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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                  to
Commission File Number: 001-35481
RETAIL PROPERTIES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
 
Maryland
 
42-1579325
(State or other jurisdiction
of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
2021 Spring Road, Suite 200, Oak Brook, Illinois
 
60523
(Address of principal executive offices)
 
(Zip Code)
(630) 634-4200
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
Accelerated filer o
 
 
 
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Number of shares outstanding of the registrant’s classes of common stock as of October 24, 2014:
Class A common stock:    236,599,972 shares


 



RETAIL PROPERTIES OF AMERICA, INC.
TABLE OF CONTENTS





Part I — Financial Information
Item 1.  Financial Statements
RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
(in thousands, except par value amounts)

 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Investment properties:
 
 
 
 
Land
 
$
1,222,412

 
$
1,174,065

Building and other improvements
 
4,550,657

 
4,586,657

Developments in progress
 
42,178

 
43,796

 
 
5,815,247

 
5,804,518

Less accumulated depreciation
 
(1,362,980
)
 
(1,330,474
)
Net investment properties
 
4,452,267

 
4,474,044

Cash and cash equivalents
 
67,830

 
58,190

Investment in unconsolidated joint ventures
 
7,087

 
15,776

Accounts and notes receivable (net of allowances of $7,898 and $8,197, respectively)
 
83,428

 
80,818

Acquired lease intangible assets, net
 
132,322

 
129,561

Assets associated with investment properties held for sale
 
39,815

 
8,616

Other assets, net
 
108,138

 
110,571

Total assets
 
$
4,890,887

 
$
4,877,576

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Mortgages payable, net
 
$
1,652,729

 
$
1,684,633

Unsecured notes payable
 
250,000

 

Unsecured term loan
 
450,000

 
450,000

Unsecured revolving line of credit
 
58,000

 
165,000

Accounts payable and accrued expenses
 
65,053

 
54,457

Distributions payable
 
39,187

 
39,138

Acquired lease intangible liabilities, net
 
103,848

 
91,881

Liabilities associated with investment properties held for sale
 
1,206

 
6,603

Other liabilities
 
66,688

 
77,030

Total liabilities
 
2,686,711

 
2,568,742

 
 
 
 
 
Commitments and contingencies (Note 15)
 

 

 
 
 
 
 
Equity:
 
 
 
 
Preferred stock, $0.001 par value, 10,000 shares authorized, 7.00% Series A cumulative
redeemable preferred stock, 5,400 shares issued and outstanding at September 30, 2014
and December 31, 2013; liquidation preference $135,000
 
5

 
5

Class A common stock, $0.001 par value, 475,000 shares authorized, 236,600 and 236,302
shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively
 
237

 
236

Additional paid-in capital
 
4,921,946

 
4,919,633

Accumulated distributions in excess of earnings
 
(2,719,003
)
 
(2,611,796
)
Accumulated other comprehensive loss
 
(503
)
 
(738
)
Total shareholders’ equity
 
2,202,682

 
2,307,340

Noncontrolling interests
 
1,494

 
1,494

Total equity
 
2,204,176

 
2,308,834

Total liabilities and equity
 
$
4,890,887

 
$
4,877,576


See accompanying notes to condensed consolidated financial statements

1


RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Operations and Other Comprehensive (Loss) Income
(Unaudited)
(in thousands, except per share amounts)

 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
Rental income
 
$
120,098

 
$
107,487

 
$
354,505

 
$
319,878

Tenant recovery income
 
29,230

 
26,636

 
86,086

 
73,814

Other property income
 
2,074

 
2,002

 
5,905

 
6,814

Total revenues
 
151,402

 
136,125

 
446,496

 
400,506

 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
Property operating expenses
 
23,638

 
21,215

 
72,306

 
65,454

Real estate taxes
 
20,574

 
18,987

 
58,055

 
52,617

Depreciation and amortization
 
54,096

 
50,847

 
161,786

 
161,451

Provision for impairment of investment properties
 
54,584

 
27,183

 
60,378

 
27,183

Loss on lease terminations
 
550

 
221

 
1,208

 
813

General and administrative expenses
 
6,982

 
6,820

 
22,794

 
23,163

Total expenses
 
160,424

 
125,273

 
376,527

 
330,681

 
 
 
 
 
 
 
 
 
Operating (loss) income
 
(9,022
)
 
10,852

 
69,969

 
69,825

 
 
 
 
 
 
 
 
 
Gain on extinguishment of other liabilities
 

 

 
4,258

 

Equity in (loss) income of unconsolidated joint ventures, net
 
(232
)
 
126

 
(1,443
)
 
(736
)
Gain on change in control of investment properties
 

 

 
24,158

 

Interest expense (Note 9)
 
(37,356
)
 
(32,092
)
 
(101,092
)
 
(112,364
)
Other income, net
 
4,706

 
985

 
5,383

 
4,146

(Loss) income from continuing operations
 
(41,904
)
 
(20,129
)
 
1,233

 
(39,129
)
 
 
 
 
 
 
 
 
 
Discontinued operations:
 
 
 
 
 
 
 
 
(Loss) income, net
 

 
(20,278
)
 
(148
)
 
3,226

Gain on sales of investment properties
 

 
1,705

 
655

 
6,635

(Loss) income from discontinued operations
 

 
(18,573
)
 
507

 
9,861

Gain on sales of investment properties
 
15,168

 
1,150

 
15,695

 
5,807

Net (loss) income
 
(26,736
)
 
(37,552
)
 
17,435

 
(23,461
)
Net (loss) income attributable to the Company
 
(26,736
)
 
(37,552
)
 
17,435

 
(23,461
)
Preferred stock dividends
 
(2,362
)
 
(2,362
)
 
(7,087
)
 
(7,087
)
Net (loss) income attributable to common shareholders
 
$
(29,098
)
 
$
(39,914
)
 
$
10,348

 
$
(30,548
)
 
 
 
 
 
 
 
 
 
(Loss) earnings per common share — basic and diluted:
 
 
 
 
 
 
 
 
Continuing operations
 
$
(0.12
)
 
$
(0.09
)
 
$
0.04

 
$
(0.17
)
Discontinued operations
 

 
(0.08
)
 

 
0.04

Net (loss) income per common share attributable to common shareholders
 
$
(0.12
)
 
$
(0.17
)
 
$
0.04

 
$
(0.13
)
 
 
 
 
 
 
 
 
 
Net (loss) income
 
$
(26,736
)
 
$
(37,552
)
 
$
17,435

 
$
(23,461
)
Other comprehensive (loss) income:
 
 
 
 
 
 
 
 
Net unrealized gain (loss) on derivative instruments (Note 9)
 
390

 
(705
)
 
235

 
396

Comprehensive (loss) income attributable to the Company
 
$
(26,346
)
 
$
(38,257
)
 
$
17,670

 
$
(23,065
)
 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — basic
 
236,203

 
236,151

 
236,177

 
233,462

 
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding — diluted
 
236,203

 
236,151

 
236,180

 
233,462


See accompanying notes to condensed consolidated financial statements

2


RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Equity
(Unaudited)
(in thousands, except per share amounts)

 
Preferred Stock
 
Class A
Common Stock
 
Class B
Common Stock
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance at January 1, 2013
5,400

 
$
5

 
133,606

 
$
133

 
97,037

 
$
98

 
$
4,835,370

 
$
(2,460,093
)
 
$
(1,254
)
 
$
2,374,259

 
$
1,494

 
$
2,375,753

Net loss

 

 

 

 

 

 

 
(23,461
)
 

 
(23,461
)
 

 
(23,461
)
Other comprehensive income

 

 

 

 

 

 

 

 
396

 
396

 

 
396

Distributions declared to preferred shareholders ($1.3611 per share)

 

 

 

 

 

 

 
(7,350
)
 

 
(7,350
)
 

 
(7,350
)
Distributions declared to common shareholders ($0.496875 per share)

 

 

 

 

 

 

 
(116,478
)
 

 
(116,478
)
 

 
(116,478
)
Issuance of common stock, net of offering costs

 

 
5,547

 
5

 

 

 
83,532

 

 

 
83,537

 

 
83,537

Issuance of restricted common stock

 

 
73

 

 

 

 

 

 

 

 

 

Conversion of Class B common stock to Class A common stock

 

 
48,518

 
49

 
(48,518
)
 
(49
)
 

 

 

 

 

 

Stock based compensation expense, net of shares withheld for employee taxes and forfeitures

 

 
(4
)
 

 

 

 
410

 

 

 
410

 

 
410

Balance at September 30, 2013
5,400

 
$
5

 
187,740

 
$
187

 
48,519

 
$
49

 
$
4,919,312

 
$
(2,607,382
)
 
$
(858
)
 
$
2,311,313

 
$
1,494

 
$
2,312,807

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2014
5,400

 
$
5

 
236,302

 
$
236

 

 
$

 
$
4,919,633

 
$
(2,611,796
)
 
$
(738
)
 
$
2,307,340

 
$
1,494

 
$
2,308,834

Net income

 

 

 

 

 

 

 
17,435

 

 
17,435

 

 
17,435

Other comprehensive income

 

 

 

 

 

 

 

 
235

 
235

 

 
235

Distributions declared to preferred shareholders ($1.3125 per share)

 

 

 

 

 

 

 
(7,087
)
 

 
(7,087
)
 

 
(7,087
)
Distributions declared to common shareholders ($0.496875 per share)

 

 

 

 

 

 

 
(117,555
)
 

 
(117,555
)
 

 
(117,555
)
Issuance of common stock, net of offering costs

 

 

 

 

 

 
(114
)
 

 

 
(114
)
 

 
(114
)
Issuance of restricted common stock

 

 
303

 
1

 

 

 

 

 

 
1

 

 
1

Stock based compensation expense, net of shares withheld for employee taxes and forfeitures

 

 
(5
)
 

 

 

 
2,427

 

 

 
2,427

 

 
2,427

Balance at September 30, 2014
5,400

 
$
5

 
236,600

 
$
237

 

 
$

 
$
4,921,946

 
$
(2,719,003
)
 
$
(503
)
 
$
2,202,682

 
$
1,494

 
$
2,204,176


See accompanying notes to condensed consolidated financial statements


3



RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
Cash flows from operating activities:
 
 
 
Net income (loss)
$
17,435

 
$
(23,461
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
(including discontinued operations):
 
 
 
Depreciation and amortization
161,786

 
171,282

Provision for impairment of investment properties
60,378

 
59,140

Gain on sales of investment properties
(16,350
)
 
(12,442
)
Gain on extinguishment of debt

 
(26,331
)
Gain on extinguishment of other liabilities
(4,258
)
 

Gain on change in control of investment properties
(24,158
)
 

Loss on lease terminations
1,208

 
813

Amortization of loan fees, mortgage debt premium and discount on debt assumed, net
4,000

 
8,391

Equity in loss of unconsolidated joint ventures, net
1,443

 
736

Distributions on investments in unconsolidated joint ventures
1,360

 
6,679

Payment of leasing fees and inducements
(6,818
)
 
(9,341
)
Changes in accounts receivable, net
(867
)
 
3,076

Changes in accounts payable and accrued expenses, net
9,734

 
(137
)
Changes in other operating assets and liabilities, net
(9,686
)
 
(7,112
)
Other, net
2,745

 
6,674

Net cash provided by operating activities
197,952

 
177,967

 
 
 
 
Cash flows from investing activities:
 
 
 
Changes in restricted escrows, net
676

 
2,519

Purchase of investment properties
(152,236
)
 

Capital expenditures and tenant improvements
(31,254
)
 
(31,456
)
Proceeds from sales of investment properties
164,581

 
67,419

Investment in developments in progress
(2,611
)
 
(887
)
Investment in unconsolidated joint ventures
(25
)
 
(7,111
)
Distributions of investments in unconsolidated joint ventures

 
836

Other, net
(150
)
 
(77
)
Net cash (used in) provided by investing activities
(21,019
)
 
31,243

 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from mortgages and notes payable
3,159

 
498

Principal payments on mortgages and notes payable
(187,130
)
 
(467,291
)
Proceeds from unsecured notes payable
250,000

 

Proceeds from credit facility
365,500

 
425,000

Repayments of credit facility
(472,500
)
 
(190,000
)
Payment of loan fees and deposits, net
(1,550
)
 
(5,380
)
Proceeds from issuance of common stock

 
84,835

Distributions paid
(124,593
)
 
(122,898
)
Other, net
(179
)
 
(1,722
)
Net cash used in financing activities
(167,293
)
 
(276,958
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
9,640

 
(67,748
)
Cash and cash equivalents, at beginning of period
58,190

 
138,069

Cash and cash equivalents, at end of period
$
67,830

 
$
70,321

(continued)
 

4



RETAIL PROPERTIES OF AMERICA, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(in thousands)

 
Nine Months Ended September 30,
 
2014
 
2013
Supplemental cash flow disclosure, including non-cash activities:
 
 
 
Cash paid for interest
$
91,255

 
$
108,027

Distributions payable
$
39,187

 
$
39,130

Accrued capital expenditures and tenant improvements
$
4,748

 
$
7,229

Accrued leasing fees and inducements
$
139

 
$
1,390

Developments in progress placed in service
$
4,047

 
$

Forgiveness of mortgage debt
$

 
$
19,615

Forgiveness of accrued interest, net of escrows held by the lender
$

 
$
6,716

Shares of Class B common stock converted to Class A common stock

 
48,518

 
 
 
 
Purchase of investment properties (after credits at closing):
 
 
 
Land, building and other improvements, net
$
(318,666
)
 
$

Accounts receivable, acquired lease intangible and other assets
(29,163
)
 

Accounts payable, acquired lease intangible and other liabilities
24,950

 

Mortgages payable assumed, net
146,485

 

Gain on change in control of investment properties
24,158

 

 
$
(152,236
)
 
$

 
 
 
 
Proceeds from sales of investment properties:
 
 
 
Land, building and other improvements, net
$
142,655

 
$
51,849

Accounts receivable, acquired lease intangible and other assets
6,986

 
3,402

Accounts payable, acquired lease intangible and other liabilities
(1,952
)
 
(39
)
Mortgages payable

 
(26
)
Deferred gains
542

 
(209
)
Gain on sales of investment properties
16,350

 
12,442

 
$
164,581

 
$
67,419

(concluded)
 
