group, the holders of the equity investment at risk (a) lack the power through voting or similar rights to make decisions about the entity’s activities that significantly impact the entity’s performance, (b) have no obligation to absorb the expected losses of the entity, or (c) have no right to receive the expected residual returns of the entity, or (3) the equity investors have voting rights that are not proportional to their economic interests, and substantially all of the entity’s activities either involve, or are conducted on behalf of, an investor that has disproportionately fewer voting rights. A VIE is required to be consolidated by its primary beneficiary. The primary beneficiary of a VIE has (1) the power to direct the activities that most significantly impact the entity’s
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
economic performance, and (2) the obligation to absorb losses of the VIE or the right to receive benefits from the VIE that could be significant to the VIE. Significant judgments related to these determinations include estimates about the current and future fair values, performance of real estate held by these VIEs, and general market conditions.
The Company has a 60%-owned joint venture originally formed to develop the project known as Crossroads II. This joint venture is consolidated as it is deemed to be a VIE and the Company is the primary beneficiary. The Company (1) guarantees all related debt, (2) does not require its partners to fund additional capital requirements, (3) has an economic interest greater than its voting proportion and (4) participates in the management activities that significantly impact the performance of the joint venture. At December 31, 2014, this VIE owned real estate with a carrying value of $40.5 million and no mortgage loan payable.
With respect to its two other consolidated joint venture properties at December 31, 2014 (New London Mall and San Souci Plaza), the Company is the general partner and has a partnership interest of 40% in each. As such entities are not VIEs, and the Company is the sole general partner and exercises substantial operating control over these entities, the Company has determined that such entities should be consolidated. On January 23, 2015, the Company acquired the New London joint venture’s 60% ownership interest, giving the Company a 100% ownership interest in this property. The purchase price was $27.3 million, consisting of $10.9 million in cash, and $16.4 million representing the 60% share of the in-place mortgage financing.
The Company also had two 60%-owned joint ventures originally formed to develop the projects known as Heritage Crossings and Upland Square. Heritage Crossings was sold in May 2013 (see Note 4 - “Discontinued Operations”) and the Company acquired the remaining 40% interest in Upland Square in October 2013 (see Note 3 - “Real Estate”). Prior to these respective dates, these joint ventures were consolidated as they were deemed to be VIEs and the Company was the primary beneficiary. The Company (1) had guaranteed all related debt, (2) did not require its partners to fund additional capital requirements, (3) had an economic interest greater than its voting proportion, and (4) participated in the management activities that significantly impacted the performance of the joint venture.
The Company also had a 20% interest in the Cedar/RioCan joint venture, which the Company accounted for under the equity method (the Company exited the joint venture in October 2012). Although the Company provided management and other services, RioCan had significant management participation rights, thus the Company had determined that this joint venture was not a VIE (see Note 5 - “Investment in Cedar/RioCan Joint Venture”).
With respect to its interest in the Homburg joint venture properties (buy/sell provisions were concluded in October 2012 - see Note 4 - “Discontinued Operations”), the Company was the general partner and had partnership interests of 20% in each of the venture’s nine properties. As (1) such entities were not VIEs, and (2) the Company was the sole general partner and exercised substantial operating control over these entities, the Company had determined that such entities should be consolidated for financial statement purposes.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The accompanying financial statements are prepared on the accrual basis in accordance with accounting principles generally accepted in the United States (“GAAP”), which requires management to make estimates and assumptions that affect the disclosure of contingent assets and liabilities, the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the periods covered by the financial statements. Actual results could differ from these estimates.
The consolidated financial statements reflect reclassifications of prior period amounts relating primarily to one operating property previously classified as discontinued operations that was determined in 2014 to be treated as continuing operations. Accordingly, applicable amounts have been reclassified from “real estate held for sale/conveyance” to “real estate held for use” on the prior-year consolidated balance sheet, and from “discontinued operations” to “continuing operations” on all prior years’ consolidated statements of operations. The reclassifications had no impact on previously-reported net income attributable to common shareholders or earnings per share.
Real Estate Investments
Real estate investments are carried at cost less accumulated depreciation. The provision for depreciation is calculated using the straight-line method based upon the estimated useful lives of the respective assets of between 3 and 40 years. Depreciation expense amounted to $35.0 million, $41.1 million and $40.0 million for 2014, 2013 and 2012, respectively. Expenditures for betterments that substantially extend the useful lives of the assets are capitalized. Expenditures for maintenance, repairs, and betterments that do not substantially prolong the normal useful life of an asset are charged to operations as incurred.
Real estate investments include costs of ground-up development and redevelopment activities, and construction in progress. Capitalized costs, including interest and other carrying costs during the construction and/or renovation periods, are included in the cost of the related asset and charged to operations through depreciation over the asset’s estimated useful life. A variety of costs are incurred in the development and leasing of a property, such as pre-construction costs essential to the development of the property, development costs, construction costs, interest costs, real estate taxes, salaries and related costs, and other costs incurred during the period of development. After a determination is made to capitalize a cost, it is allocated to the specific component of a project that is benefited. The Company ceases capitalization on the portions substantially completed and occupied, or held available for occupancy, and capitalizes only those costs associated with the portions under development. The Company considers a construction project to be substantially completed and held available for occupancy upon the completion of tenant improvements, but not later than one year from cessation of major construction activity.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The Company allocates the fair value of real estate acquired to land, buildings and improvements. In addition, the fair value of in-place leases is allocated to intangible lease assets and liabilities. The fair value of the tangible assets of an acquired property is determined by valuing the property as if it were vacant, which value is then allocated to land, buildings and improvements based on management’s determination of the fair values of these assets. In valuing an acquired property’s intangibles, factors considered by management include an estimate of carrying costs during the expected lease-up periods, such as real estate taxes, insurance, other operating expenses, and estimates of lost rental revenue during the expected lease-up periods based on its evaluation of current market demand. Management also estimates costs to execute similar leases, including leasing commissions, tenant improvements, legal and other related costs.
The values of acquired above-market and below-market leases are recorded based on the present values (using discount rates which reflect the risks associated with the leases acquired) of the differences between the contractual amounts to be received and management’s estimate of market lease rates, measured over the terms of the respective leases that management deemed appropriate at the time of the acquisitions. Such valuations include a consideration of the non-cancellable terms of the respective leases as well as any applicable renewal periods. The fair values associated with below-market rental renewal options are determined based on the Company’s experience and the relevant facts and circumstances that existed at the time of the acquisitions. The values of above-market leases are amortized to rental income over the terms of the respective non-cancelable lease periods. The portion of the values of below-market leases associated with the original non-cancelable lease terms are amortized to rental income over the terms of the respective non-cancelable lease periods. The portion of the values of the leases associated with below-market renewal options that are likely of exercise are amortized to rental income over the respective renewal periods. The value of other intangible assets (including leasing commissions, tenant improvements, etc.) is amortized to expense over the applicable terms of the respective leases. If a lease were to be terminated prior to its stated expiration or not renewed, all unamortized amounts relating to that lease would be recognized in operations at that time.
Management reviews each real estate investment for impairment whenever events or circumstances indicate that the carrying value of a real estate investment may not be recoverable. The review of recoverability of real estate investments held for use is based on an estimate of the future cash flows that are expected to result from the real estate investment’s use and eventual disposition. These cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of leasing demand, capital expenditures, competition and other factors. If an impairment event exists due to the projected inability to recover the carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds estimated fair value.
Sales of real estate are recognized only when sufficient down payments have been obtained, possession and other attributes of ownership have been transferred to the buyer and the Company has no significant continuing involvement. The Company believes these criteria were met for all real estate sold during 2014, 2013 and 2012.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Properties Held For Sale/Conveyance
In accordance with the newly-adopted guidance for reporting discontinued operations (see below), the carrying values of the assets and liabilities of properties determined to be held for sale/conveyance, principally the net book values of the real estate and the related mortgage loans payable to be assumed by the buyers (or conveyed to the mortgagees), are reclassified as “held for sale/conveyance” on the Company’s consolidated balance sheets at the time such determinations are made, on a prospective basis only. In addition, the Company anticipates that sales of all such properties remaining classified as “held for sale/conveyance” at the balance sheet date will be concluded within one year from such date.
The Company conducts a continuing review of the values for all remaining properties “held for sale/conveyance” based on final sales prices and sales contracts entered into. Impairment charges/reversals, if applicable, are based on a comparison of the carrying values of the properties with either (1) actual sales prices less costs to sell for properties sold, or contract amounts for properties in the process of being sold, (2) estimated sales prices based on discounted cash flow analyses, if no contract amounts were as yet being negotiated (see Note 6 - “Fair Value Measurements”), or (3) with respect to land parcels, estimated sales prices, less cost to sell, based on comparable sales completed in the selected market areas. Prior to the Company’s determination to dispose of properties, which are subsequently reclassified to “held for sale/conveyance”, the Company performs recoverability analyses based on the estimated undiscounted cash flows that were expected to result from the real estate investments’ use and eventual disposal. The projected undiscounted cash flows of each property reflects that the carrying value of each real estate investment would be recovered. However, as a result of the properties’ meeting the “held for sale” criteria, such properties were written down to the lower of their carrying value and estimated fair values less costs to sell.
Cash and Cash Equivalents / Restricted Cash
Cash and cash equivalents consist of cash in banks and short-term investments with original maturities when purchased of less than ninety days, and include cash at consolidated joint ventures of $0.8 million and $1.5 million at December 31, 2014 and 2013, respectively.
The terms of several of the Company’s mortgage loans payable require the Company to deposit certain replacement and other reserves with its lenders. Such “restricted cash” is generally available only for property-level requirements for which the reserves have been established.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Fair Value Measurements
The accounting guidance for fair value measurement establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels:
•
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
•
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The fair value hierarchy gives the highest priority to Level 1 inputs and the lowest priority to Level 3 inputs. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible while also considering counterparty credit risk in the assessment of fair value.
Revenue Recognition and Receivables
Management has determined that all of the Company’s leases with its various tenants are operating leases. Rental income with scheduled rent increases is recognized using the straight-line method over the respective non-cancelable terms of the leases. The aggregate excess of rental revenue recognized on a straight-line basis over the contractual base rents is included in receivables on the consolidated balance sheet. Leases also generally contain provisions under which the tenants reimburse the Company for a portion of property operating expenses and real estate taxes incurred, generally attributable to their respective allocable portions of gross leasable area. Such income is recognized in the periods earned. In addition, a limited number of operating leases contain contingent rent provisions under which tenants are required to pay, as additional rent, a percentage of their sales in excess of a specified amount. The Company defers recognition of contingent rental income until those specified sales targets are met. Revenues also include items such as lease termination fees, which tend to fluctuate more than rents from year to year. Termination fees are fees that the Company has agreed to accept in consideration for permitting certain tenants to terminate their lease prior to the contractual expiration. The Company recognizes lease termination income when the following conditions are met: (1) the lease termination agreement has been executed, (2) the lease termination fee is determinable, (3) all the Company’s landlord services pursuant to the terminated lease have been rendered, and (4) collectability of the lease termination fee is assured.
The Company must make estimates as to the collectability of its accounts receivable related to base rent, straight-line rent, percentage rent, expense reimbursements and other
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
revenues. When management analyzes accounts receivable and evaluates the adequacy of the allowance for doubtful accounts, it considers such things as historical bad debts, tenant creditworthiness, current economic trends, current developments relevant to a tenant’s business specifically and to its business category generally, and changes in tenants’ payment patterns. The allowance for doubtful accounts was $4.3 million and $5.1 million at December 31, 2014 and 2013, respectively. The provision for doubtful accounts (included in operating, maintenance and management expenses) was $1.9 million, $1.8 million and $1.9 million in 2014, 2013 and 2012, respectively.
Income Taxes
The Company has elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the “Code”). A REIT will generally not be subject to federal income taxation on that portion of its income that qualifies as REIT taxable income, to the extent that it distributes at least 90% of such REIT taxable income to its shareholders and complies with certain other requirements. As of December 31, 2014, the Company was in compliance with all REIT requirements.
The Company follows a two-step approach for evaluating uncertain federal, state and local tax positions. Recognition (step one) occurs when an enterprise concludes that a tax position, based solely on its technical merits, is more-likely-than-not to be sustained upon examination. Measurement (step two) determines the amount of benefit that more-likely-than-not will be realized upon settlement. Derecognition of a tax position that was previously recognized would occur when a company subsequently determines that a tax position no longer meets the more-likely-than-not threshold of being sustained. The Company has not identified any uncertain tax positions which would require an accrual.
Derivative Financial Instruments
The Company occasionally utilizes derivative financial instruments, principally interest rate swaps, to manage its exposure to fluctuations in interest rates. The Company has established policies and procedures for risk assessment, and the approval, reporting and monitoring of derivative financial instruments. Derivative financial instruments must be effective in reducing the Company’s interest rate risk exposure in order to qualify for hedge accounting. When the terms of an underlying transaction are modified, or when the underlying hedged item ceases to exist, all changes in the fair value of the instrument are marked-to-market with changes in value included in net income for each period until the derivative financial instrument matures or is settled. Any derivative financial instrument used for risk management that does not meet the hedging criteria is marked-to-market with the changes in value included in net income. The Company has not entered into, and does not plan to enter into, derivative financial instruments for trading or speculative purposes.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Noncontrolling Interest - Limited Partners’ Mezzanine OP Units
The Company follows the accounting guidance related to noncontrolling interests in consolidated financial statements, which states that a noncontrolling interest in a subsidiary (minority interests or certain limited partners’ interest, in the case of the Company), subject to the classification and measurement of redeemable securities, is an ownership interest in a consolidated entity which should be reported as equity in the parent company’s consolidated financial statements. The guidance requires a reconciliation of the beginning and ending balances of equity attributable to noncontrolling interests and disclosure, on the face of the consolidated income statement, of those amounts of consolidated net income attributable to the noncontrolling interests. The Company classifies the balances related to minority interests in consolidated joint ventures and limited partners’ interest in the Operating Partnership into the consolidated equity accounts, as appropriate. Certain noncontrolling interests of the Company are classified in the mezzanine section of the balance sheet (the “mezzanine OP Units”) as such OP Units do not meet the requirements for equity classification (certain of the holders of such OP Units have registration rights that provide such holders with the right to demand registration under the federal securities laws of the common stock of the Company issuable upon conversion of such OP Units). The Company adjusts the carrying value of the mezzanine OP Units each period to equal the greater of its historical carrying value or its redemption value. Through December 31, 2014, there have been no cumulative net adjustments recorded to the carrying amounts of the mezzanine OP Units.