See accompanying notes to condensed consolidated financial statements

5

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Readers of this Quarterly Report should refer to the audited financial statements of Retail Properties of America, Inc. for the year ended December 31, 2013, which are included in its 2013 Annual Report on Form 10-K, as certain footnote disclosures which would substantially duplicate those contained in the Annual Report have been omitted from this Quarterly Report. In the opinion of management, all adjustments necessary, all of which were of normal recurring nature, for a fair presentation, have been included in this Quarterly Report.
(1)   Organization and Basis of Presentation
Retail Properties of America, Inc. (the Company) was formed on March 5, 2003 to own and operate high quality, strategically located shopping centers in the United States.
All share amounts and dollar amounts in this Quarterly Report are stated in thousands with the exception of per share amounts and per square foot amounts.
The Company has elected to be taxed as a real estate investment trust (REIT) under the Internal Revenue Code of 1986, as amended (the Code). The Company believes it qualifies for taxation as a REIT and, as such, the Company generally will not be subject to U.S. federal income tax on taxable income that is distributed to shareholders. If the Company fails to qualify as a REIT in any taxable year, the Company will be subject to U.S. federal income tax on its taxable income at regular corporate tax rates. Even if the Company qualifies for taxation as a REIT, the Company may be subject to certain state and local taxes on its income, property or net worth and U.S. federal income and excise taxes on its undistributed income. The Company has one wholly-owned subsidiary that has jointly elected to be treated as a taxable REIT subsidiary (TRS) for U.S. federal income tax purposes. A TRS is taxed on its taxable income at regular corporate tax rates. The income tax expense incurred as a result of the TRS did not have a material impact on the Company’s accompanying condensed consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. For example, significant estimates and assumptions have been made with respect to useful lives of assets, capitalization of development costs, fair value measurements, provision for impairment, including estimates of holding periods, capitalization rates and discount rates (where applicable), provision for income taxes, recoverable amounts of receivables, deferred taxes and initial valuations and related amortization periods of deferred costs and intangibles, particularly with respect to property acquisitions. Actual results could differ from those estimates.
The accompanying condensed consolidated financial statements include the accounts of the Company, as well as all wholly-owned subsidiaries and consolidated joint venture investments. Wholly-owned subsidiaries generally consist of limited liability companies (LLCs), limited partnerships (LPs) and statutory trusts.
The Company’s property ownership as of September 30, 2014 is summarized below:

Wholly-owned
 
Consolidated
Joint Ventures (a)
Operating properties (b)
225

 

Development properties
2

 
1

(a)
The Company has a 50% ownership interest in one LLC.
(b)
Excludes two wholly-owned operating properties and a portion of a third wholly-owned operating property classified as held for sale as of September 30, 2014.
Noncontrolling interest is the portion of equity in a consolidated subsidiary not attributable, directly or indirectly, to the Company. In the condensed consolidated statements of operations and other comprehensive (loss) income, revenues, expenses and net income or loss from less-than-wholly-owned consolidated subsidiaries are reported at the consolidated amounts, including both the amounts attributable to common shareholders and noncontrolling interests. Condensed consolidated statements of equity are included in the quarterly financial statements, including beginning balances, activity for the period and ending balances for total shareholders’

6

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

equity, noncontrolling interests and total equity. Noncontrolling interests are adjusted for additional contributions from and distributions to noncontrolling interest holders, as well as the noncontrolling interest holders’ share of the net income or loss of each respective entity, as applicable. As of September 30, 2014, the Company is the controlling member in one less-than-wholly-owned consolidated entity.
The Company evaluates the classification and presentation of noncontrolling interests associated with its consolidated joint venture investments on an ongoing basis as facts and circumstances necessitate. No adjustment to the carrying value of the noncontrolling interests in the Company’s consolidated joint venture investments was made during the nine months ended September 30, 2014 and 2013.
(2)   Summary of Significant Accounting Policies
Refer to the Company’s 2013 Annual Report on Form 10-K for a summary of the Company’s significant accounting policies. Except as disclosed below, there have been no changes to the Company’s significant accounting policies in the nine months ended September 30, 2014.
Recent Accounting Pronouncements
Effective January 1, 2014, companies are required to present unrecognized tax benefits as a reduction to deferred tax assets when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists. To the extent none of these are available at the reporting date, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of this pronouncement did not have any effect on the Company’s condensed consolidated financial statements.
Effective January 1, 2015, with early adoption permitted effective January 1, 2014, the definition of discontinued operations has been revised to limit what qualifies for this classification and presentation to disposals of components of a company that represent strategic shifts that have, or will have, a major effect on a company’s operations and financial results. Required expanded disclosures for disposals or disposal groups that qualify for discontinued operations are intended to provide users of financial statements with enhanced information about the assets, liabilities, revenues and expenses of such discontinued operations. In addition, in accordance with this pronouncement, companies are required to disclose the pretax profit or loss of an individually significant component that does not qualify for discontinued operations treatment. While the threshold for a disposal or disposal group to qualify for discontinued operations treatment has been revised, this pronouncement retains the held for sale classification and presentation concepts of previous authoritative literature. Accordingly, under this pronouncement, a disposal or disposal group may qualify for held for sale classification but not meet the threshold for discontinued operations treatment. The Company has elected to early adopt this pronouncement effective January 1, 2014. The adoption, which is applied prospectively, is anticipated to substantially reduce the number of the Company’s transactions, going forward, that qualify for discontinued operations as compared to historical results. Upon adoption of this pronouncement effective January 1, 2014, the investment properties that were sold or held for sale during 2014, except for Riverpark Phase IIA, which qualified for discontinued operations treatment under the previous standard, did not qualify for discontinued operations and, as such, are reflected in continuing operations on the condensed consolidated statements of operations and other comprehensive (loss) income.
Effective January 1, 2016, with early adoption permitted effective January 1, 2014, companies that grant their employees share-based payments in which the terms of the award provide that a performance target which affects vesting could be achieved after the requisite service period will be required to treat that feature as a performance condition. The Company has elected to early adopt this pronouncement effective January 1, 2014. The adoption of this pronouncement did not have any effect on the Company’s condensed consolidated financial statements.
Effective January 1, 2017, companies will be required to apply a five-step model in accounting for revenue arising from contracts with customers. The core principle of the revised revenue model is that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Lease contracts will be excluded from this revenue recognition criteria; however, the sale of real estate will be required to follow the new model. Expanded quantitative and qualitative disclosures regarding revenue recognition will be required for contracts that are subject to this guidance. The Company does not expect the adoption will have a material effect on its consolidated financial statements, however it will continue to evaluate this assessment until the guidance becomes effective.

7

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Effective January 1, 2017, a company’s management will be required to assess the entity’s ability to continue as a going concern every reporting period including interim periods for a period of one year after the date that the financial statements are issued (or available to be issued) and provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The Company does not expect the adoption will have a material effect on its consolidated financial statements.
(3)   Acquisitions
During the nine months ended September 30, 2014, the Company acquired seven properties, one outparcel at an existing consolidated multi-tenant retail operating property and the fee interest in an existing consolidated multi-tenant retail operating property that was previously subject to a ground lease with a third party, as summarized below.
On June 23, 2014, the Company paid $6,369 using available cash on hand to acquire an 8,500 square foot single-user outparcel at Southlake Town Square, one of the Company’s existing consolidated multi-tenant retail operating properties, located in Southlake, Texas.
As discussed in Note 10, on June 5, 2014, the Company dissolved its joint venture arrangement with its partner in MS Inland Fund, LLC (MS Inland) by acquiring its partner’s 80% ownership interest in the six multi-tenant retail properties owned by the joint venture (collectively, the MS Inland acquisitions). The six properties had, at acquisition, a combined fair value of $292,500, with the Company’s partner’s interest valued at $234,000. The Company paid total cash consideration of approximately $120,600, using available cash on hand and proceeds from its unsecured revolving line of credit, before transaction costs and prorations and after assumption of the joint venture’s in-place mortgage financing on those properties of $141,698 at a weighted average interest rate of 4.79%. The properties acquired have a combined total gross leasable area of 1,194,800 square feet. The Company accounted for this transaction as a business combination achieved in stages and recognized a gain on change in control of investment properties of $24,158 in the second quarter of 2014 as a result of remeasuring the carrying value of its 20% interest in the six acquired properties to fair value. Such gain is presented as “Gain on change in control of investment properties” in the accompanying condensed consolidated statements of operations and other comprehensive (loss) income. Refer to Note 10 for additional transaction details.
On February 27, 2014, the Company acquired a 100% interest in Heritage Square, a 53,100 square foot multi-tenant retail property located in Issaquah, Washington, for a purchase price of $18,022 using proceeds from its unsecured revolving line of credit. In addition, on February 27, 2014, the Company paid $10,350 using available cash on hand to acquire the fee interest in Bed Bath & Beyond Plaza, one of the Company’s existing consolidated multi-tenant retail operating properties located in Miami, Florida that was previously subject to a ground lease with a third party. The Company did not acquire any properties during the nine months ended September 30, 2013.
The following table summarizes the acquisition date fair values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:
Land
 
$
112,804

Building and other improvements
 
205,862

Acquired lease intangible assets
 
33,568

Acquired lease intangible liabilities
 
(20,206
)
Mortgages payable (a)
 
(146,485
)
Net assets acquired (b)
 
$
185,543

(a)
Includes mortgage premium of $4,787.
(b)
Net assets attributable to the MS Inland acquisitions are presented at 100%.
Transaction costs, which were not material, were expensed as incurred and included within “General and administrative expenses” in the accompanying condensed consolidated statements of operations and other comprehensive (loss) income. In conjunction with the Bed Bath & Beyond Plaza transaction, the Company reversed a straight-line ground rent liability of $4,258, which is presented in “Gain on extinguishment of other liabilities” in the accompanying condensed consolidated statements of operations and other comprehensive (loss) income.

8

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Condensed Pro Forma Financial Information
The results of operations of the acquisitions accounted for as business combinations, including the MS Inland acquisitions and the acquisitions of Heritage Square and the outparcel at Southlake Town Square, are included in the following unaudited condensed pro forma financial information as if these acquisitions had been completed as of January 1, 2013. The results of operations associated with the Bed Bath & Beyond Plaza acquisition have not been included in the pro forma presentation as such acquisition was accounted for as an asset acquisition. These pro forma results are for comparative purposes only and are not necessarily indicative of what the actual results of operations of the Company would have been had the acquisitions occurred at the beginning of the periods presented, nor are they necessarily indicative of future operating results.
The unaudited condensed pro forma financial information is as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Total revenues
$
151,402

 
$
143,538

 
$
458,523

 
$
422,596

Net loss
$
(27,270
)
 
$
(38,104
)
 
$
(8,759
)
 
$
(3,191
)
Net loss attributable to common shareholders
$
(29,632
)
 
$
(40,466
)
 
$
(15,846
)
 
$
(10,278
)
Loss per common share — basic and diluted
 
 
 
 
 
 
 
Net loss per common share attributable to common shareholders
$
(0.13
)
 
$
(0.17
)
 
$
(0.07
)
 
$
(0.04
)
Weighted average number of common shares outstanding - basic
236,203

 
236,151

 
236,177

 
233,462

Weighted average number of common shares outstanding - diluted
236,203

 
236,151

 
236,180

 
233,462

(4)   Dispositions
The Company monitors its investment properties to ensure that each property continues to meet financial and strategic objectives. This approach results in the sale of certain non-strategic and non-core assets that no longer meet the Company’s investment criteria.
The Company closed on the following property dispositions during the nine months ended September 30, 2014:
Date
 
Property Name
 
Property Type
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Mortgage
Debt
Extinguished
 
Gain
Continuing Operations:
 
 
 
 
 
 
 
 
 
 
 
 
August 27, 2014
 
Four Peaks Plaza
 
Multi-tenant retail
 
140,400

 
$
9,900

 
$
9,381

 
$
9,713

 
$

August 26, 2014
 
Crossroads Plaza CVS
 
Single-user retail
 
16,000

 
7,650

 
7,411

 

(b)
2,863

August 19, 2014
 
Greenwich Center
 
Multi-tenant retail
 
182,600

 
22,700

 
21,977

 

(c)
5,871

August 19, 2014
 
Boston Commons
 
Multi-tenant retail
 
103,400

 
9,820

 
9,586

 

 

August 15, 2014
 
Fisher Scientific
 
Single-user office
 
114,700

 
14,000

 
13,715

 

 
3,732

August 15, 2014
 
Stanley Works/Mac Tools
 
Single-user office
 
72,500

 
10,350

 
10,184

 

 
1,375

August 1, 2014
 
Battle Ridge Pavilion
 
Multi-tenant retail
 
103,500

 
14,100

 
13,722

 

 
1,327

May 16, 2014
 
Beachway Plaza & Cornerstone Plaza (d)
 
Multi-tenant retail
 
189,600

 
24,450

 
23,292

 

 
527

April 1, 2014
 
Midtown Center
 
Multi-tenant retail
 
408,500

 
47,150

 
46,043

 

(e)

 
 
 
 
 
 
1,331,200

 
160,120

 
155,311

 
9,713

 
15,695

Discontinued Operations:
 
 
 
 
 
 
 
 
 
 
 
 
March 11, 2014
 
Riverpark Phase IIA
 
Single-user retail
 
64,300

 
9,269

 
9,204

 

(f)
655

 
 
 
 
 
 
1,395,500

 
$
169,389

 
$
164,515

 
$
9,713

 
$
16,350

(a)
Aggregate proceeds are net of transaction costs and exclude $66 of condemnation proceeds, which did not result in any additional gain recognition.
(b)
The Company repaid the $4,229 mortgage payable prior to the disposition of the property.
(c)
The Company repaid the $14,475 mortgage payable prior to the disposition of the property.
(d)
The terms of the disposition of Beachway Plaza and Cornerstone Plaza were negotiated as a single transaction.
(e)
The Company repaid the $30,124 mortgage payable prior to the disposition of the property.
(f)
The Company repaid the $6,435 mortgage payable prior to the disposition of the property.