Share-Based Compensation
The Company’s 2012 Stock Incentive Plan (the “2012 Plan”) establishes the procedures for the granting of, among other things, restricted stock awards. The maximum number of shares of the Company’s common stock that may be issued pursuant to the 2012 Plan is 4.5 million, and the maximum number of shares that may be granted to a participant in any calendar year may not exceed 500,000. All grants issued pursuant to the 2012 Plan generally vest (1) at the end of designated time periods for time-based grants, or (2) upon the completion of a designated period of performance for performance-based grants and satisfaction of performance criteria. Time-based grants are valued according to the market price for the Company’s common stock at the date of grant. For performance-based grants, the Company generally engages an independent appraisal company to determine the value of the shares at the date of grant, taking into account the underlying contingency risks associated with the performance criteria. The value of all grants are being expensed on a straight-line basis over their respective vesting periods (irrespective of achievement of the performance-based grants) adjusted, as applicable, for forfeitures. For restricted share grants subject to graded vesting, the amounts expensed are at least equal to the measured expense of each vested tranche. Based on the terms of the 2012 Plan, those grants of restricted shares that are contributed to the Rabbi Trusts are classified as treasury stock on the Company’s consolidated balance sheet.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Supplemental Consolidated Statements of Cash Flows Information
Recently-Issued Accounting Pronouncements
In April 2014, the Financial Accounting Standards Board (“FASB”) issued guidance which amends the requirements for reporting discontinued operations. Under the amended guidance, a disposal of an individual property or group of properties is required to be reported in “discontinued operations” only if the disposal represents a strategic shift that has, or will have, a major effect on the Company’s operations and financial results. The amended guidance also requires additional disclosures about both discontinued operations and the disposal of an individually significant component of an entity that does not qualify for discontinued operations presentation in the financial statements. The Company has adopted the provisions of this guidance as of January 1, 2014, and has applied the provisions prospectively. The results of operations for properties classified as “held for sale/conveyance” prior to the adoption of this guidance will continue to be reported as “discontinued operations” in the consolidated statements of operations.
In May 2014, the FASB issued guidance which amends the accounting for revenue recognition. Under the amended guidance, a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The guidance is effective for interim and annual reporting periods beginning after December 15, 2016, with early adoption not permitted. The Company is currently in the process of evaluating the impact the adoption of the guidance will have on its consolidated financial statements.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
In August 2014, the FASB issued guidance which requires management to evaluate whether there are conditions and events that raise substantial doubt about an entity’s ability to continue as a going concern, and to provide disclosures when it is probable that the entity will be unable to meet its obligations as they become due within one year after the date that the financial statements are issued. The guidance is effective for annual periods ending after December 15, 2016, with early adoption permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements.
Note 3. Real Estate
Real estate activity for 2014 and 2013 is comprised of the following:
At December 31, 2014, certain of the Company’s shopping center properties were pledged as collateral for mortgage loans payable. See Note 10 - “Mortgage Loans Payable and Credit Facilities”.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
2014 Acquisition
On March 21, 2014, the Company acquired Quartermaster Plaza located in Philadelphia, Pennsylvania. The purchase price for the property was approximately $92.3 million, of which approximately $53.4 million was funded from the assumption of (1) a $42.1 million mortgage loan payable, bearing interest at the rate of 5.3% per annum and maturing in October 2015, and (2) an $11.3 million mortgage loan payable, bearing interest at the rate of 5.5% per annum and payable in October 2014 (repaid in June 2014), with the remainder being funded from the Company’s unsecured revolving credit facility. The Company incurred costs of $2.9 million in connection with this acquisition.
2013 Acquisitions
On August 16, 2013, the Company exercised the buy/sell option pursuant to the terms of the 60%-owned joint venture originally formed for the development of the Upland Square project, and the Company’s partner opted not to meet the offered purchase option. The Company acquired the remaining 40% interest in the property on October 31, 2013 for approximately $1.6 million, reflecting the impact of the Company’s preferred interest in the joint venture. As the property was previously controlled and consolidated by the Company, the acquisition of the 40% noncontrolling interest was recorded as a capital transaction. As such, the excess ($0.5 million) paid by the Company over the carrying value of the noncontrolling interest was recorded as a decrease in the Company’s shareholders’ equity.
On November 18, 2013, the Company acquired the Big Y Shopping Center located in Fairfield County, Connecticut. The purchase price for the property was approximately $34.5 million, of which approximately $33 million was funded from the Company’s unsecured revolving credit facility and the $1.5 million balance by the issuance of approximately 270,000 OP Units (based on the market price of the Company’s common stock). The Company incurred costs of $0.2 million in connection with this acquisition.
2012 Acquisitions
As more fully discussed in Note 5 - “Investment in Cedar/RioCan Joint Venture”, on October 10, 2012, the Company acquired a 100% interest in Franklin Village Plaza, located in Franklin, Massachusetts. As more fully discussed in Note 4 - “Discontinued Operations”, on October 12, 2012, the Company acquired the non-controlling 80% ownership interests in Meadows Marketplace, located in Hershey, Pennsylvania, and Fieldstone Marketplace, located in New Bedford, Massachusetts.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Properties Held For Sale/Conveyance Subsequent to December 31, 2013
During 2014, the Company determined to sell the properties listed below which did not meet the criteria set forth in the newly-adopted guidance for reporting discontinued operations (See Note 2 - Summary of Significant Accounting Policies):
As such, these properties have been classified as “real estate held for sale/conveyance” as of December 31, 2014 on the accompanying consolidated balance sheet, and their results of operations have remained in continuing operations. The carrying values of the assets of those properties that remained unsold at December 31, 2014 totaled $14.6 million, and are included in real estate held for sale/conveyance on the consolidated balance sheets. The Company recorded impairment charges of $3.4 million during 2014 relating to the above properties, which is included in continuing operations in the accompanying consolidated statements of operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Land Parcels
During 2014, 2013 and 2012, the Company sold the following land parcels:
The Company recorded reversals of impairments of $0.3 million in 2014, in addition to impairment charges of $0.9 million and $1.1 million during 2013 and 2012, respectively, relating to land parcels, which are included in continuing operations in the accompanying consolidated statements of operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 4 -Discontinued Operations
The results of operations for properties classified as discontinued operations prior to the newly-adopted guidance for reporting discontinued operations (see Note 2 - Summary of Significant Accounting Policies) have been classified as “discontinued operations” for all years presented. The following is a summary of the components of income from discontinued operations applicable to properties classified as such prior to the newly-adopted guidance for reporting discontinued operations:
2014 Transactions
During 2014, the Company sold or conveyed the following properties classified as discontinued operations:
(a) Lender accepted a deed-in-lieu of foreclosure on the property. Sales price represents mortgage loan payable, accrued interest and other expenses forgiven upon title transfer.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
On May 6, 2014, the McCormick Place lender accepted and recorded the deed to the property, thus completing the deed-in-lieu of foreclosure process in full satisfaction of the mortgage loan payable and related accrued interest aggregating $2.7 million. Based on the $1.8 million carrying value of the property, the Company recorded a $0.8 million gain on the extinguishment of a debt obligation in the second quarter of 2014, which is included in discontinued operations in the accompanying consolidated statement of operations.
On May 27, 2014, the Gahanna Discount Drug Mart Plaza lender accepted and recorded the deed to the property, thus completing the deed-in-lieu of foreclosure process in full satisfaction of the mortgage loan payable and related accrued interest aggregating $5.0 million. Based on the $4.3 million carrying value of the property, the Company recorded a $0.6 million gain on the extinguishment of a debt obligation in the second quarter of 2014, which is included in discontinued operations in the accompanying consolidated statement of operations.
2013 Transactions
During 2013, the Company sold or conveyed the following properties classified as discontinued operations:
(a) Lender accepted a deed-in-lieu of foreclosure on the property. Sales price represents mortgage loan payable, accrued interest and other expenses forgiven upon title transfer.
On June 5, 2013, the Company sold, through a short sale, Westlake Discount Drug Mart Plaza for net proceeds of $2.1 million. As of that date, the balance of the mortgage loan payable secured by the sold property, including accrued interest and real estate taxes, totaled $3.4 million. The lender accepted the net proceeds of $2.1 million in full satisfaction of the mortgage loan payable and related accrued interest. As a result, the Company recorded a $1.3 million gain on the extinguishment of a debt obligation during the second quarter of 2013, which is included in discontinuing operations in the accompanying consolidated statements of operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
On November 14, 2013, the Roosevelt II lender accepted and recorded the deed to the property, thus completing the deed-in-lieu of foreclosure process in full satisfaction of the mortgage loan payable and related accrued interest aggregating $13.9 million. Based on the $4.7 million carrying value of the property, the Company recorded a $9.2 million gain on the extinguishment of a debt obligation of in the fourth quarter of 2013, which is included in discontinued operations in the accompanying consolidated statements of operations.
2012 Transactions
During 2012, the Company sold the following properties classified as discontinued operations:
On October 12, 2012, the Company concluded definitive agreements with Homburg Invest Inc. (“Homburg”) relating to the application of the buy/sell provisions of the joint venture agreements for each of the nine properties owned by the joint venture. In February 2011, Homburg had exercised its buy/sell option pursuant to the terms of the joint venture agreements for each of the nine properties owned by the venture. The Company made elections to purchase Homburg’s 80% interest in two of the nine properties, Meadows Marketplace, located in Hershey, Pennsylvania, and Fieldstone Marketplace, located in New Bedford, Massachusetts. The Company also determined not to meet Homburg’s buy/sell offers for each of the remaining seven properties, which were thereupon treated as “held for sale/conveyance”. Pursuant to the agreements, the Company acquired Homburg’s 80% ownership in Meadows Marketplace, located in Hershey, Pennsylvania, and Fieldstone Marketplace, located in New Bedford,
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Massachusetts, for approximately $27.3 million, including the assumption of related in-place mortgage financing of $21.8 million, giving the Company a 100% ownership interest in these two properties. As the two properties were previously controlled and consolidated by the Company, the acquisitions of the 80% noncontrolling interests were recorded as a capital transaction. As such, the excess ($7.6 million) of the carrying amount of the noncontrolling interests over amounts paid by the Company was recognized as an increase in the Company’s shareholders’ equity and a corresponding decrease in noncontrolling interests. In addition, the Company sold to Homburg its 20% ownership interest in the remaining seven joint venture properties for approximately $23.6 million, including the assumption of related in-place mortgage financing of $14.5 million. In connection with the transactions, the Company has recorded a gain of $3.9 million relating to the sale of the seven properties. The Company’s property management agreements for the sold properties terminated upon the closing of the sale.
Note 5. Investment in Cedar/RioCan Joint Venture
On October 10, 2012, the Company concluded definitive agreements with RioCan to exit the 20% Cedar / 80% RioCan joint venture that owned 22 retail properties. Pursuant to the agreements, the Company exchanged its 20% interest in the joint venture for (1) a 100% ownership interest in Franklin Village Plaza, located in Franklin, Massachusetts, at an agreed-upon value of approximately $75.1 million, including the assumption of related in-place mortgage financing of approximately $43.1 million, and (2) approximately $41.6 million in cash, which was initially used to reduce the outstanding balance under the Company’s revolving credit facility. The Company continued to manage the properties acquired by RioCan subject to a management agreement which terminated effective January 31, 2013. In connection with the transactions, the Company recorded a net gain of $30.5 million relating to the exit from the joint venture in 2012.
The Company earned fees from the joint venture of approximately $0.2 million and $2.8 million for 2013 and 2012, respectively. Such fees are included in other revenues in the accompanying consolidated statements of operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The following is a summary of the components of income related to the Company’s investment in the Cedar/RioCan unconsolidated joint venture:
Note 6. Fair Value Measurements
The carrying amounts of cash and cash equivalents, restricted cash, rents and other receivables, certain other assets, accounts payable and accrued liabilities, and variable-rate debt approximate fair value due to their terms and/or short-term nature. The fair value of the Company’s investments and liabilities related to share-based compensation were determined to be Level 1 within the valuation hierarchy, and were based on independent values provided by financial institutions.
The valuation of the liabilities for the Company’s interest rate swaps, which are measured on a recurring basis, were determined to be Level 2 within the valuation hierarchy, and were based on independent values provided by financial institutions. Such valuations were determined using widely accepted valuation techniques, including discounted cash flow analyses, on the expected cash flows of each derivative. The analyses reflect the contractual terms of the swaps, including the period to maturity, and user-observable market-based inputs, including interest rate curves (“significant other observable inputs”). The fair value calculation also includes an amount for risk of non-performance using “significant unobservable inputs” such as estimates of current credit spreads to evaluate the likelihood of default. The Company has concluded that, as of December 31, 2014, the fair value associated with the “significant unobservable inputs” relating
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
to the Company’s risk of non-performance was insignificant to the overall fair value of the interest rate swap agreements and, as a result, that the relevant inputs for purposes of calculating the fair value of the interest rate swap agreements, in their entirety, were based upon “significant other observable inputs”.