9

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

During the year ended December 31, 2013, the Company sold 20 properties, six of which were sold during the nine months ended September 30, 2013. The dispositions and certain additional transactions, including earnouts, pad sales and condemnations, resulted in aggregate proceeds, net of transaction costs, of $67,419 with aggregate gains of $12,442 during the nine months ended September 30, 2013.
As of September 30, 2014, the Company had entered into contracts to sell the following properties, which qualified for held for sale accounting treatment:
Property Name
 
Property Location
 
Property Type
 
Square
Footage
Gloucester Town Center
 
Gloucester, New Jersey
 
Multi-tenant retail
 
107,200

Plaza at Riverlakes
 
Bakersfield, California
 
Multi-tenant retail
 
102,800

Mission Crossing (a)
 
San Antonio, Texas
 
Multi-tenant retail
 
163,400

 
 
 
 
 
 
373,400

(a)
The anticipated disposition of Mission Crossing does not impact the Company’s property count as the Company will continue to own a single-user parcel at the property, which is not classified as held for sale as of September 30, 2014.
These properties qualified for held for sale accounting treatment upon meeting all applicable GAAP criteria on or prior to September 30, 2014, at which time depreciation and amortization were ceased. As such, the assets and liabilities associated with these properties are separately classified as held for sale in the condensed consolidated balance sheet as of September 30, 2014. However, the anticipated disposition of these properties did not qualify for discontinued operations treatment due to the Company’s early adoption of the revised discontinued operations pronouncement, and, therefore, the operations for these properties for all periods presented continue to be classified within continuing operations in the condensed consolidated statements of operations and other comprehensive (loss) income. Riverpark Phase IIA, which was sold on March 11, 2014, was classified as held for sale as of December 31, 2013.
The following table presents the assets and liabilities associated with the held for sale properties:
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
Land, building and other improvements
$
47,653

 
$
10,285

Accumulated depreciation
(9,666
)
 
(2,206
)
Net investment properties
37,987

 
8,079

Other assets
1,828

 
537

Assets associated with investment properties held for sale
$
39,815

 
$
8,616

 
 
 
 
Liabilities
 
 
 
Mortgages payable
$

 
$
6,435

Other liabilities
1,206

 
168

Liabilities associated with investment properties held for sale
$
1,206

 
$
6,603


10

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The Company does not allocate general corporate interest expense to discontinued operations. The results of operations for the investment properties that are accounted for as discontinued operations, which population consists of investment properties sold and classified as held for sale on or prior to December 31, 2013, including Riverpark Phase IIA, are presented in the table below:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014

2013
Revenues:
 
 
 
 
 

 
Rental income
$

 
$
6,390

 
$
(123
)

$
20,008

Tenant recovery income

 
1,432

 
144


4,440

Other property income

 
800

 
23


6,349

Total revenues

 
8,622

 
44


30,797


 
 
 
 



Expenses:
 
 
 
 
 

 
Property operating expenses

 
1,031

 
121


4,003

Real estate taxes

 
1,546

 
3


4,895

Depreciation and amortization

 
2,971

 


9,831

Provision for impairment of investment properties

 
22,781

 

 
31,957

Gain on extinguishment of debt

 

 

 
(26,331
)
Interest expense

 
590

 
68


3,269

Other income, net

 
(19
)
 

 
(53
)
Total expenses

 
28,900

 
192


27,571


 
 
 
 





(Loss) income from discontinued operations, net
$

 
$
(20,278
)
 
$
(148
)

$
3,226

(5)   Compensation Plans
On May 22, 2014, the Company’s shareholders approved the Company’s 2014 Long-Term Equity Compensation Plan (the 2014 Plan), which replaces the Company’s 2008 Long-Term Equity Compensation Plan and Third Amended and Restated Independent Director Stock Option and Incentive Plan (Director Plan). The 2014 Plan, subject to certain conditions, authorizes the issuance of incentive and non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock, performance shares, dividend equivalent rights and cash-based awards to the Company’s employees, non-employee directors, consultants and advisors in connection with compensation and incentive arrangements that may be established by the Company’s board of directors or executive management.
The following table represents a summary of the Company’s unvested restricted shares as of and for the nine months ended September 30, 2014:

Unvested
Restricted
Shares

Weighted Average
Grant Date Fair
Value per
Restricted Share
Balance at January 1, 2014
152


$
15.11

Shares granted (a)
303


$
13.89

Shares vested
(57
)

$
14.50

Shares forfeited
(1
)

$
15.61

Balance at September 30, 2014
397


$
14.27

(a)
Shares granted vest ratably over periods ranging from one to three years in accordance with the terms of applicable award documents.
During the three months ended September 30, 2014 and 2013, the Company recorded compensation expense of $922 and $133, respectively, related to unvested restricted shares. During the nine months ended September 30, 2014 and 2013, the Company recorded compensation expense of $2,490 and $320, respectively, related to unvested restricted shares. As of September 30, 2014, total unrecognized compensation expense related to unvested restricted shares was $3,052, which is expected to be amortized over a weighted average term of 1.2 years.

11

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Prior to 2013, non-employee directors had been granted options to acquire shares under the Company’s former Director Plan. As of September 30, 2014, options to purchase 84 shares of common stock had been granted, of which options to purchase one share had been exercised, options to purchase six shares had expired and options to purchase 11 shares had been forfeited. The Company did not record any compensation expense related to these options during the three months ended September 30, 2014. Compensation expense of $7 related to these options was recorded during the three months ended September 30, 2013. Compensation expense of $3 and $22 related to these options was recorded during the nine months ended September 30, 2014 and 2013, respectively. The Company did not grant any options in 2013 or 2014.
(6)   Mortgages Payable
The following table summarizes the Company’s mortgages payable:
 
September 30, 2014
 
December 31, 2013

Aggregate
Principal
Balance

Weighted
Average
Interest Rate
 
Weighted
Average Years
to Maturity
 
Aggregate
Principal
Balance
 
Weighted
Average
Interest Rate
 
Weighted
Average Years
to Maturity
Fixed rate mortgages payable (a)
$
1,634,083


6.04
%
 
4.2
 
$
1,673,080

 
6.15
%
 
4.9
Variable rate construction loan (b)
14,518


2.44
%
 
0.1
 
11,359

 
2.44
%
 
0.8
Mortgages payable
1,648,601

 
6.01
%
 
4.2
 
1,684,439

 
6.13
%
 
4.9
Premium, net of accumulated amortization
4,726

 
 
 
 
 
1,175

 
 
 
 
Discount, net of accumulated amortization
(598
)

 
 
 
 
(981
)
 
 
 
 
Mortgages payable, net
$
1,652,729


 
 
 
 
$
1,684,633

 
 
 
 
(a)
Includes $8,177 and $8,337 of variable rate mortgage debt that was swapped to a fixed rate as of September 30, 2014 and December 31, 2013, respectively, and excludes mortgages payable of $6,435 associated with one investment property classified as held for sale as of December 31, 2013. The fixed rate mortgages had interest rates ranging from 3.35% to 8.00% and 3.50% to 8.00% as of September 30, 2014 and December 31, 2013, respectively.
(b)
The variable rate construction loan bears interest at a floating rate of London Interbank Offered Rate (LIBOR) plus 2.25%.
Mortgages Payable
During the nine months ended September 30, 2014, the Company made mortgages payable repayments in the total amount of $174,635 (excluding $55 from condemnation proceeds which were paid to the lender and scheduled principal payments of $12,440 related to amortizing loans). The loans repaid during the nine months ended September 30, 2014 had fixed interest rates with a weighted average interest rate of 6.04%. In addition, during the nine months ended September 30, 2014, as part of the MS Inland acquisitions, the Company assumed the joint venture’s in-place mortgage financing on the acquired properties of $141,698 at a weighted average interest rate of 4.79%.
The majority of the Company’s mortgages payable require monthly payments of principal and interest, as well as reserves for real estate taxes and certain other costs. The Company’s properties and the related tenant leases are pledged as collateral for the fixed rate mortgages payable while a consolidated joint venture property and the related tenant leases are pledged as collateral for the variable rate construction loan. Although the mortgage loans obtained by the Company are generally non-recourse, occasionally, the Company may guarantee all or a portion of the debt on a full-recourse basis. As of September 30, 2014, the Company had guaranteed $7,851 of the outstanding mortgage and construction loans with maturity dates ranging from November 2, 2014 through September 30, 2016 (see Note 15). At times, the Company has borrowed funds financed as part of a cross-collateralized package, with cross-default provisions, in order to enhance the financial benefits of a transaction. In those circumstances, one or more of the properties may secure the debt of another of the Company’s properties. As of September 30, 2014, the most significant cross-collateralized mortgage loan was the IW JV 2009, LLC mortgage in the amount of $477,654, which is cross-collateralized by 55 properties.

12

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Debt Maturities
The following table shows the scheduled maturities and principal amortization of the Company’s indebtedness as of September 30, 2014 for the remainder of 2014, each of the next four years and thereafter and does not reflect the impact of any debt activity that occurred after September 30, 2014:
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages payable (a)
$
4,607

 
$
377,328

 
$
67,908

 
$
321,315

 
$
12,618

 
$
850,307

 
$
1,634,083

Unsecured credit facility - fixed rate portion of term loan (b)

 

 

 

 
300,000

 

 
300,000

Unsecured notes payable

 

 

 

 

 
250,000

 
250,000

Total fixed rate debt
4,607

 
377,328

 
67,908

 
321,315

 
312,618

 
1,100,307

 
2,184,083

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction loan
14,518

 

 

 

 

 

 
14,518

Unsecured credit facility

 

 

 
58,000

 
150,000

 

 
208,000

Total variable rate debt
14,518

 

 

 
58,000

 
150,000

 

 
222,518

Total debt (c)
$
19,125

 
$
377,328

 
$
67,908

 
$
379,315

 
$
462,618

 
$
1,100,307

 
$
2,406,601

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate on debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
6.25
%
 
5.58
%
 
5.07
%
 
5.53
%
 
2.19
%
 
6.02
%
 
5.30
%
Variable rate debt
2.44
%
 

 

 
1.66
%
 
1.61
%
 

 
1.68
%
Total
3.36
%
 
5.58
%
 
5.07
%
 
4.94
%
 
2.00
%
 
6.02
%
 
4.96
%
(a)
Includes $8,177 of variable rate mortgage debt that was swapped to a fixed rate as of September 30, 2014. Excludes mortgage premium of $4,726 and discount of $(598), net of accumulated amortization, which was outstanding as of September 30, 2014.
(b)
$300,000 of LIBOR-based variable rate debt has been swapped to a fixed rate through February 24, 2016. The swap effectively converts one-month floating rate LIBOR to a fixed rate of 0.53875% over the term of the swap.
(c)
As of September 30, 2014, the weighted average years to maturity of consolidated indebtedness was 4.5 years.
The Company plans on addressing its debt maturities by using available cash on hand, proceeds from its unsecured revolving line of credit and capital markets transactions.
(7)   Unsecured Notes Payable
On June 30, 2014, the Company issued $250,000 of senior unsecured notes in a private placement transaction pursuant to a Note Purchase Agreement the Company entered into on May 16, 2014 with various institutional investors. The proceeds were used to pay down a portion of the Company’s unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities. The following table summarizes the Company’s unsecured notes payable:
Unsecured Notes Payable
 
Maturity Date
 
Principal
Balance as of
September 30, 2014
 
Interest Rate/
Weighted Average
Interest Rate
Series A senior notes
 
June 30, 2021
 
$
100,000

 
4.12
%
Series B senior notes
 
June 30, 2024
 
150,000

 
4.58
%
 
 
Total
 
$
250,000

 
4.40
%
The Note Purchase Agreement contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the Note Purchase Agreement, the Company is subject to various financial covenants, some of which are based upon the financial covenants in effect in the Company’s primary credit facility, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum interest coverage and unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth. As of September 30, 2014, management believes the Company was in compliance with the financial covenants and default provisions under the Note Purchase Agreement.

13

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(8)   Credit Facility
On May 13, 2013, the Company entered into its third amended and restated unsecured credit agreement with a syndicate of financial institutions led by KeyBank National Association and Wells Fargo Securities LLC to provide for an unsecured credit facility aggregating to $1,000,000. The third amended and restated credit facility consists of a $550,000 unsecured revolving line of credit and a $450,000 unsecured term loan (collectively, the credit facility). The Company has the ability to increase available borrowings up to $1,450,000 in certain circumstances. The Company has a one year extension option on the unsecured revolving line of credit, which it may exercise as long as it is in compliance with the terms of the unsecured credit agreement and it pays an extension fee equal to 0.15% of the commitment amount being extended.
The credit facility is currently priced on a leverage grid at a rate of LIBOR plus a margin ranging from 1.50% to 2.05%, plus a quarterly unused fee ranging from 0.25% to 0.30% depending on the undrawn amount, for the unsecured revolving line of credit and LIBOR plus a margin ranging from 1.45% to 2.00% for the unsecured term loan. On January 27, 2014, the Company received an investment grade credit rating. In accordance with the unsecured credit agreement, the Company may elect to convert to an investment grade pricing grid. Upon making such an election and depending on the Company’s credit rating, the interest rate for the unsecured revolving line of credit would equal LIBOR plus a margin ranging from 0.90% to 1.70%, plus a facility fee ranging from 0.15% to 0.35%, and for the unsecured term loan, LIBOR plus a margin ranging from 1.05% to 2.05%. As of September 30, 2014, making such an election would have resulted in a higher interest rate and, as such, the Company has not made the election to convert to an investment grade pricing grid.
The following table summarizes the Company’s credit facility as of September 30, 2014:
Credit Facility
 
Maturity Date
 
Balance as of
September 30, 2014
 
Interest Rate/
Weighted Average
Interest Rate
Term loan - fixed rate portion (a)
 
May 11, 2018
 
$
300,000

 
1.99
%
Term loan - variable rate portion
 
May 11, 2018
 
150,000

 
1.61
%
Revolving line of credit - variable rate
 
May 12, 2017
 
58,000

 
1.66
%
 
 
Total
 
$
508,000

 
1.84
%
(a)
$300,000 of the term loan has been swapped to a fixed rate of 0.53875% plus a margin based on a leverage grid ranging from 1.45% to 2.00% through February 24, 2016. The applicable margin was 1.45% as of September 30, 2014.
The unsecured credit agreement contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the unsecured credit agreement, the Company is subject to various financial covenants, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum fixed charge and unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth. As of September 30, 2014, management believes the Company was in compliance with the financial covenants and default provisions under the unsecured credit agreement.
(9)   Derivative Instruments
The Company’s objective in using interest rate derivatives is to manage its exposure to interest rate movements and add stability to interest expense. To accomplish this objective, the Company uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable rate amounts from a counterparty in exchange for the Company making fixed rate payments over the life of the agreement without exchange of the underlying notional amount.
The Company utilizes two interest rate swaps to hedge the variable cash flows associated with variable rate debt. The effective portion of changes in the fair value of derivatives that are designated and that qualify as cash flow hedges is recorded in “Accumulated other comprehensive loss” and is subsequently reclassified to interest expense as interest payments are made on the Company’s variable rate debt. Over the next 12 months, the Company estimates that an additional $862 will be reclassified as an increase to interest expense. The ineffective portion of the change in fair value of derivatives is recognized directly in earnings.

14

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

The following table summarizes the Company’s interest rate swaps that were designated as cash flow hedges of interest rate risk:
 
 
Number of Instruments
 
Notional
Interest Rate Derivatives
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Interest rate swaps
 
2

 
2

 
$
308,177

 
$
308,337

The table below presents the estimated fair value of the Company’s derivative financial instruments, which are presented within “Other liabilities” in the condensed consolidated balance sheets. The valuation techniques utilized are described in Note 14 to the condensed consolidated financial statements.
 