Nonfinancial assets and liabilities measured at fair value in the consolidated financial statements consist of real estate held for sale/conveyance, which are measured on a nonrecurring basis, have been determined to be (1) Level 2 within the valuation hierarchy, where applicable, based on the respective contracts of sale, adjusted for closing costs and expenses, or (2) Level 3 within the valuation hierarchy, where applicable, based on estimated sales prices, adjusted for closing costs and expenses, determined by discounted cash flow analyses, direct capitalization analyses or a sales comparison approach if no contracts had been concluded. The discounted cash flow and direct capitalization analyses include all estimated cash inflows and outflows over a specific holding period and, where applicable, any estimated debt premiums. These cash flows were comprised of unobservable inputs which included forecasted rental revenues and expenses based upon existing in-place leases, market conditions and expectations for growth. Capitalization rates and discount rates utilized in these analyses were based upon observable rates that the Company believed to be within a reasonable range of current market rates for the respective properties. The sales comparison approach was utilized for certain land values and include comparable sales that were completed in the selected market areas. The comparable sales utilized in these analyses were based upon observable per acre rates that the Company believed to be within a reasonable range of current market rates for the respective properties.
Valuations were prepared using internally-developed valuation models. These valuations are reviewed and approved, during each reporting period, by a diverse group of management, as deemed necessary, including personnel from the acquisition, accounting, finance, operations, development and leasing departments, and the valuations are updated as appropriate. In addition, the Company may engage third party valuation experts to assist with the preparation of certain of its valuations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The following tables show the hierarchy for those assets measured at fair value on a recurring basis as of December 31, 2014 and December 31, 2013, respectively:
(a) Included in other assets and deferred charges, net in the accompanying consolidated balance sheets.
(b) Included in accounts payable and accrued liabilities in the accompanying consolidated balance sheets.
The fair values of the Company’s fixed rate mortgage loans and unsecured revolving credit facility and term loans were estimated using available market information and discounted cash flow analyses based on borrowing rates the Company believes it could obtain with similar terms and maturities. As of December 31, 2014 and December 31, 2013, respectively, the aggregate fair values of the Company’s unsecured revolving credit facility and term loans approximated the carrying values. As of December 31, 2014 and December 31, 2013, the aggregate fair values of the Company’s fixed rate mortgage loans payable and mortgage loans payable - real estate held for sale/conveyance, which were determined to be Level 3 within the valuation hierarchy, were approximately $410.8 million and $495.1 million, respectively; the carrying values of such loans were $393.4 million and $481.1 million, respectively.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The following tables show the hierarchy for those assets measured at fair value on a non-recurring basis as of December 31, 2014 and December 31, 2013, respectively:
The following table details the quantitative information regarding Level 3 assets measured at fair value on a non-recurring basis as of December 31 2014 and December 31, 2013, respectively:
Note 7. Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents in excess of insured amounts and tenant receivables. The Company places its cash and cash equivalents with high quality financial institutions. Management performs ongoing credit evaluations of its tenants and requires certain tenants to provide security deposits and/or suitable guarantees.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Excluding properties held for sale, Giant Food Stores, LLC and Stop & Shop, Inc., each of which is owned by Ahold N.V., a Netherlands corporation, accounted for an aggregate of approximately 14%, 15% and 14% of the Company’s total revenues during 2014, 2013 and 2012, respectively.
The Company’s properties are located largely in the region straddling the Washington DC to Boston corridor, which exposes it to greater economic risks than if the properties it owned were located in a greater number of geographic regions (in particular, 26 of the Company’s properties are located in Pennsylvania).
Note 8. Receivables
Receivables at December 31, 2014 and 2013 are comprised of the following:
During the fourth quarter of 2012, a $4.1 million loan receivable collateralized by a mortgage on a development parcel went into default. The Company concluded that the loan was unlikely to be paid and wrote off the loan and accrued interest, resulting in an impairment charge of $4.4 million during 2012, which is included in continuing operations in the accompanying consolidated statements of operations. Subsequently, on March 28, 2013, the borrowers sold the development land parcel for approximately $1.1 million and, simultaneously, the Company accepted $1.1 million in full satisfaction of the loan. As a result, the Company recorded an impairment reversal of $1.1 million during the first quarter of 2013, which is included in continuing operations in the accompanying consolidated statements of operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 9. Other Assets and Deferred Charges, Net
Other assets and deferred charges, net at December 31, 2014 and 2013 are comprised of the following:
(a) Lease origination costs include the unamortized balance of intangible lease assets resulting from purchase accounting allocations of $8.4 million (cost of $20.7 million and accumulated amortization of $12.3 million) and $5.6 million (cost of $17.5 million and accumulated amortization of $11.9 million), respectively.
Deferred charges are amortized over the terms of the related agreements. Amortization expense related to deferred charges (including amortization of deferred financing costs included in non-operating income and expense) amounted to $5.6 million, $5.2 million and $7.9 million for 2014, 2013 and 2012, respectively. The unamortized balances of deferred lease origination costs and deferred financing costs are net of accumulated amortization of $22.4 million and $11.9 million, respectively, and will be charged to future operations as follows (lease origination costs through 2080, and financing costs through 2029):
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 10. Mortgage Loans Payable and Unsecured Credit Facilities
Debt relating to continuing operations is comprised of the following at December 31, 2014 and 2013:
Mortgage Loans Payable
Mortgage loan activity for 2014 and 2013 is summarized as follows:
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
During 2014 and 2013, the Company repaid the following mortgage loans payable:
During 2014 and 2013, in connection with these repayments, the Company incurred charges relating to early extinguishment of mortgage loans payable (prepayment penalties and accelerated amortization of deferred financing costs) of $825,000 and $106,000, respectively, included in continuing operations. In addition, during 2013, in connection with these repayments, the Company incurred charges relating to early extinguishment of mortgage loans payable (prepayment penalties and accelerated amortization of deferred financing costs) of $437,000, included in discontinued operations.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Mortgage Loans Payable - Real Estate Held for Sale/Conveyance
The Company had no debt included in mortgage loans payable - real estate held for sale/conveyance at December 31, 2014. Debt included in mortgage loans payable - real estate held for sale/conveyance is comprised of the following at December 31, 2013:
(a) At December 31, 2013, the Company had a mortgage loan payable of approximately $11.9 million, subject to an interest rate swap which converted the LIBOR-based variable rate to a fixed annual rate of 5.2% per annum.
Unsecured Revolving Credit Facility and Term Loans
On August 13, 2013, the Company entered into a $310 million unsecured credit facility which, as amended on February 5, 2015, consists of (1) a $260 million revolving credit facility, expiring on February 5, 2019, and (2) a $50 million term loan, expiring on February 5, 2020. The revolving credit facility may be extended, at the Company’s option, for an additional one-year period, subject to customary conditions. Under an accordion feature, the facility can be increased to $750 million, subject to customary conditions and lending commitments. Borrowings under the revolving credit facility component can range from LIBOR plus 135 bps to 195 bps (150 bps on February 5, 2015) and borrowing under the term loan component can range from 130 to 190 bps (145 bps on February 5, 2015), each based on the Company’s leverage ratio. As of December 31, 2014, the Company had $187.7 million available for additional borrowings under the revolving credit facility.