 
Fair Value
 
 
September 30,
2014
 
December 31,
2013
Derivatives designated as cash flow hedges:
 
 
 
 
Interest rate swaps
 
$
503

 
$
751

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations and other comprehensive (loss) income.
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of (Gain) Loss
Recognized in Other Comprehensive Income
on Derivative
(Effective Portion)
 
Location of Loss
Reclassified from
Accumulated Other
Comprehensive Income (AOCI) into Income
(Effective Portion)
 
Amount of Loss
Reclassified from
AOCI into Income
(Effective Portion)
 
Location of
(Gain) Loss
Recognized In
Income on Derivative
(Ineffective Portion and Amount
Excluded from
Effectiveness Testing)
 
Amount of (Gain) Loss
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
Interest rate swaps
 
Three Months
Ended
September 30,
 
Nine Months
Ended
September 30,
 
 
 
Three Months
Ended
September 30,
 
Nine Months
Ended
September 30,
 
 
 
Three Months
Ended
September 30,
 
Nine Months
Ended
September 30,
2014
 
$
(92
)
 
$
649

 
Interest expense
 
$
298

 
$
884

 
Other income, net
 
$

 
$
(13
)
2013
 
$
1,209

 
$
1,113

 
Interest expense
 
$
504

 
$
1,509

 
Other income, net
 
$
41

 
$
(891
)
(10) Investment in Unconsolidated Joint Ventures
Investment Summary
The following table summarizes the Company’s investments in unconsolidated joint ventures:
 
 
 
 
Ownership Interest
 
Investment at
Joint Venture
 
Date of
Investment
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
MS Inland (a)
 
4/27/2007
 
%
 
20.0
%
 
$

 
$
6,915

Oak Property and Casualty LLC (b)
 
10/1/2006
 
25.0
%
 
20.0
%
 
7,087

 
8,861

 
 
 
 
 

 
 

 
$
7,087

 
$
15,776

(a)
The MS Inland unconsolidated joint venture was formed with a large state pension fund; the Company was the managing member of the venture and earned fees for providing property management and leasing services. The Company had the ability to exercise significant influence, but did not have financial or operating control over this joint venture, and as a result the Company accounted for its investment pursuant to the equity method of accounting. On June 5, 2014, the Company dissolved its joint venture arrangement with its partner in MS Inland through the acquisition of the six properties owned by the joint venture.
(b)
Oak Property & Casualty LLC (the Captive) is an insurance association owned by the Company and three other unaffiliated parties (four other unaffiliated parties as of December 31, 2013). The Captive was formed to insure/reimburse the members’ deductible obligations for property and general liability insurance claims subject to certain limitations. The Company entered into the Captive to stabilize insurance costs, manage exposures and recoup expenses through the function of the Captive. It has been determined that the Captive is a variable interest entity, but because the Company does not hold the power to most significantly impact the Captive’s performance, the Company is not considered the primary beneficiary. Accordingly, the Company’s investment in the Captive is accounted for pursuant to the equity method of accounting. The Company’s risk of loss is limited to its investment and the Company is not required to fund additional capital

15

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

to the Captive. On August 29, 2014, the Company provided written notice of its termination in the Captive, effective December 1, 2014, at which time it plans to establish a new wholly-owned captive insurance company.
Under the equity method of accounting, the Company’s net equity investment in each unconsolidated joint venture is reflected in the accompanying condensed consolidated balance sheets and the Company’s share of net income or loss from each unconsolidated joint venture is reflected in the accompanying condensed consolidated statements of operations and other comprehensive (loss) income. Distributions from these investments that are related to income from operations are included as operating activities and distributions that are related to capital transactions are included as investing activities in the accompanying condensed consolidated statements of cash flows.
Combined condensed financial information of the Company’s joint ventures (at 100%) for the periods attributable to the Company’s ownership is summarized as follows:
 
 
Combined
Condensed Total
 
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
Real estate assets
 
$

 
$
270,916

Less accumulated depreciation
 

 
(52,624
)
Real estate, net
 

 
218,292

 
 
 
 
 
Other assets, net
 
25,648

 
49,227

Total assets
 
$
25,648

 
$
267,519

 
 
 
 
 
Liabilities
 
 
 
 
Mortgage debt
 
$

 
$
142,537

Other liabilities, net
 
16,332

 
22,725

Total liabilities
 
16,332

 
165,262

 
 
 
 
 
Total equity
 
9,316

 
102,257

Total liabilities and equity
 
$
25,648

 
$
267,519

 
 
Three Months Ended September 30,
 
 
RioCan (a)
 
Hampton (b)
 
Other Joint
Ventures (c)
 
Combined
Condensed Total
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property related income
 
$

 
$
12,036

 
$

 
$

 
$

 
$
6,957

 
$

 
$
18,993

Other income
 

 

 

 

 
1,795

 
2,070

 
1,795

 
2,070

Total revenues
 

 
12,036

 

 

 
1,795

 
9,027

 
1,795

 
21,063

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
 

 
1,699

 

 

 

 
912

 

 
2,611

Real estate taxes
 

 
2,155

 

 

 

 
1,268

 

 
3,423

Depreciation and amortization
 

 
6,767

 

 

 

 
2,422

 

 
9,189

Loss (gain) on lease terminations
 

 
4

 

 

 

 
(22
)
 

 
(18
)
General and administrative expenses
 

 
163

 

 

 
50

 
107

 
50

 
270

Interest expense, net
 

 
2,219

 

 

 

 
1,783

 

 
4,002

Other (income) expense, net
 

 
(4,442
)
 

 

 
5,919

 
604

 
5,919

 
(3,838
)
Total expenses
 

 
8,565

 

 

 
5,969

 
7,074

 
5,969

 
15,639

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 

 
3,471

 

 

 
(4,174
)
 
1,953

 
(4,174
)
 
5,424

(Loss) income from discontinued operations (d)
 

 
(206
)
 

 

 

 
2

 

 
(204
)
Net income (loss)
 
$

 
$
3,265

 
$

 
$

 
$
(4,174
)
 
$
1,955

 
$
(4,174
)
 
$
5,220


16

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
 
Nine Months Ended September 30,
 
 
RioCan (a)
 
Hampton (b)
 
Other Joint
Ventures (c)
 
Combined
Condensed Total
 
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property related income
 
$

 
$
36,758

 
$

 
$

 
$
11,853

 
$
20,894

 
$
11,853

 
$
57,652

Other income
 

 

 

 

 
5,818

 
6,144

 
5,818

 
6,144

Total revenues
 

 
36,758

 

 

 
17,671

 
27,038

 
17,671

 
63,796

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Property operating expenses
 

 
5,001

 

 

 
1,660

 
2,635

 
1,660

 
7,636

Real estate taxes
 

 
6,187

 

 

 
2,339

 
3,935

 
2,339

 
10,122

Depreciation and amortization
 

 
21,128

 

 

 
4,117

 
7,314

 
4,117

 
28,442

Loss (gain) on lease terminations
 

 
836

 

 

 
(169
)
 
(6
)
 
(169
)
 
830

General and administrative expenses
 

 
457

 

 
6

 
220

 
357

 
220

 
820

Interest expense, net
 

 
7,033

 

 
(1,758
)
 
3,028

 
5,349

 
3,028

 
10,624

Other (income) expense, net
 

 
(4,436
)
 

 
(13
)
 
11,006

 
4,479

 
11,006

 
30

Total expenses
 

 
36,206

 

 
(1,765
)
 
22,201

 
24,063

 
22,201

 
58,504

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
 

 
552

 

 
1,765

 
(4,530
)
 
2,975

 
(4,530
)
 
5,292

(Loss) income from discontinued operations (d)
 

 
(1,026
)
 

 
(117
)
 

 
52

 

 
(1,091
)
Gain on sales of investment properties - discontinued operations
 

 

 

 
1,019

 

 

 

 
1,019

Net (loss) income
 
$

 
$
(474
)
 
$

 
$
2,667

 
$
(4,530
)
 
$
3,027

 
$
(4,530
)
 
$
5,220

(a)
On October 1, 2013, the Company dissolved its joint venture arrangement with its partner in RC Inland L.P. (RioCan).
(b)
During 2013, the Company dissolved its joint venture arrangement with its partner in Hampton Retail Colorado, L.L.C. (Hampton).
(c)
On June 5, 2014, the Company dissolved its joint venture arrangement with its partner in MS Inland.
(d)
Included within “(Loss) income from discontinued operations” are the following: property-level operating results attributable to the five properties the Company acquired from its RioCan unconsolidated joint venture on October 1, 2013; all property-level operating results attributable to the Hampton unconsolidated joint venture; and, the property-level operating results recognized by the Company’s MS Inland unconsolidated joint venture related to a property sold to the Company’s RioCan unconsolidated joint venture. The property-level operating results for the portfolio of properties held by the Company’s MS Inland unconsolidated joint venture are presented within “(Loss) income from continuing operations” above given that the Company’s acquisition of its partner’s 80% interest in all of the properties was a transaction among partners. The property-level operating results of the eight RioCan properties in which the Company’s partner acquired the Company’s 20% interest are presented within “Income (loss) from continuing operations” above given the continuity of the controlling financial interest before and after the dissolution transaction.
Profits, Losses and Capital Activity
The following table summarizes the Company’s share of net income (loss) as well as net cash distributions from (contributions to) each unconsolidated joint venture:
 
 
The Company’s Share of
Net Income (Loss) for the
Three Months Ended September 30,
 
Net Cash Distributions
from/(Contributions to)
Joint Ventures for the
Three Months Ended
September 30,
 
Fees Earned by the
Company for the
Three Months Ended September 30,
Joint Venture
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
MS Inland (a)
 
$

 
$
163

 
$

 
$
490

 
$

 
$
204

Captive
 
(232
)
 
(348
)
 

 

 

 

Hampton
 

 

 

 

 

 

RioCan (b)
 

 
290

 

 
(3,405
)
 

 
523

 
 
$
(232
)
 
$
105

 
$

 
$
(2,915
)
 
$

 
$
727


17

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
 
The Company’s Share of
Net Income (Loss) for the
Nine Months Ended September 30,
 
Net Cash Distributions
from/(Contributions to)
Joint Ventures for the
Nine Months Ended
September 30,
 
Fees Earned by the
Company for the
Nine Months Ended September 30,
Joint Venture
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
MS Inland (a)
 
$
241

 
$
475

 
$
1,360

 
$
1,943

 
$
338

 
$
622

Captive
 
(1,799
)
 
(1,821
)
 
(25
)
 

 

 

Hampton (c)
 

 
2,576

 

 
855

 

 
1

RioCan (b)
 

 
(176
)
 

 
(2,394
)
 

 
1,648

 
 
$
(1,558
)
 
$
1,054

 
$
1,335

 
$
404

 
$
338

 
$
2,271

(a)
On June 5, 2014, the Company dissolved its joint venture arrangement with its partner in MS Inland.
(b)
On October 1, 2013, the Company dissolved its joint venture arrangement with its partner in RioCan.
(c)
During the nine months ended September 30, 2013, Hampton determined that the carrying value of certain of its assets was not recoverable and, accordingly, recorded property level impairment charges in the amount of $298, of which the Company’s share was $286. The joint venture’s estimate of fair value relating to these impairment assessments was based upon bona fide purchase offers. During 2013, the Company dissolved its joint venture arrangement with its partner in Hampton.
In addition to the Company’s share of net income (loss) for each unconsolidated joint venture, amortization of basis differences is recorded within “Equity in (loss) income of unconsolidated joint ventures, net” in the condensed consolidated statements of operations and other comprehensive (loss) income. Such basis differences resulted from the differences between the Company’s net book values based on historical cost and the fair values of investment properties contributed to its unconsolidated joint ventures and are amortized over the depreciable lives of the joint ventures’ real estate assets and liabilities. The Company recorded amortization of $0 and $21, which was accretive to net income, related to these differences during the three months ended September 30, 2014 and 2013, respectively. The Company recorded amortization of $115 and $44, which was accretive to net income, related to these differences during the nine months ended September 30, 2014 and 2013, respectively.
The Company’s investments in unconsolidated joint ventures are reviewed for potential impairment, in addition to impairment evaluations of the individual assets underlying these investments, whenever events or changes in circumstances warrant such an evaluation. To determine whether impairment, if any, is other-than-temporary, the Company considers whether it has the ability and intent to hold the investment until the carrying value is fully recovered. As a result of such evaluations, impairment charges of $1,834 were recorded during the nine months ended September 30, 2013 to write down the carrying value of the Company’s investment in Hampton. The Company’s Hampton joint venture arrangement was dissolved during the year ended December 31, 2013. No impairment charges to the Company’s investments in unconsolidated joint ventures were considered necessary during the nine months ended September 30, 2014.
Acquisitions
On June 5, 2014, the Company dissolved its joint venture arrangement with its partner in MS Inland by acquiring its partner’s 80% ownership interest in the six multi-tenant retail properties owned by the joint venture (see Note 3). The six properties had, at acquisition, a combined fair value of $292,500, with the Company’s partner’s interest valued at $234,000. The Company paid total cash consideration of approximately $120,600 before transaction costs and prorations and after assumption of the joint venture’s in-place mortgage financing on those properties of $141,698 at a weighted average interest rate of 4.79%. The Company accounted for this transaction as a business combination achieved in stages and recognized a gain on change in control of investment properties of $24,158 in the second quarter of 2014 as a result of remeasuring the carrying value of its 20% interest in the six acquired properties to fair value. The following table summarizes the calculation of the gain on change in control of investment properties recognized in conjunction with the transaction discussed above:
Fair value of the net assets acquired at 100%
 
$
150,802

 
 
 
Fair value of the net assets acquired at 20%
 
$
30,160

Carrying value of the Company’s previous investment in the six properties acquired on June 5, 2014
 
(6,002
)
Gain on change in control of investment properties
 
$
24,158


18

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(11) Equity
On March 7, 2013, the Company established an at-the-market (ATM) equity program under which it may sell shares of its Class A common stock, having an aggregate offering price of up to $200,000, from time to time. Actual sales may depend on a variety of factors, including, among others, market conditions and the trading price of the Company’s Class A common stock. The net proceeds are expected to be used for general corporate purposes, which may include repaying debt, including the Company's unsecured revolving line of credit, and funding acquisitions.
The Company did not sell any shares under its ATM equity program during the nine months ended September 30, 2014.
The following table presents activity under the Company’s ATM equity program:
 
 
Number of
common
shares sold
 
Total net
consideration
 
Average price
per share
First quarter 2013
 
56

 
$
688

 
$
14.94

Second quarter 2013
 
5,491

 
$
82,839

 
$
15.30

Third quarter 2013
 

 
$

 
$

Year to date September 30, 2013
 
5,547

 
$
83,527

 
$
15.29

 
 
 
 
 
 
 
First quarter 2014
 

 
$

 
$

Second quarter 2014
 

 
$

 
$

Third quarter 2014
 

 
$

 
$

Year to date September 30, 2014
 

 
$

 
$

As of September 30, 2014, the Company had common shares having an aggregate offering price of up to $115,165 remaining available for sale under its ATM equity program.
(12) Earnings per Share
The following is a reconciliation between weighted average shares used in the basic and diluted earnings per share (EPS) calculations, excluding amounts attributable to noncontrolling interests:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2014
 
2013
 
2014
 
2013
 
Numerator:
 
 
 
 
 

 

(Loss) income from continuing operations
$
(41,904
)
 
$
(20,129
)
 
$
1,233


$
(39,129
)

Gain on sales of investment properties
15,168

 
1,150

 
15,695


5,807


Preferred stock dividends
(2,362
)
 
(2,362
)
 
(7,087
)
 
(7,087
)
 
(Loss) income from continuing operations attributable to
common shareholders
(29,098
)
 
(21,341
)
 
9,841


(40,409
)

(Loss) income from discontinued operations

 
(18,573
)
 
507

 
9,861


Net (loss) income attributable to common shareholders
(29,098
)
 
(39,914
)
 
10,348


(30,548
)

Distributions paid on unvested restricted shares
(65
)
 
(18
)
 
(159
)
 
(41
)

Net (loss) income attributable to common shareholders excluding amounts attributable to unvested restricted shares
$
(29,163
)
 
$
(39,932
)
 
$
10,189


$
(30,589
)


 
 
 
 




Denominator:
 
 
 
 
 

 
 
Denominator for (loss) earnings per common share — basic:
 
 
 
 
 
 
 
 
Weighted average number of common shares outstanding
236,203

(a)
236,151

(b)
236,177

(a)
233,462

(b)
Effect of dilutive securities — stock options

(c)

(c)
3

(c)

(c)
Denominator for (loss) earnings per common share — diluted:
 
 
 
 






Weighted average number of common and common
equivalent shares outstanding
236,203

 
236,151

 
236,180

 
233,462

 

19

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(a)
Excluded from these weighted average amounts are 397 shares of unvested restricted common stock, which equate to 397 and 353 shares, respectively, on a weighted average basis for the three and nine months ended September 30, 2014. These shares will continue to be excluded from the computation of basic EPS until contingencies are resolved and the shares are released.
(b)
Excluded from these weighted average amounts are 109 shares of unvested restricted common stock, which equate to 109 and 93 shares, respectively, on a weighted average basis for the three and nine months ended September 30, 2013. These shares will continue to be excluded from the computation of basic EPS until contingencies are resolved and the shares are released.
(c)
There were outstanding options to purchase 66 and 78 shares of common stock as of September 30, 2014 and 2013, respectively, at a weighted average exercise price of $19.09 and $19.10, respectively. Of these outstanding options, 54 and 78 shares of common stock as of September 30, 2014 and 2013, respectively, at a weighted average exercise price of $20.72 and $19.10, respectively, have been excluded from the common shares used in calculating diluted earnings per share as including them would be anti-dilutive.
(13) Provision for Impairment of Investment Properties
As of September 30, 2014, the Company identified certain indicators of impairment for 10 of its properties, three of which were classified as held for sale as of September 30, 2014. Such indicators included a low occupancy rate, difficulty in leasing space and related cost of re-leasing, financially troubled tenants or reduced anticipated holding periods. The Company performed individual cash flow analyses for this population and determined it necessary to record impairment charges to write down the carrying value of its investment in three properties, one of which was classified as held for sale as of September 30, 2014. For the remaining seven properties, the Company determined that the projected undiscounted cash flows based upon the estimated holding period for each asset exceeded the respective carrying value by a weighted average of 58%. In addition, during the nine months ended September 30, 2014, the Company recorded impairment charges related to the dispositions of Midtown Center, Boston Commons and Four Peaks Plaza.
The investment property impairment charges recorded by the Company during the nine months ended September 30, 2014 are summarized below:
Property Name
 
Property Type
 
Impairment Date
 
Approximate
Square
Footage
 
Provision for
Impairment of
Investment
Properties
Midtown Center (a)
 
Multi-tenant retail
 
March 31, 2014
 
408,500

 
$
394

Gloucester Town Center (b)
 
Multi-tenant retail
 
Various
 
107,200

 
6,148

Boston Commons (c)
 
Multi-tenant retail
 
August 19, 2014
 
103,400

 
453

Four Peaks Plaza (c)
 
Multi-tenant retail
 
August 27, 2014
 
140,400

 
4,154

Shaw’s Supermarket (d)
 
Single-user retail
 
September 30, 2014
 
65,700

 
6,230

The Gateway (e)
 
Multi-tenant retail
 
September 30, 2014
 
623,200

 
42,999

 
 
 
 
 
 
Total

 
$
60,378

 
 
Estimated fair value of impaired properties as of impairment date
$
155,720

(a)
The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract. This property was sold on April 1, 2014, but is included in continuing operations due to the Company’s early adoption of the 2014 discontinued operations pronouncement. See Note 2 for further details.
(b)
The Company recorded an impairment charge of $5,400 during the second quarter of 2014 initially based upon the terms and conditions of a bona fide purchase offer received from an unaffiliated third party and an additional impairment charge of $748 during the third quarter of 2014 based upon the final disposition price and the related terms and conditions of the executed sales contract. This property was classified as held for sale as of September 30, 2014 and was sold on October 2, 2014.
(c)
During August 2014, the Company recorded an impairment charge in conjunction with the sale of the property based upon the terms and conditions of an executed sales contract.
(d)
The Company recorded an impairment charge upon re-evaluating the strategic alternatives for the property.
(e)
The Company recorded an impairment charge as a result of a combination of factors including the expected impact on future operating results stemming from a re-evaluation of the anticipated positioning of, and tenant population at, the property and a re-evaluation of other potential strategic alternatives for the property.

20

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

As part of its analyses performed during the nine months ended September 30, 2013, the Company identified certain indicators of impairment at 18 of its properties (five of which were classified as held for sale as of September 30, 2013 and 12 of which were subsequently sold). The Company performed cash flow analyses during the nine months ended September 30, 2013 and determined it necessary to record an impairment charge to write down the carrying value of its investment in four properties to their estimated fair value, two of which were classified as held for sale as of September 30, 2013. Of the remaining 14 properties, three were classified as held for sale as of September 30, 2013. For the remaining 11 properties, the Company determined that the projected undiscounted cash flows based upon the estimated holding period for each asset exceeded their respective carrying values by a weighted average of 25%.
The investment property impairment charges recorded by the Company during the nine months ended September 30, 2013 are summarized below:
Property Name
 
Property Type
 
Impairment Date
 
Approximate
Square
Footage
 
Provision for
Impairment of
Investment
Properties
Continuing Operations:
 
 
 
 
 
 
 
 
Aon Hewitt East Campus (a)
 
Single-user office
 
September 30, 2013
 
343,000

 
$
27,183

 
 
 
 
 
 
 
 
27,183

Discontinued Operations:
 
 
 
 
 
 
 
 
University Square (b)
 
Multi-tenant retail
 
June 30, 2013
 
287,000

 
6,694

Raytheon Facility (c)
 
Single-user office
 
Various
 
105,000

 
2,518

Shops at 5 (d)
 
Multi-tenant retail
 
September 30, 2013
 
421,700

 
20,601

Preston Trail Village (e)
 
Multi-tenant retail
 
September 30, 2013
 
180,000

 
1,939

Rite Aid - Atlanta (e)
 
Single-user retail
 
September 30, 2013
 
10,900

 
205

 
 
 
 
 
 
 
 
31,957

 
 
 
 
 
 
Total

 
$
59,140

 
 
Estimated fair value of impaired properties as of impairment date
$
77,853

(a)
The Company recorded an impairment charge based upon the terms of a bona fide purchase offer received from an unaffiliated third party.
(b)
The Company recorded an impairment charge upon re-evaluating the strategic alternatives for the property, which was sold on October 25, 2013.
(c)
The Company recorded an impairment charge of $2,482 during the second quarter of 2013 initially based upon the terms and conditions of a bona fide purchase offer received from an unaffiliated third party and an additional impairment charge of $36 on July 31, 2013, the date of disposition, based upon the final disposition price and related terms and conditions of the executed sales contract.
(d)
The Company recorded an impairment charge based upon the terms and conditions of a negotiated sales contract with an unaffiliated third party.
(e)
The Company recorded impairment charges calculated based upon an estimated fair value equal to expected sales prices from executed sales agreements less estimated transaction costs.
The Company can provide no assurance that material impairment charges with respect to the Company’s investment properties will not occur in future periods.

21

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(14) Fair Value Measurements
Fair Value of Financial Instruments
The following table presents the carrying value and estimated fair value of the Company’s financial instruments.
 
September 30, 2014
 
December 31, 2013
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable, net
$
1,652,729

 
$
1,789,231

 
$
1,684,633

 
$
1,827,638

Unsecured notes payable
$
250,000

 
$
254,967

 
$

 
$

Credit facility
$
508,000

 
$
509,761

 
$
615,000

 
$
617,478

Derivative liability
$
503

 
$
503

 
$
751

 
$
751

The carrying values of mortgages payable, net and unsecured notes payable in the table above are included in the condensed consolidated balance sheets under the indicated captions. The carrying value of the credit facility is comprised of the “Unsecured term loan” and the “Unsecured revolving line of credit” and the carrying value of the derivative liability is included in “Other liabilities” in the condensed consolidated balance sheets.
Recurring Fair Value Measurements
The following table presents the Company’s financial instruments, which are measured at fair value on a recurring basis, by the level in the fair value hierarchy within which those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2014
 
 
 
 
 
 
 
Derivative liability
$

 
$
503

 
$

 
$
503

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Derivative liability
$

 
$
751

 
$

 
$
751

Derivative liability:  The fair value of the derivative liability is determined using a discounted cash flow analysis on the expected future cash flows of each derivative. This analysis utilizes observable market data including forward yield curves and implied volatilities to determine the market’s expectation of the future cash flows of the variable component. The fixed and variable components of the derivative are then discounted using calculated discount factors developed based on the LIBOR swap rate and are aggregated to arrive at a single valuation for the period. The Company also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by itself and its counterparties. However, as of September 30, 2014 and December 31, 2013, the Company has assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation. As a result, the Company has determined that its derivative valuations in their entirety are classified within Level 2 of the fair value hierarchy. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered any applicable credit enhancements. The Company’s derivative instruments are further described in Note 9.

22

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Nonrecurring Fair Value Measurements
The following table presents the Company’s assets measured on a nonrecurring basis at September 30, 2014 and December 31, 2013, aggregated by the level within the fair value hierarchy in which those measurements fall. The table includes information related to properties remeasured to fair value during the nine months ended September 30, 2014 and year ended December 31, 2013, except for those properties sold prior to September 30, 2014 and December 31, 2013, respectively. Methods and assumptions used to estimate the fair value of these assets are described after the table.
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Provision for
Impairment (a)
September 30, 2014
 
 
 
 
 
 
 
 
 
Investment properties - held for sale (b)
$

 
$
10,350

 
$

 
$
10,350

 
$
6,148

Investment properties (c)
$

 
$

 
$
78,500

 
$
78,500

 
$
49,229

 
 
 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
 
 
Investment properties (d)
$

 
$

 
$
75,000

 
$
75,000

 
$
59,486

(a)
Excludes impairment charges recorded on investment properties sold prior to September 30, 2014 and December 31, 2013, respectively.
(b)
Represents impairment charges of $5,400 and $748 recorded during the three months ended June 30, 2014 and September 30, 2014, respectively, to write down the carrying value of the Company’s Gloucester Town Center investment property to estimated fair value. The charge recorded during the three months ended September 30, 2014, calculated as the final disposition price of the executed sales contract less transaction costs, as compared to the Company’s carrying value of its investment, was determined to be a Level 2 input. The transaction costs totaling $594 are not reflected as a reduction to the fair value disclosed in the table above.
(c)
Represents impairment charges to write down the carrying value of the Company’s Shaw’s Supermarket and The Gateway investment properties to estimated fair value. The Company’s re-evaluation of strategic alternatives for Shaw’s Supermarket was the primary driver of the impairment charge recorded for that property. The Company recorded an impairment charge for The Gateway as a result of a combination of factors including the expected impact on future operating results stemming from a re-evaluation of the anticipated positioning of, and tenant population at, the property and a re-evaluation of other potential strategic alternatives for the property. The estimated fair values of Shaw’s Supermarket and The Gateway of $3,100 and $75,400, respectively, were determined using the income approach. The income approach involves discounting the estimated income stream and reversion (presumed sale) value of a property over an estimated holding period to a present value at a risk-adjusted rate. Discount rates, growth assumptions and terminal capitalization rates utilized in this approach are derived from property-specific information, market transactions and other industry data. The terminal capitalization rate and discount rate are significant inputs to this valuation. The following are the key Level 3 inputs used in estimating the fair value of Shaw’s Supermarket and The Gateway as of September 30, 2014.
 
 
2014
 
 
Low
 
High
Rental growth rates
 
Varies (i)
 
Varies (i)
Operating expense growth rates
 
1.39%
 
3.70%
Discount rates
 
8.25%
 
9.50%
Terminal capitalization rates
 
7.50%
 
8.50%
(i) Since cash flow models are established at the tenant level, projected rental revenue growth rates fluctuate over the course of the estimated holding period based upon the timing of lease rollover, amount of available space and other property and space-specific factors.
(d)
Includes impairment charges to write down the carrying value of the Company’s Aon Hewitt East Campus, Four Peaks Plaza and Lake Mead Crossing investment properties to estimated fair value. The estimated fair value of Aon Hewitt East Campus of $18,000 was based upon a bona fide purchase offer received by the Company from an unaffiliated third party (a Level 3 input). A change in the Company’s estimated holding period was the primary driver of the impairment charges recorded to the Company’s investments in Four Peaks Plaza and Lake Mead Crossing. The estimated fair values of Four Peaks Plaza and Lake Mead Crossing of $14,000 and $43,000, respectively, were determined using the income approach. See (b) above for full description of the income approach. The following are the key Level 3 inputs used in estimating the fair value of Four Peaks Plaza and Lake Mead Crossing as of December 31, 2013.

23

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

 
 
2013
 
 
Low
 
High
Rental growth rates
 
Varies (i)
 
Varies (i)
Operating expense growth rates
 
3.27%
 
3.56%
Discount rates
 
7.29%
 
8.45%
Terminal capitalization rates
 
6.79%
 
8.49%
(i)
Since cash flow models are established at the tenant level, projected rental revenue growth rates fluctuate over the course of the estimated holding period based upon the timing of lease rollover, amount of available space and other property and space-specific factors.
Fair Value Disclosures
The following table presents the Company’s financial liabilities, which are measured at fair value for disclosure purposes, by the level in the fair value hierarchy within which they fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
 
Level 1
 
Level 2
 
Level 3
 
Total
September 30, 2014
 
 
 
 
 
 
 
Mortgages payable, net
$

 
$

 
$
1,789,231

 
$
1,789,231

Unsecured notes payable
$

 
$

 
$
254,967

 
$
254,967

Credit facility
$

 
$

 
$
509,761

 
$
509,761

 
 
 
 
 
 
 
 
December 31, 2013
 
 
 
 
 
 
 
Mortgages payable, net
$

 
$

 
$
1,827,638

 
$
1,827,638

Credit facility
$

 
$

 
$
617,478

 
$
617,478

Mortgages payable, net:  The Company estimates the fair value of its mortgages payable by discounting the future cash flows of each instrument at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rate for each of the Company’s individual mortgages payable based upon the specific terms of the agreement, including the term to maturity, the quality and nature of the underlying property, and its leverage ratio. The rates used range from 2.4% to 4.3% and 2.4% to 5.6% at September 30, 2014 and December 31, 2013, respectively.
Unsecured notes payable: The Company estimates the fair value of its unsecured notes payable by discounting the future cash flows at rates currently offered to the Company by its lenders for similar debt instruments of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The weighted average rate used was 4.13% as of September 30, 2014.
Credit facility:  The Company estimates the fair value of its credit facility by discounting the future cash flows related to the credit spreads at rates currently offered to the Company by its lenders for similar facilities of comparable maturities. The rates used are not directly observable in the marketplace and judgment is used in determining the appropriate rates. The rates used were 1.35% and 1.40% for the unsecured term loan and unsecured revolving line of credit, respectively, as of both September 30, 2014 and December 31, 2013.
There were no transfers of liabilities between the levels of the fair value hierarchy during the nine months ended September 30, 2014.
(15) Commitments and Contingencies
Although the mortgage loans obtained by the Company are generally non-recourse, occasionally the Company may guarantee all or a portion of the debt on a full-recourse basis. As of September 30, 2014, the Company has guaranteed $7,851 of its outstanding mortgage and construction loans, with maturity dates ranging from November 2, 2014 through September 30, 2016.