On February 11, 2014, the Company closed $150 million of unsecured term loans comprised of a five-year $75 million term loan, maturing on February 11, 2019, and a seven-year $75 million term loan, maturing on February 11, 2021. As amended on February 5, 2015, borrowing under the five-year $75 million term loan can range from LIBOR plus 130 bps to 190 bps (145 bps on February 5, 2015) and borrowings under the seven-year $75 million term loan can range from LIBOR plus 170 bps to 230 bps (180 bps on February 5, 2015), each based on the Company’s leverage ratio. Additionally, the Company has entered into forward interest rate swap agreements which convert the LIBOR rates to fixed rates for these term loans beginning July 1, 2014 through their maturities. Reflecting the February 5, 2015 amendment, the new effective fixed interest rates are 3.1% for the five-year $75 million term loan and 4.1% for the seven-year $75 million term loan.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
On February 5, 2015, the Company closed $100 million of new unsecured term loans comprised of a five-year $50 million term loan maturing February 5, 2020 (all of which was borrowed at closing), and a seven-year $50 million term loan maturing February 5, 2022. Proceeds from the seven-year term loan can be drawn at any time from closing until July 1, 2015. Borrowings under the five-year $50 million term loan can range from 130 to 190 bps (145 bps on February 5, 2015) and borrowing under the seven-year $50 million term loan can range from LIBOR plus 155 bps to 215 bps (170 bps as of February 5, 2015), each based on the Company’s leverage ratio. Additionally, the Company entered into forward interest rate swap agreements which converted the LIBOR rates to fixed rates for these term loans beginning July 1, 2015 through their maturities. As a result, the effective fixed interest rates will be 2.9% for the five-year $50 million term loan and 3.4% for the seven-year $50 million term loan.
The Company’s unsecured credit facility and term loans contain financial covenants including, but not limited to, maximum debt leverage, maximum secured debt, minimum fixed charge coverage, and minimum net worth. In addition, the facility contains restrictions including, but not limited to, limits on indebtedness, certain investments and distributions. The Company’s failure to comply with the covenants or the occurrence of an event of default under the facility could result in the acceleration of the related debt. As of December 31, 2014, the Company is in compliance with all financial covenants.
Scheduled Principal Payments
Scheduled principal payments on mortgage loans payable, term loans, and the credit facility at December 31, 2014, due on various dates from 2015 to 2029, are as follows:
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(a) To be substantially refinanced with the proceeds from unsecured term loans which closed on February 5, 2015.
(b) As amended on February 5, 2015, includes $72.0 million applicable to the unsecured revolving credit facility, subject to a one-year extension option, originally due in 2016.
(c) As amended on February 5, 2015, includes $50.0 million applicable to a term loan originally due in 2018.
Derivative Financial Instruments
As discussed above, on February 11, 2014, the Company closed $150 million of unsecured term loans for which it entered into forward interest rate swap agreements, which became effective on July 1, 2014.
On May 29, 2014, the Company sold Townfair Center, which collateralized an $11.8 million mortgage loan payable subject to an interest rate swap having a fair value recorded as a liability of $0.7 million. At closing, the buyer assumed both the outstanding mortgage loan payable and the related interest rate swap, and the aforementioned $0.7 million was removed from both accumulated other comprehensive loss and accounts payable and accrued liabilities.
At December 31, 2014, the Company had $2,777,000 on the consolidated balance sheet included in accounts payable and accrued liabilities relating to the fair value of the interest rate swaps applicable to the $150 million unsecured term loans which closed on February 11, 2014. Charges and/or credits relating to the changes in the fair value of the interest rate swaps are made to accumulated other comprehensive income (loss), noncontrolling interests (minority interests in consolidated joint ventures and limited partners’ interest), or operations (included in interest expense), as applicable. Over time, the unrealized gains and losses recorded in accumulated other comprehensive loss will be reclassified into earnings as an increase or reduction to interest expense in the same periods in which the hedged interest payments affect earnings. The Company estimates that approximately $2.7 million of accumulated other comprehensive loss will be reclassified as a charge to earnings within the next twelve months.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The following is a summary of the derivative financial instruments held by the Company at December 31, 2014 and December 31, 2013:
(a) Amount is an interest rate swap related to mortgage loans payable - real estate held for sale/conveyance on the consolidated balance sheet.
The following presents the effect of the Company’s derivative financial instruments on the consolidated statements of operations and the consolidated statements of equity 2014 and 2013, respectively:
As of December 31, 2014, the Company believes it has no significant risk associated with non-performance of the financial institutions which are the counterparties to its derivative contracts. Additionally, based on the rates in effect as of December 31, 2014, if a counterparty were to default, the Company would receive a net interest benefit.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 11. Intangible Lease Asset/Liability
Unamortized intangible lease liabilities that relate to below-market leases amounted to $23.8 million and $26.9 million at December 31, 2014 and December 31, 2013, respectively. Unamortized intangible lease assets that relate to above-market leases amounted to $0.1 million and $0.2 million at December 31, 2014 and December 31, 2013, respectively.
The unamortized balance of intangible lease liabilities at December 31, 2014 is net of accumulated amortization of $46.5 million, and will be credited to future operations through 2080 as follows:
Note 12. Commitments and Contingencies
The Company is a party to certain legal actions arising in the normal course of business. Management does not expect there to be adverse consequences from these actions that would be material to the Company’s consolidated financial statements.
Under various federal, state, and local laws, ordinances, and regulations, an owner or operator of real estate may be required to investigate and clean up hazardous or toxic substances, or petroleum product releases, at its properties. The owner may be liable to governmental entities or to third parties for property damage, and for investigation and cleanup costs incurred by such parties in connection with any contamination. Generally, the Company’s tenants must comply with environmental laws and meet any remediation requirements. In addition, leases typically impose obligations on tenants to indemnify the Company from any compliance costs the Company may incur as a result of environmental conditions on the property caused by the tenant. However, if a lease does not require compliance, or if a tenant fails to or cannot comply, the Company could be forced to pay these costs. Management is unaware of any environmental matters that would have a material impact on the Company’s consolidated financial statements.
The Company’s executive offices are located at 44 South Bayles Avenue, Port Washington, New York. The terms of the lease, which will expire in February 2020, provide for future minimum rents as follows: 2015 - $463,000, 2016 - $476,000, 2017 - $489,000, 2018 -
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
$503,000, 2019 - $517,000 and 2020 - $86,000. In addition, several of the Company’s properties and portions of several others are owned subject to operating leases which provide for annual payments subject, in certain cases, to cost-of-living, as follows: 2015 - $1.1 million, 2016 - $1.1 million, 2017 - $0.5 million, 2018 - $0.3 million, 2019 - $0.3 million, and thereafter - $10.1 million.
Rent expense was $1.3 million, $1.4 million and $1.4 million for 2014, 2013 and 2012, respectively.