24

RETAIL PROPERTIES OF AMERICA, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

(16) Litigation
As previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, in 2012, certain shareholders of the Company filed putative class action lawsuits against the Company and certain of its officers and directors.
On June 10, 2014, the U.S. District Court in the Northern District of Illinois (the Court) dismissed four of the five lawsuits with prejudice and entered judgment in favor of the Company and its officers and directors. The Court dismissed the fifth lawsuit without prejudice and granted the plaintiff in that case permission to file an amended complaint. The amended complaint did not name the Company or its officers and directors as defendants. On August 6, 2014, in the fifth lawsuit, the Court entered judgment in favor of the Company and its officers and directors. The plaintiffs did not file a timely appeal from the June 10, 2014 dismissal order and judgments, and the time to appeal has now expired in all five lawsuits. Consequently, the lawsuits against the Company and its officers and directors are now closed.
The Company is subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, management believes, based on currently available information, that the final outcome of such matters will not have a material effect on the financial statements of the Company.
(17) Subsequent Events
Subsequent to September 30, 2014, the Company:
repaid $20,000, net of borrowings, on its unsecured revolving line of credit using proceeds from dispositions;
closed on the sale of Gloucester Town Center, a 107,200 square foot multi-tenant retail property located in Gloucester, New Jersey for a sales price of $10,350 with no significant gain or loss on sale due to impairment charges previously recognized; and
closed on the sale of a portfolio of five single-user retail properties aggregating 65,400 square feet for a total sales price of $24,400 with an anticipated gain on sale of approximately $6,363.
On October 21, 2014, the Company’s board of directors declared the cash dividend for the fourth quarter of 2014 for the Company’s 7.00% Series A cumulative redeemable preferred stock. The dividend of $0.4375 per preferred share will be paid on December 31, 2014 to preferred shareholders of record at the close of business on December 19, 2014.
On October 21, 2014, the Company’s board of directors declared the distribution for the fourth quarter of 2014 of $0.165625 per share on the Company’s outstanding Class A common stock, which will be paid on January 9, 2015 to Class A common shareholders of record at the close of business on December 26, 2014.

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and elsewhere in this Quarterly Report on Form 10-Q may constitute “forward-looking statements” within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act). Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future events. Forward-looking statements depend on assumptions, data or methods which may be incorrect or imprecise and we may not be able to realize them. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). You can identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “should,” “seeks,” “approximately,” “intends,” “plans,” “pro forma,” “estimates,” “focus,” “contemplates,” “aims,” “continues,” “would” or “anticipates” or the negative of these words and phrases or similar words or phrases. You can also identify forward-looking statements by discussions of strategies, plans or intentions. Risks, uncertainties and other factors could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements. Changes in the following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:
economic, business and financial conditions, and changes in our industry and changes in the real estate markets in particular;
economic and other developments in the Dallas-Fort Worth-Arlington area, where we have a high concentration of properties;
our business strategy;
our projected operating results;
rental rates and/or vacancy rates;
frequency and magnitude of defaults on, early terminations of or non-renewal of leases by tenants;
interest rates or operating costs;
real estate and zoning laws and changes in real property tax rates;
real estate valuations, potentially resulting in impairment charges, as applicable;
our leverage;
our ability to generate sufficient cash flows to service our outstanding indebtedness;
our ability to obtain necessary outside financing;
the availability, terms and deployment of capital;
general volatility of the capital and credit markets and the market price of our Class A common stock;
risks generally associated with real estate acquisitions, dispositions and redevelopment, including the cost of construction delays and cost overruns;
our ability to identify properties to acquire and complete acquisitions;
our ability to successfully operate acquired properties;
our ability to effectively manage growth;
composition of members of our senior management team;
availability of or our ability to attract and retain qualified personnel;
our ability to make distributions to our shareholders;
our ability to continue to qualify as a real estate investment trust (REIT);
governmental regulations, tax law and rates and similar matters;

26


our compliance with laws, rules and regulations;
environmental uncertainties and exposure to natural disasters;
insurance coverage; and
the likelihood or actual occurrence of terrorist attacks in the U.S.
For a further discussion of these and other factors that could impact our future results, performance or transactions, see Item 1A. “Risk Factors” in this document, in our Annual Report on Form 10-K for the year ended December 31, 2013 and in our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014. Readers should not place undue reliance on any forward-looking statements, which are based only on information currently available to us (or to third parties making the forward-looking statements). We undertake no obligation to publicly release any revisions to such forward-looking statements to reflect events or circumstances after the date of this Quarterly Report on Form 10-Q, except as required by applicable law.
The following discussion and analysis summarizes our portfolio and company highlights and compares our results of operations for the three and nine months ended September 30, 2014 to the three and nine months ended September 30, 2013. It should be read in conjunction with our condensed consolidated financial statements and the related notes included in this report.
Executive Summary
Retail Properties of America, Inc. is a REIT and is one of the largest owners and operators of high quality, strategically located shopping centers in the United States. As of September 30, 2014, we owned 218 retail operating properties representing 31,100,000 square feet of gross leasable area (GLA). Our retail operating portfolio primarily includes power centers, neighborhood and community centers and lifestyle centers, as well as single-user retail properties.
The following table summarizes our operating portfolio, including our office and industrial properties, as of September 30, 2014:
Description
 
Number of 
Properties
 
GLA
(in thousands)
 
Occupancy
 
Percent Leased 
Including Leases 
Signed (a)
Operating portfolio:
 
 
 
 
 
 
 
 
Retail (b)
 
218

 
31,100

 
93.3
%
 
94.7
%
Office
 
6

 
1,473

 
100.0
%
 
100.0
%
Industrial
 
1

 
159

 
100.0
%
 
100.0
%
Total operating portfolio
 
225

 
32,732

 
93.7
%
 
95.0
%
(a)
Includes leases signed but not commenced.
(b)
Excludes two consolidated multi-tenant retail operating properties and a portion of a third consolidated multi-tenant retail operating property classified as held for sale as of September 30, 2014.
In addition to our operating portfolio, as of September 30, 2014, we held interests in three retail properties under development, one of which is held in a consolidated joint venture.
Company Highlights — Nine Months Ended September 30, 2014
Leasing Activity
Leasing activity in our retail operating portfolio remained strong during the nine months ended September 30, 2014, as we signed 572 leases for a total of approximately 3,233,000 square feet, achieving a renewal rate of 86.0%. Rental rates for comparable new leases signed during 2014 increased approximately 14.9% and rental rates for comparable renewal leases signed during 2014 increased by approximately 5.2% over previous rental rates, for a combined comparable releasing spread of approximately 5.9% for the nine months ended September 30, 2014. We anticipate continued strength in leasing volume for the remainder of 2014.

27


The following table summarizes the leasing activity in our retail operating portfolio, including our pro rata share of unconsolidated joint ventures, during the nine months ended September 30, 2014. Leases of less than 12 months have been excluded.
 
 
Number of Leases Signed
 
GLA Signed
(in thousands)
 
New Contractual
Rent per Square Foot (PSF) (a)
 
Prior Contractual Rent PSF (a)
 
% Change over Prior Annualized Base Rent (ABR) (a)
 
Weighted Average Lease Term
 
Tenant Allowances PSF
Comparable Renewal Leases
 
393

 
2,543

 
$
15.73

 
$
14.95

 
5.2
%
 
5.16

 
$
0.98

Comparable New Leases
 
42

 
137

 
22.12

 
19.25

 
14.9
%
 
8.10

 
31.97

Non-Comparable New and
Renewal Leases (b)
 
137

 
553

 
17.58

 
n/a

 
n/a

 
5.94

 
18.53

Total
 
572

 
3,233

 
$
16.06

 
$
15.17

 
5.9
%
 
5.47

 
$
5.30

(a)
Total excludes the impact of Non-Comparable New and Renewal Leases.
(b)
Includes leases signed on units that were vacant for over 12 months, leases signed without fixed rental payments and leases signed where the previous and the current lease do not have a consistent lease structure.
Acquisitions
During the nine months ended September 30, 2014, our acquisition activity totaled $268,741, on a pro rata basis, and included seven multi-tenant retail operating properties, one outparcel at an existing consolidated multi-tenant retail operating property and the fee interest in an existing consolidated multi-tenant retail operating property that was previously subject to a ground lease with a third party, as detailed below.
We paid $6,369 to acquire an 8,500 square foot single-user outparcel at Southlake Town Square, one of our existing consolidated multi-tenant retail operating properties, located in Southlake, Texas.
We also continued executing on our investment strategy of acquiring high quality, multi-tenant retail assets within our target markets through the acquisition of our partner’s 80% ownership interest in the six multi-tenant retail properties owned by our MS Inland Fund, LLC (MS Inland and collectively, the MS Inland acquisitions) unconsolidated joint venture. The six properties had, at acquisition, a combined fair value of $292,500, with our partner’s interest valued at $234,000. We paid total cash consideration of approximately $120,600 before transaction costs and prorations and after assumption of the joint venture’s in-place mortgage financing on those properties of $141,698 at a weighted average interest rate of 4.79%. The properties acquired have a combined total gross leasable area of 1,194,800 square feet.
In addition, we closed on the acquisition of Heritage Square, a 53,100 square foot multi-tenant retail property located in the Seattle metropolitan statistical area, for a purchase price of $18,022. We also paid $10,350 to acquire the fee interest in Bed Bath & Beyond Plaza, one of our existing consolidated multi-tenant retail operating properties, located in Miami, Florida that was previously subject to a ground lease with a third party.
Dispositions
During the nine months ended September 30, 2014, our disposition activity totaled $169,389, as we continued to pursue targeted dispositions of select non-strategic and non-core properties, closing on the sales of two single-user retail operating properties aggregating 80,300 square feet for total consideration of $16,919, two single-user office properties aggregating 187,200 square feet for total consideration of $24,350 and seven multi-tenant retail operating properties aggregating 1,128,000 square feet for total consideration of $128,120.
Capital Markets
On June 30, 2014, we issued $250,000 of senior unsecured notes to institutional investors in a private placement transaction, consisting of $100,000 of notes with a seven-year term, priced at a fixed interest rate of 4.12%, and $150,000 of notes with a ten-year term, priced at a fixed interest rate of 4.58%, resulting in a weighted average fixed interest rate of 4.40%. The proceeds were used to pay down a portion of our unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities.
Additionally, during the nine months ended September 30, 2014, we continued to prudently manage our balance sheet by repaying mortgage debt, including prepaying certain longer dated maturities, in amounts totaling $174,635 (excluding $55 from condemnation proceeds which were paid to the lender and scheduled principal payments of $12,440 related to amortizing loans).

28


We also repaid $107,000, net of borrowings, on our unsecured revolving line of credit. As discussed above, as part of the MS Inland acquisitions, we assumed the joint venture’s in-place mortgage financing on the acquired properties of $141,698 at a weighted average interest rate of 4.79%.
Distributions
We declared quarterly distributions totaling $1.3125 per share of preferred stock and quarterly distributions totaling $0.496875 per share of common stock during the nine months ended September 30, 2014.
Results of Operations
We believe that net operating income (NOI) is a useful measure of our operating performance. We define NOI as operating revenues (rental income, tenant recovery income and other property income, excluding straight-line rental income, amortization of lease inducements, amortization of acquired above and below market lease intangibles and lease termination fee income) less property operating expenses (real estate tax expense and property operating expense, excluding straight-line ground rent expense, amortization of acquired ground lease intangible liability and straight-line bad debt expense). Other REITs may use different methodologies for calculating NOI, and accordingly, our NOI may not be comparable to other REITs.
This measure provides an operating perspective not immediately apparent from operating income or net income attributable to common shareholders as defined within accounting principles generally accepted in the United States (GAAP). We use NOI to evaluate our performance on a property-by-property basis because NOI allows us to evaluate the impact that factors such as lease structure, lease rates and tenant base, which vary by property, have on our operating results. However, NOI should only be used as an alternative measure of our financial performance. For reference and as an aid in understanding our computation of NOI, a reconciliation of NOI to net income attributable to common shareholders as computed in accordance with GAAP has been presented.
Comparison of the Three Months Ended September 30, 2014 and 2013
The following table presents operating information for our same store portfolio consisting of 210 operating properties acquired or placed in service prior to July 1, 2013, along with a reconciliation to net operating income. The number of properties in our same store portfolio decreased to 210 as of September 30, 2014 from 218 as of June 30, 2014 as a result of the following:
sale of six same store investment properties during the three months ended September 30, 2014; and
two same store investment properties classified as held for sale as of September 30, 2014.
The sale of Greenwich Center in August 2014 had no impact on the change in our same store property count because it was classified as held for sale as of June 30, 2014, and, as such, was removed from the same store portfolio at that time. In addition, Mission Crossing is classified as held for sale as of September 30, 2014 but does not impact our same store property count as we will continue to own a single-user parcel at the property, which is not classified as held for sale as of September 30, 2014.
The properties and financial results reported in “Other investment properties” primarily include the properties acquired after June 30, 2013, our development properties, a property where we began activities during 2014 in anticipation of a future redevelopment, the investment properties that were sold or held for sale in 2014 that did not qualify for discontinued operations treatment and the historical ground rent expense related to an existing same store investment property that was subject to a ground lease with a third party prior to our acquisition of the fee interest during 2014.