Note 13. Shareholders’ Equity
Preferred Stock
The Company’s 7.25% Series B Cumulative Redeemable Preferred Stock (“Series B Preferred Stock”) has a liquidation preference of $25.00 per share, has no stated maturity, is not convertible into any other security of the Company, and is redeemable at the Company’s option beginning May 22, 2017 at a price of $25.00 per share plus accrued and unpaid distributions. On February 12, 2013, the Company concluded a public offering of 2,000,000 shares of its Series B Preferred Stock at $24.58 per share, and realized net proceeds, after offering expenses, of approximately $47.6 million. Also, on February 12, 2013, the underwriters exercised their over-allotment option to the extent of 300,000 additional shares of the Company’s Series B Preferred Stock, and the Company realized additional net proceeds of $7.1 million. In addition, the Company has an at-the-market (“ATM”) equity program in which the Company may, from time to time, offer and sell additional shares of its Series B Preferred Stock. During 2013, the Company sold 221,000 shares of its Series B Preferred Stock under the ATM equity program at a weighted average price of $24.52 per share, and realized net proceeds, after offering expenses, of approximately $5.2 million. There were no transactions during 2014 under this program.
The Company’s 8.875% Series A Cumulative Redeemable Preferred Stock (“Series A Preferred Stock”) had no stated maturity, was not convertible into any other security of the Company, and was redeemable at the Company’s option at a price of $25.00 per share, plus accrued and unpaid distributions. On March 11, 2013, the Company redeemed the remaining 1,408,000 shares of its Series A Preferred Stock, for a total cash outlay of $35.4 million.
Common Stock
On January 13, 2014, the Company concluded a public offering of 6,900,000 shares of its common stock (including 900,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.3 million.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
The Company has an at-the-market offering program under which it may offer and sell, from time-to-time, up to 10 million shares of its common stock. Through December 31, 2014, no shares had been sold under this program.
The Company has a Dividend Reinvestment and Direct Stock Purchase Plan (“DRIP”) which offers a convenient method for shareholders to invest cash dividends and/or make optional cash payments to purchase shares of the Company’s common stock. Such purchases are at 100% of market value. There were no significant transactions under the DRIP during 2014 and 2013. At December 31, 2014, there remained 2,849,000 shares authorized under the DRIP.
On January 12, 2015, the Company concluded a public offering of 5,750,000 shares of its common stock (including 750,000 shares relating to the exercise of an over-allotment option by the underwriters), and realized net proceeds, after offering expenses, of approximately $41.9 million.
OP Units
On July 1, 2014, the Company redeemed 69,000 OP Units from one of its executive officers for a total cash outlay of $424,000, based on the market value of the Company’s common stock. On October 10, 2014, the Company redeemed an additional 2,000 OP Units from a holder for a total cash outlay of $13,000.
During 2014 and 2013, holders of 51,000 and 3,000 OP Units, respectively, converted their holdings to shares of the Company’s common stock.
During 2013, the Company redeemed 32,000 OP Units (including 30,000 mezzanine OP Units) for a total cash outlay of $170,000.
In connection with an acquisition of a shopping center in 2013 (see Note 3 - “Real Estate”), the Operating Partnership issued 270,000 OP Units.
Dividends
The following table provides a summary of dividends declared and paid per share:
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
At December 31, 2014 and 2013, there were $1.6 million and $1.6 million, respectively, of accrued preferred stock dividends.
On January 24, 2015, the Company’s Board of Directors declared a dividend of $0.05 per share with respect to its common stock. At the same time, the Board declared a dividend of $0.453125 per share with respect to the Company’s Series B Preferred Stock. The distributions are payable on February 20, 2015 to shareholders of record on February 10, 2015.
Note 14. Revenues
Rents for 2014, 2013 and 2012, respectively, are comprised of the following:
Annual future base rents due to be received under non-cancelable operating leases in effect at December 31, 2014 are approximately as follows (excluding those base rents applicable to properties treated as discontinued operations):
Total future minimum rents do not include expense recoveries for real estate taxes and operating costs, or percentage rents based upon tenants’ sales volume. Such additional revenue amounts aggregated approximately $32.1 million, $29.5 million and $26.5 million for 2014, 2013 and 2012, respectively. Such amounts do not include amortization of intangible lease liabilities.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Other
Other revenues include items which, although recurring, tend to fluctuate more than rental income from period to period, such as lease termination income. Other revenues in 2012 include lease termination income (approximately $3.0 million) and fees earned from the Cedar/RioCan joint venture in 2012 (approximately $2.8 million). The management agreement relating to the Cedar/RioCan joint venture properties terminated on January 31, 2013 (see Note 5 -“Investment in Cedar/RioCan Joint Venture”).
Note 15. 401(k) Retirement Plan
The Company has a 401(k) retirement plan (the “Plan”), which permits all eligible employees to defer a portion of their compensation under the Code. Pursuant to the provisions of the Plan, the Company may make discretionary contributions on behalf of eligible employees. The Company made contributions to the Plan of $279,000, $244,000, and $253,000 for 2014, 2013, and 2012, respectively.
Note 16. Employee Termination Costs
During 2012, the Company concluded separation arrangements and terminations of employment agreements relating primarily to employee headcount reductions in connection with property dispositions and the exit from the Cedar/RioCan joint venture. As a result, the Company recorded an approximate $1.2 million charge applicable thereto (included in employee termination costs in the consolidated statements of operations).
Note 17. Share-Based Compensation
The following tables set forth certain share-based compensation information for 2014, 2013, and 2012, respectively:
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
(a) 2012 includes expense relating to equity and liability awards, as discussed below.
(b) 2012 includes $362,000 applicable to accelerated vestings that are included in employee termination costs.
The 2012 Plan authorizes 4.5 million shares to be available for grant and sets the maximum number of shares that may be granted to a participant in any calendar year at 500,000. At December 31, 2014, 1.6 million shares remained available for grants pursuant to the 2012 Plan and, at that date, there remained an aggregate of $8.6 million applicable to all grants and awards to be expensed over a weighted average period of 3.2 years.
During 2014, there were 133,000 time-based restricted shares granted, with a weighted average grant date fair value of $6.32 per share. During 2013, there were 584,000 time-based restricted shares granted with a weighted average grant date fair value of $5.65 per share. During 2012, in addition to shares issued to the Company’s President and Chief Executive Officer, as discussed below, there were 698,000 other time-based restricted shares granted with a weighted average grant date fair value of $4.75 per share.
The total fair values of shares vested during 2014, 2013, and 2012 were $943,000, $1,863,000, and $2,126,000, respectively (the 2012 amount include $585,000, applicable to accelerated vestings).
In June 2011, the Company’s President and Chief Executive Officer was to receive restricted share grants totaling 2.5 million shares as provided in his employment agreement, one-half of which to be time-based, vesting upon the seventh anniversary of the date of grant (vesting on June 15, 2018), and the other half to be performance-based, to be earned if the total annual return on an investment in the Company’s common stock (“TSR”) is at least an average of 6.5%
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
per year for the seven years ending June 15, 2018. An independent appraisal determined the value of the performance-based award to be $4.39 per share compared to a market price at the date of grant of $4.98 per share. As a result of a per-person limitation within the Company’s prior stock incentive plan, only 500,000 shares had been issued through June 2012, 1.5 million shares had been accounted for as an “equity award”, and 500,000 shares had been accounted for as a “liability award”. The values of the equity and liability awards were expensed on a straight-line basis over the vesting period. As specifically provided in the 2012 Plan, the 2.0 million shares previously designated as equity and liability awards were issued, with the liability award being reclassified to equity. Consistent with such awards to other recipients, dividends have been paid on all the shares, including the equity and liability award shares, with the dividends paid on the equity award shares treated as distributions to common shareholders and included in the statement of equity, and the dividends paid on the liability award shares treated as compensation and included in the statement of operations. In addition, with respect to the liability award, adjustments to reflect changes in the fair value of the award (based on changes in the market price of the Company’s common stock) were also charged to operations.
Note 18. Nonconcontrolling Interest - Limited Partners’ Mezzanine OP Units
Note 19. Earnings Per Share
Basic earnings per share (“EPS”) is calculated by dividing net income (loss) attributable to the Company’s common shareholders by the weighted average number of common shares outstanding for the period including participating securities (restricted shares issued pursuant to the Company’s share-based compensation program are considered participating securities, as
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
such shares have non-forfeitable rights to receive dividends). Unvested restricted shares are not allocated net losses and/or any excess of dividends declared over net income, as such amounts are allocated entirely to the common shareholders. For 2014, 2013 and 2012, the Company had 3.7 million, 3.8 million and 3.3 million, respectively, of weighted average unvested restricted shares outstanding. The following table provides a reconciliation of the numerator and denominator of the EPS calculations for the 2014, 2013 and 2012, respectively:
Fully-diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into shares of common stock. The net loss attributable to noncontrolling interests of the Operating Partnership has been excluded from the numerator and the related OP Units have been excluded from the denominator for the purpose of calculating diluted EPS as there would have been no effect had such amounts been included. The weighted average number of OP Units outstanding was 433,000, 297,000 and 459,000 for 2014, 2013 and 2012, respectively.
Cedar Realty Trust, Inc.
Notes to Consolidated Financial Statements
December 31, 2014
Note 20. Selected Quarterly Financial Data (unaudited)
(a) Represents revenues which were previously reported in discontinued operations.
(b) Differences between the sum of the four quarterly per share amounts and the annual per share amounts are attributable to the effect of the weighted average outstanding share calculations for the respective periods.
Note 21. Subsequent Events
In determining subsequent events, management reviewed all activity from January 1, 2015 through the date of filing this Annual Report on Form 10-K.
Cedar Realty Trust, Inc.
Schedule III
Real Estate and Accumulated Depreciation
Year ended December 31, 2014
Cedar Realty Trust, Inc.
Schedule III
Real Estate and Accumulated Depreciation
Year ended December 31, 2014
Cedar Realty Trust, Inc.
Schedule III
Real Estate and Accumulated Depreciation
Year ended December 31, 2014
Cedar Realty Trust, Inc.
Schedule III
Real Estate and Accumulated Depreciation
Year ended December 31, 2014
Cedar Realty Trust, Inc.
Schedule III
Real Estate and Accumulated Depreciation
Year ended December 31, 2014
(continued)
The changes in real estate and accumulated depreciation for the three years ended December 31, 2014 are as follows (1):
(1) Restated to reflect reclassifications of certain properties previously treated as “real estate held for sale/conveyance” to “real estate held for use”.
(2) At December 31, 2014, the aggregate cost for federal income tax purposes was approximately $3.6 million less than the Company’s recorded values.
(3) Depreciation is provided over the estimated useful lives of the buildings and improvements, which range from 3 to 40 years.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None
Item 9A.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures and internal controls designed to ensure that information required to be disclosed in its filings under the Securities Exchange Act of 1934 is reported within the time periods specified in the rules and regulations of the Securities and Exchange Commission (“SEC”). In this regard, the Company has formed a Disclosure Committee currently comprised of several of the Company’s executive officers as well as certain other employees with knowledge of information that may be considered in the SEC reporting process. The Committee has responsibility for the development and assessment of the financial and non-financial information to be included in the reports filed with the SEC, and assists the Company’s Chief Executive Officer and Chief Financial Officer in connection with their certifications contained in the Company’s SEC filings. The Committee meets regularly and reports to the Audit Committee on a quarterly or more frequent basis. The Company’s principal executive and financial officers have evaluated its disclosure controls and procedures as of December 31, 2014, and have determined that such disclosure controls and procedures are effective.
There have been no changes in the internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, these internal controls over financial reporting during the last quarter of 2014.
Management Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control system was designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in “Internal Control - 2013 Integrated Framework”. Based on such assessment, management believes that, as of December 31, 2014, the Company’s internal control over financial reporting is effective based on those criteria.
Ernst & Young LLP, the Company’s independent registered public accounting firm, has issued an opinion on the Company’s internal control over financial reporting, which appears elsewhere in this report.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of
Cedar Realty Trust, Inc.
We have audited Cedar Realty Trust, Inc.’s (the “Company”) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). Cedar Realty Trust, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Item 9A. Controls and Procedures -“Management Report on Internal Control Over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Cedar Realty Trust, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Cedar Realty Trust, Inc. as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, equity and cash flows for each of the three years in the period ended December 31, 2014 of Cedar Realty Trust, Inc. and our report dated February 19, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
New York, New York
February 19, 2015
Part III.
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
This item is incorporated by reference to the definitive proxy statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A.
Item 11.
Item 11. Executive Compensation
This item is incorporated by reference to the definitive proxy statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
This item is incorporated by reference to the definitive proxy statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
This item is incorporated by reference to the definitive proxy statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A.
Item 14.
Item 14. Principal Accountant Fees and Services
This item is incorporated by reference to the definitive proxy statement for the 2015 Annual Meeting of Shareholders, to be filed pursuant to Regulation 14A.
Part IV
Item 15.
Item 15. Exhibits and Financial Statement Schedules
(a)
1.
Financial Statements
The response to this portion of Item 15 is included in Item 8 of this report.
2.
Financial Statement Schedules
The response to this portion of Item 15 is included in Item 8 of this report.
3.
Exhibits
* Management contracts or compensatory plans required to be filed pursuant to Rule 601 of Regulation S-K.
(b) Exhibits
The response to this portion of Item 15 is included in Item 15(a)(3) above.
(c) The following financial statement schedules are filed as part of the report:
The response to this portion of Item 15 is included in Item 15(a)(2) above.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CEDAR REALTY TRUST, INC.
/s/ BRUCE J. SCHANZER
/s/ PHILIP R. MAYS
Bruce J. Schanzer
Philip R. Mays
President
Chief Financial Officer
(principal executive officer)
(principal financial officer)
/s/ GASPARE J. SAITTA, II
Gaspare J. Saitta, II
Chief Accounting Officer
(principal accounting officer)
February 19, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and as of the date indicated.
/s/ JAMES J. BURNS
/s/ PAMELA N. HOOTKIN
James J. Burns
Pamela N. Hootkin
Director
Director
/s/ PAUL G. KIRK, JR
/s/ EVERETT B. MILLER, III
Paul G. Kirk, Jr.
Everett B. Miller, III
Director
Director
/s/ BRUCE J. SCHANZER
/s/ ROGER M. WIDMANN
Bruce J. Schanzer
Roger M. Widmann
Director
Director
February 19, 2015