29


 
Three Months Ended September 30,
 
 
 
 
 
2014
 
2013
 
Change
 
Percentage
Operating revenues:
 
 
 
 
 
 
 
Same store investment properties (210 properties):
 
 
 
 
 
 
 
Rental income
$
102,727

 
$
100,311

 
$
2,416

 
2.4

Tenant recovery income
24,381

 
24,925

 
(544
)
 
(2.2
)
Other property income
1,749

 
1,764

 
(15
)
 
(0.9
)
Other investment properties:
 
 
 
 
 
 
 
Rental income
16,383

 
6,968

 
9,415

 
 
Tenant recovery income
4,849

 
1,711

 
3,138

 
 
Other property income
179

 
51

 
128

 
 
Operating expenses:
 
 
 
 
 
 
 
Same store investment properties (210 properties):
 
 
 
 
 
 
 
Property operating expenses
(18,997
)
 
(18,740
)
 
(257
)
 
(1.4
)
Real estate taxes
(17,200
)
 
(17,746
)
 
546

 
3.1

Other investment properties:
 
 
 
 
 
 
 
Property operating expenses
(3,825
)
 
(1,734
)
 
(2,091
)
 
 
Real estate taxes
(3,374
)
 
(1,241
)
 
(2,133
)
 
 
Net operating income from continuing operations:
 
 
 
 
 
 
 
Same store investment properties
92,660

 
90,514

 
2,146

 
2.4

Other investment properties
14,212

 
5,755

 
8,457

 
 
Total net operating income from continuing operations
106,872

 
96,269

 
10,603

 
11.0

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Straight-line rental income, net
875

 
93

 
782

 
 
Amortization of acquired above and below market lease intangibles, net
289

 
182

 
107

 
 
Amortization of lease inducements
(176
)
 
(67
)
 
(109
)
 
 
Lease termination fees
146

 
187

 
(41
)
 
 
Straight-line ground rent expense
(956
)
 
(741
)
 
(215
)
 
 
Amortization of acquired ground lease intangible liability
140

 

 
140

 
 
Depreciation and amortization
(54,096
)
 
(50,847
)
 
(3,249
)
 
 
Provision for impairment of investment properties
(54,584
)
 
(27,183
)
 
(27,401
)
 
 
Loss on lease terminations
(550
)
 
(221
)
 
(329
)
 
 
General and administrative expenses
(6,982
)
 
(6,820
)
 
(162
)
 
 
Equity in (loss) income of unconsolidated joint ventures, net
(232
)
 
126

 
(358
)
 
 
Interest expense
(37,356
)
 
(32,092
)
 
(5,264
)
 
 
Other income, net
4,706

 
985

 
3,721

 
 
Total other expense
(148,776
)
 
(116,398
)
 
(32,378
)
 
 
 
 
 
 
 
 
 
 
Loss from continuing operations
(41,904
)
 
(20,129
)
 
(21,775
)
 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss, net

 
(20,278
)
 
20,278

 
 
Gain on sales of investment properties

 
1,705

 
(1,705
)
 
 
Loss from discontinued operations

 
(18,573
)
 
18,573

 
 
Gain on sales of investment properties
15,168

 
1,150

 
14,018

 
 
Net loss
(26,736
)
 
(37,552
)
 
10,816

 
 
Net loss attributable to the Company
(26,736
)
 
(37,552
)
 
10,816

 
 
Preferred stock dividends
(2,362
)
 
(2,362
)
 

 
 
Net loss attributable to common shareholders
$
(29,098
)
 
$
(39,914
)
 
$
10,816

 
 
Same store net operating income increased $2,146, or 2.4%, primarily due to the following:
rental income increased $2,416 primarily due to an increase of $1,450 from occupancy growth, $649 from contractual rent changes and $625 from leasing spreads;
partially offset by
total operating expenses, net of tenant recovery income, increased $255 primarily due to an increase in bad debt expense of $331.

30


Total net operating income increased $10,603, or 11.0%, primarily due to an increase of $10,205 in net operating income related to the properties acquired during 2013 and 2014 and the increase due to the same store changes noted above, partially offset by a decrease of $2,371 in net operating income related to the properties sold in 2014.
Other income (expense). Total other expense increased $32,378, or 27.8%, primarily due to:
a $27,401 increase in provision for impairment of investment properties in continuing operations. Based on the results of our evaluations for impairment (see Notes 13 and 14 to the condensed consolidated financial statements), we recognized impairment charges of $54,584 and $27,183 for the three months ended September 30, 2014 and 2013, respectively;
a $5,264 increase in interest expense primarily consisting of prepayment penalties of $5,129 incurred during the three months ended September 30, 2014;
a $3,249 increase in depreciation and amortization primarily due to the acquisition of properties in the fourth quarter of 2013 and in 2014;
partially offset by
a $3,721 increase in other income, net primarily due to the reversal of a $4,594 excise tax accrual during the three months ended September 30, 2014.
Discontinued operations. No discontinued operations activity was reported for the three months ended September 30, 2014. Discontinued operations activity reported for the three months ended September 30, 2013 consist of 20 properties that were sold during the year ended December 31, 2013 and one property classified as held for sale as of December 31, 2013, including 12 multi-tenant retail properties, six single-user retail properties, two single-user office properties and one single-user industrial property. The 2013 dispositions aggregated 2,833,900 square feet for consideration totaling $328,045, extinguishment of other liabilities of $3,511 and gains of $41,279 during the year ended December 31, 2013.
Comparison of the Nine Months Ended September 30, 2014 and 2013
The following table presents operating information for our same store portfolio consisting of 210 operating properties acquired or placed in service prior to January 1, 2013, along with a reconciliation to net operating income. The number of properties in our same store portfolio decreased to 210 as of September 30, 2014 from 218 as of June 30, 2014. Refer to the lead in paragraph to the comparison of the three months ended September 30, 2014 and 2013 table for an explanation of the change in the number of properties in our same store portfolio.

31


 
Nine Months Ended September 30,
 
 
 
 
 
2014
 
2013
 
Change
 
Percentage
Operating revenues:
 
 
 
 
 
 
 
Same store investment properties (210 properties):
 
 
 
 
 
 
 
Rental income
$
306,864

 
$
299,900

 
$
6,964

 
2.3

Tenant recovery income
72,676

 
68,405

 
4,271

 
6.2

Other property income
5,048

 
5,126

 
(78
)
 
(1.5
)
Other investment properties:
 
 
 
 
 
 
 
Rental income
43,567

 
20,373

 
23,194

 
 
Tenant recovery income
13,410

 
5,409

 
8,001

 
 
Other property income
578

 
176

 
402

 
 
Operating expenses:
 
 
 
 
 
 
 
Same store investment properties (210 properties):
 
 
 
 
 
 
 
Property operating expenses
(58,322
)
 
(57,913
)
 
(409
)
 
(0.7
)
Real estate taxes
(49,374
)
 
(48,781
)
 
(593
)
 
(1.2
)
Other investment properties:
 
 
 
 
 
 
 
Property operating expenses
(11,470
)
 
(5,081
)
 
(6,389
)
 
 
Real estate taxes
(8,681
)
 
(3,836
)
 
(4,845
)
 
 
Net operating income from continuing operations:
 
 
 
 
 
 
 
Same store investment properties
276,892

 
266,737

 
10,155

 
3.8

Other investment properties
37,404

 
17,041

 
20,363

 
 
Total net operating income from continuing operations
314,296

 
283,778

 
30,518

 
10.8

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Straight-line rental income, net
3,979

 
(835
)
 
4,814

 
 
Amortization of acquired above and below market lease intangibles, net
628

 
571

 
57

 
 
Amortization of lease inducements
(533
)
 
(131
)
 
(402
)
 
 
Lease termination fees
279

 
1,327

 
(1,048
)
 
 
Straight-line ground rent expense
(2,934
)
 
(2,275
)
 
(659
)
 
 
Amortization of acquired ground lease intangible liability
420

 

 
420

 
 
Depreciation and amortization
(161,786
)
 
(161,451
)
 
(335
)
 
 
Provision for impairment of investment properties
(60,378
)
 
(27,183
)
 
(33,195
)
 
 
Loss on lease terminations
(1,208
)
 
(813
)
 
(395
)
 
 
General and administrative expenses
(22,794
)
 
(23,163
)
 
369

 
 
Gain on extinguishment of other liabilities
4,258

 

 
4,258

 
 
Equity in loss of unconsolidated joint ventures, net
(1,443
)
 
(736
)
 
(707
)
 
 
Gain on change in control of investment properties
24,158

 

 
24,158

 
 
Interest expense
(101,092
)
 
(112,364
)
 
11,272

 
 
Other income, net
5,383

 
4,146

 
1,237

 
 
Total other expense
(313,063
)
 
(322,907
)
 
9,844

 
 
 
 
 
 
 
 
 
 
Income (loss) from continuing operations
1,233

 
(39,129
)
 
40,362

 
 
Discontinued operations:
 
 
 
 
 
 
 
(Loss) income, net
(148
)
 
3,226

 
(3,374
)
 
 
Gain on sales of investment properties
655

 
6,635

 
(5,980
)
 
 
Income from discontinued operations
507

 
9,861

 
(9,354
)
 
 
Gain on sales of investment properties
15,695

 
5,807

 
9,888

 
 
Net income (loss)
17,435

 
(23,461
)
 
40,896

 
 
Net income (loss) attributable to the Company
17,435

 
(23,461
)
 
40,896

 
 
Preferred stock dividends
(7,087
)
 
(7,087
)
 

 
 
Net income (loss) attributable to common shareholders
$
10,348

 
$
(30,548
)
 
$
40,896

 
 
Same store net operating income increased $10,155, or 3.8%, primarily due to the following:
rental income increased $6,964 primarily due to an increase of $4,553 from occupancy growth, $2,053 from leasing spreads and $1,720 from contractual rent changes, partially offset by a decrease of $754 from negotiated rent reductions and co-tenancy provisions in certain leases; and
total operating expenses, net of tenant recovery income, decreased $3,269 primarily as a result of an increase in tenant recovery income caused by an increase in recoverable property operating expenses and real estate taxes and negative adjustments from the common area maintenance and real estate tax reconciliation process in 2013.

32


Total net operating income increased $30,518, or 10.8%, primarily due to an increase of $22,764 in net operating income related to the properties acquired during 2013 and 2014, and the increase due to the same store changes noted above, partially offset by a decrease of $3,147 in net operating income related to the properties sold in 2014.
Other income (expense). Total other expense decreased $9,844, or 3.0%, primarily due to:
a $24,158 increase in gain on change in control of investment properties associated with the dissolution of our MS Inland unconsolidated joint venture during 2014 (see Note 10 to the condensed consolidated financial statements);
an $11,272 decrease in interest expense primarily consisting of a $10,199 decrease in interest on mortgages payable due to the repayment of mortgage debt;
a $4,814 increase in straight-line rental income, net consisting of an increase of $2,639 due to the terms of, modification to and early terminations of tenant leases within our portfolio and $2,175 related to properties acquired in 2013 or 2014 and properties disposed of in 2014 that did not meet the qualifications for discontinued operations treatment;
partially offset by
a $33,195 increase in provision for impairment of investment properties in continuing operations. Based on the results of our evaluations for impairment (see Notes 13 and 14 to the condensed consolidated financial statements), we recognized impairment charges of $60,378 and $27,183 for the nine months ended September 30, 2014 and 2013, respectively.
Discontinued operations. Discontinued operations for the nine months ended September 30, 2014 consist of amounts related to one property that was sold, and which was classified as held for sale as of December 31, 2013. No additional properties qualified for discontinued operations classification and presentation during the nine months ended September 30, 2014. Discontinued operations also consist of 20 properties that were sold during the year ended December 31, 2013. Refer to the discussion regarding discontinued operations within the comparison of the three months ended September 30, 2014 and 2013 for additional information.
Funds From Operations
Due to certain unique operating characteristics of real estate companies, the National Association of Real Estate Investment Trusts, or NAREIT, an industry trade group, has promulgated a standard known as funds from operations (FFO). We believe that FFO, which is a non-GAAP performance measure, provides an additional and useful means to assess the operating performance of REITs. As defined by NAREIT, FFO means net income (loss) computed in accordance with GAAP, excluding gains (or losses) from sales of depreciable real estate, plus depreciation and amortization and impairment charges on depreciable real estate, including amounts from continuing and discontinued operations as well as adjustments for unconsolidated joint ventures in which the reporting entity holds an interest. We have adopted the NAREIT definition in our computation of FFO. Management believes that, subject to the following limitations, FFO provides a basis for comparing our performance and operations to those of other REITs.
We define Operating FFO as FFO excluding the impact of discrete non-operating transactions and other events which we do not consider representative of the comparable operating results of our core business platform, our real estate operating portfolio. Specific examples include, but are not limited to, the financial statement impact of gains or losses associated with the early extinguishment of debt or other liabilities, actual or anticipated settlement of litigation involving the Company, and impairment charges to write down the carrying value of assets other than depreciable real estate, which are otherwise excluded from our calculation of FFO.
Neither FFO nor Operating FFO represent alternatives to “Net Income” as an indicator of our performance or “Cash Flows from Operating Activities” as determined by GAAP as a measure of our capacity to fund cash needs, including the payment of dividends. Further comparison of our presentation of Operating FFO to similarly titled measures for other REITs may not necessarily be meaningful due to possible differences in definition and application by such REITs.

33


FFO and Operating FFO are calculated as follows:
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Net (loss) income attributable to common shareholders
$
(29,098
)
 
$
(39,914
)
 
$
10,348

 
$
(30,548
)
Depreciation and amortization
54,691

 
56,236

 
164,291

 
179,362

Provision for impairment of investment properties
54,584

 
49,964

 
60,378

 
59,426

Gain on sales of investment properties (a)
(15,168
)
 
(2,855
)
 
(40,508
)
 
(13,419
)
FFO
$
65,009

 
$
63,431

 
$
194,509

 
$
194,821

 
 
 
 
 
 
 
 
Impact on earnings from the early extinguishment of debt, net
5,354

 
367

 
8,985

 
(18,783
)
Joint venture investment impairment

 

 

 
1,834

Reversal of excise tax accrual
(4,594
)
 

 
(4,594
)
 

Provision for hedge ineffectiveness

 
41

 
(13
)
 
(891
)
Gain on extinguishment of other liabilities

 

 
(4,258
)
 

Other
(73
)
 
(567
)
 
(199
)
 
(917
)
Operating FFO
$
65,696

 
$
63,272

 
$
194,430

 
$
176,064

(a)
Results for the nine months ended September 30, 2014 include the gain on change in control of investment properties of $24,158 recognized pursuant to the dissolution of our joint venture arrangement with our partner in our MS Inland unconsolidated joint venture on June 5, 2014.
Depreciation and amortization related to investment properties for purposes of calculating FFO includes a portion of loss on lease terminations encompassing the write-off of tenant-related assets, including tenant improvements and in-place lease values, as a result of early lease terminations. The portion of loss on lease terminations included in depreciation and amortization above, including our proportionate share from unconsolidated joint ventures, for the three months ended September 30, 2014 and 2013 was $595 and $295, respectively. The portion of loss on lease terminations included in depreciation and amortization above, including our proportionate share from unconsolidated joint ventures, for the nine months ended September 30, 2014 and 2013 was $1,797 and $1,319, respectively.
Liquidity and Capital Resources
We anticipate that cash flows from the below-listed sources will provide adequate capital for the next 12 months and beyond for all scheduled principal and interest payments on our outstanding indebtedness, including maturing debt, current and anticipated tenant allowance or other capital obligations, the shareholder distributions required to maintain our REIT status and compliance with the financial covenants of our unsecured credit facility and unsecured notes.
Our primary expected sources and uses of liquidity are as follows:
 
SOURCES
 
 
USES
Operating cash flow
 
 
Short-Term:
Cash and cash equivalents
 
Tenant allowances and leasing costs
Available borrowings under our unsecured revolving
 
Improvements made to individual properties that are not
 
line of credit
 
 
recoverable through common area maintenance charges to tenants
Proceeds from asset sales
 
Debt repayment requirements
Proceeds from capital markets transactions
 
Distribution payments
 
 
 
Acquisitions
 
 
 
 
 
 
 
 
 
Long-Term:
 
 
 
Major redevelopment, renovation or expansion activities
 
 
 
New development
We have made substantial progress over the last several years in strengthening our balance sheet and addressing debt maturities. We have pursued this goal through a combination of the repayment or refinancing of maturing debt, which has been funded primarily through dispositions of assets and capital markets transactions, including the completion of a public offering and listing of our Class A common stock on the New York Stock Exchange (NYSE), the completion of a public offering of our Series A preferred stock, the establishment of and issuance of stock pursuant to our at-the-market (ATM) equity program and the issuance of $250,000 of senior unsecured notes to institutional investors in a private placement transaction. As of September 30, 2014, we had $19,125 of debt scheduled to mature through the end of 2014, which we plan on satisfying by using available cash on hand.

34


The table below summarizes our consolidated indebtedness at September 30, 2014:
Debt
 
Aggregate Principal Amount at
September 30, 2014
 
Weighted
Average
Interest Rate
 
Weighted Average
Years to Maturity
Fixed rate mortgages payable (a)
 
$
1,634,083

 
6.04
%
 
4.2 years
Variable rate construction loan
 
14,518

 
2.44
%
 
0.1 years
Total mortgages payable
 
1,648,601

 
6.01
%
 
4.2 years
Premium, net of accumulated amortization
 
4,726

 
 
 
 
Discount, net of accumulated amortization
 
(598
)
 
 
 
 
Total mortgages payable, net
 
1,652,729

 
 
 
 
Unsecured notes payable:
 
 
 
 
 
 
Series A senior notes
 
100,000

 
4.12
%
 
6.8 years
Series B senior notes
 
150,000

 
4.58
%
 
9.8 years
Total unsecured notes payable
 
250,000

 
4.40
%
 
8.6 years
Unsecured credit facility:
 
 
 
 
 
 
Fixed rate portion of term loan (b)
 
300,000

 
1.99
%
 
3.6 years
Variable rate portion of term loan
 
150,000

 
1.61
%
 
3.6 years
Variable rate revolving line of credit
 
58,000

 
1.66
%
 
2.6 years
Total unsecured credit facility
 
508,000

 
1.84
%
 
3.5 years
 
 
 
 
 
 
 
Total consolidated indebtedness, net
 
$
2,410,729

 
4.96
%
 
4.5 years
(a)
Includes $8,177 of variable rate mortgage debt that was swapped to a fixed rate as of September 30, 2014.
(b)
Reflects $300,000 of variable rate debt that matures in May 2018 that is swapped to a fixed rate through February 2016.
Mortgages Payable
During the nine months ended September 30, 2014, we made mortgages payable repayments of $174,635 (excluding $55 from condemnation proceeds which were paid to the lender and scheduled principal payments of $12,440 related to amortizing loans). The loans repaid during the nine months ended September 30, 2014 had fixed interest rates with a weighted average interest rate of 6.04%. In addition, during the nine months ended September 30, 2014, as part of the MS Inland acquisitions, we assumed the joint venture’s in-place mortgage financing on the acquired properties of $141,698 at a weighted average interest rate of 4.79%.
Unsecured Notes Payable
On June 30, 2014, we issued $250,000 of senior unsecured notes in a private placement transaction pursuant to a Note Purchase Agreement we entered into on May 16, 2014 with various institutional investors. The proceeds were used to pay down a portion of our unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities. The following table summarizes our unsecured notes payable:
Unsecured Notes Payable
 
Maturity Date
 
Principal
Balance as of
September 30, 2014
 
Interest Rate/
Weighted Average
Interest Rate
Series A senior notes
 
June 30, 2021
 
$
100,000

 
4.12
%
Series B senior notes
 
June 30, 2024
 
150,000

 
4.58
%
 
 
Total
 
$
250,000

 
4.40
%
The Note Purchase Agreement contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the Note Purchase Agreement, we are subject to various financial covenants, some of which are based upon the financial covenants in effect in our primary credit facility, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios; (ii) minimum interest coverage and unencumbered interest coverage ratios; and (iii) a minimum consolidated net worth. As of September 30, 2014, management believes we were in compliance with the financial covenants and default provisions under the Note Purchase Agreement.

35


Credit Facility
On May 13, 2013, we entered into our third amended and restated unsecured credit agreement with a syndicate of financial institutions to provide for an unsecured credit facility aggregating to $1,000,000, consisting of a $550,000 unsecured revolving line of credit and a $450,000 unsecured term loan (collectively, the credit facility). We have a one year extension option on the unsecured revolving line of credit, which we may exercise as long as we are in compliance with the terms of the unsecured credit agreement and we pay an extension fee equal to 0.15% of the commitment amount being extended. The credit facility also contains an accordion feature that allows us to increase the availability thereunder to up to $1,450,000 in certain circumstances.
The credit facility is currently priced on a leverage grid at a rate of London Interbank Offered Rate (LIBOR) plus a margin ranging from 1.50% to 2.05%, plus a quarterly unused fee ranging from 0.25% to 0.30% depending on the undrawn amount, for the unsecured revolving line of credit and LIBOR plus a margin ranging from 1.45% to 2.00% for the unsecured term loan. On January 27, 2014, we received an investment grade credit rating. In accordance with the unsecured credit agreement, we may elect to convert to an investment grade pricing grid. Upon making such an election and depending on our credit rating, the interest rate for the unsecured revolving line of credit would equal LIBOR plus a margin ranging from 0.90% to 1.70%, plus a facility fee ranging from 0.15% to 0.35%, and for the unsecured term loan, LIBOR plus a margin ranging from 1.05% to 2.05%. As of September 30, 2014, making such an election would have resulted in a higher interest rate and, as such, we have not made the election to convert to an investment grade pricing grid.
The following table summarizes our credit facility as of September 30, 2014:
Credit Facility
 
Maturity Date
 
Balance as of
September 30, 2014
 
Interest Rate/
Weighted Average
Interest Rate
Term loan - fixed rate portion (a)
 
May 11, 2018
 
$
300,000

 
1.99
%
Term loan - variable rate portion
 
May 11, 2018
 
150,000

 
1.61
%
Revolving line of credit - variable rate
 
May 12, 2017
 
58,000

 
1.66
%
 
 
Total
 
$
508,000

 
1.84
%
(a)
$300,000 of the term loan has been swapped to a fixed rate of 0.53875% plus a margin based on a leverage grid ranging from 1.45% to 2.00% through February 24, 2016. The applicable margin was 1.45% as of September 30, 2014.
The unsecured credit agreement contains customary representations, warranties and covenants, and events of default. Pursuant to the terms of the unsecured credit agreement, we are subject to various financial covenants, including the requirement to maintain the following: (i) maximum unencumbered, secured and consolidated leverage ratios, (ii) minimum fixed charge and unencumbered interest coverage ratios, and (iii) a minimum consolidated net worth requirement. As of September 30, 2014, management believes we were in compliance with the financial covenants and default provisions under the credit agreement.

36


Debt Maturities
The following table shows the scheduled maturities and principal amortization and fair value of our indebtedness as of September 30, 2014 for the remainder of 2014, each of the next four years and thereafter and does not reflect the impact of any debt activity that occurred after September 30, 2014:
 
2014
 
2015
 
2016
 
2017
 
2018
 
Thereafter
 
Total
 
Fair Value
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages payable (a)
$
4,607

 
$
377,328

 
$
67,908

 
$
321,315

 
$
12,618

 
$
850,307

 
$
1,634,083

 
$
1,774,713

Unsecured credit facility - fixed rate portion of term loan (b)

 

 

 

 
300,000

 

 
300,000

 
301,073

Unsecured notes payable

 

 

 

 

 
250,000

 
250,000

 
254,967

Total fixed rate debt
4,607

 
377,328

 
67,908

 
321,315

 
312,618

 
1,100,307

 
2,184,083

 
2,330,753

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction loan
14,518

 

 

 

 

 

 
14,518

 
14,518

Unsecured credit facility

 

 

 
58,000

 
150,000

 

 
208,000

 
208,688

Total variable rate debt
14,518

 

 

 
58,000

 
150,000

 

 
222,518

 
223,206

Total debt (c)
$
19,125

 
$
377,328

 
$
67,908

 
$
379,315

 
$
462,618

 
$
1,100,307

 
$
2,406,601

 
$
2,553,959

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate on debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
6.25
%
 
5.58
%
 
5.07
%
 
5.53
%
 
2.19
%
 
6.02
%
 
5.30
%
 
 
Variable rate debt
2.44
%
 

 

 
1.66
%
 
1.61
%
 

 
1.68
%
 
 
Total
3.36
%
 
5.58
%
 
5.07
%
 
4.94
%
 
2.00
%
 
6.02
%
 
4.96
%
 
 
(a)
Includes $8,177 of variable rate mortgage debt that was swapped to a fixed rate as of September 30, 2014. Excludes mortgage premium of $4,726 and discount of $(598), net of accumulated amortization, which was outstanding as of September 30, 2014.
(b)
$300,000 of LIBOR-based variable rate debt has been swapped to a fixed rate through February 24, 2016. The swap effectively converts one-month floating rate LIBOR to a fixed rate of 0.53875% over the term of the swap.
(c)
As of September 30, 2014, the weighted average years to maturity of consolidated indebtedness was 4.5 years.
We plan on addressing our debt maturities by using available cash on hand, proceeds from our unsecured revolving line of credit and capital markets transactions.
Distributions and Equity Transactions
Our distributions of current and accumulated earnings and profits for U.S. federal income tax purposes are taxable to shareholders, generally, as ordinary income. Distributions in excess of these earnings and profits generally are treated as a non-taxable reduction of the shareholders’ basis in the shares to the extent thereof (non-dividend distributions) and thereafter as taxable gain. We intend to continue to qualify as a REIT for U.S. federal income tax purposes. The Internal Revenue Code of 1986, as amended (the Code) generally requires that a REIT annually distributes at least 90% of its taxable income, excluding the deduction for dividends paid or net capital gains. The Code imposes tax on any taxable income, including net capital gains, retained by a REIT.
To satisfy the requirements for qualification as a REIT and generally not be subject to U.S. federal income and excise tax, we intend to make regular quarterly distributions of all, or substantially all, of our REIT taxable income to shareholders. Our future distributions will be at the sole discretion of our board of directors. When determining the amount of future distributions, we expect that our board of directors will consider, among other factors, (i) the amount of cash generated from our operating activities, (ii) our expectations of future cash flow, (iii) our determination of near-term cash needs for debt repayments, acquisitions of new properties, redevelopment opportunities and existing or future share repurchases, (iv) the timing of significant re-leasing activities and the establishment of additional cash reserves for anticipated tenant allowances and general property capital improvements, (v) our ability to continue to access additional sources of capital, (vi) the amount required to be distributed to maintain our status as a REIT and to reduce any income and excise taxes that we otherwise would be required to pay, (vii) the amount required to declare and pay in cash, or set aside for the payment of, the dividends on our Series A preferred stock for all past dividend periods, (viii) any limitations on our distributions contained in our unsecured credit facility, which limits our distributions to the greater of 95% of FFO, as defined in the credit agreement (which equals FFO, as set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Funds From Operations,” excluding gains or losses from extraordinary items, impairment charges not already excluded from FFO and other non-cash charges) or the amount necessary for us to maintain our

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qualification as a REIT. Under certain circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet the REIT distribution requirements.
On March 7, 2013, we established an ATM equity program under which we may sell shares of our Class A common stock, having an aggregate offering price of up to $200,000, from time to time. The net proceeds are expected to be used for general corporate purposes, which may include repaying debt, including our unsecured revolving line of credit, and funding acquisitions. We did not sell any shares under our ATM equity program during the nine months ended September 30, 2014. As of September 30, 2014, we had common shares having an aggregate offering price of up to $115,165 remaining available for sale under our ATM equity program.
Capital Expenditures and Development Activity
We anticipate that obligations related to capital improvements to our properties can be met with cash flows from operations and working capital.
The following table provides summary information regarding our properties under development as of September 30, 2014, including one consolidated joint venture and three wholly-owned properties. As of September 30, 2014, we did not have any significant active construction ongoing at these properties, and, currently, we only intend to develop the remaining potential GLA to the extent that we have pre-leased substantially all of the space to be developed.
Location
 
Property Name
 
Our
Ownership
Percentage
 
Carrying Value at
September 30, 2014
 
Construction Loan Balance at
September 30, 2014
Henderson, Nevada
 
Green Valley Crossing
 
50.0%
 
$
2,704

 
$
14,518

Billings, Montana
 
South Billings Center
 
100.0%
 
5,154

 

Nashville, Tennessee
 
Bellevue Mall
 
100.0%
 
23,460

 

Henderson, Nevada
 
Lake Mead Crossing
 
100.0%
 
10,860

 

 
 
 
 
 
 
$
42,178

(a)
$
14,518

(a)
Total excludes $29,964 of costs, net of accumulated depreciation, placed in service, $4,047 of which was placed in service during the nine months ended September 30, 2014 based upon substantial completion of construction of an approximately 25,000 square foot anchor space leased to a grocer tenant at Green Valley Crossing. As of September 30, 2014, the ABR from the portion of our development properties with respect to which construction has been completed and placed in service was $2,040.
Asset Dispositions
During 2013, our asset sales were an integral component of our deleveraging efforts. In 2014, we continued to dispose of select non-strategic and non-core properties in order to facilitate our external growth initiatives. The following table highlights the results of our asset dispositions during 2013 and the nine months ended September 30, 2014:
 
 
Number of
Assets Sold
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Mortgage Debt
Extinguished (b)
2014 Dispositions (through September 30, 2014)
 
11

 
1,395,500

 
$
169,389

 
$
164,515

 
$
9,713

2013 Dispositions
 
20

 
2,833,900

 
$
328,045

 
$
320,574

 
$

(a)
Represents total consideration net of transaction costs.
(b)
Excludes mortgages payable repaid prior to disposition transactions.
In addition to the transactions presented in the table, we received net proceeds of $66 and $6,192 during the nine months ended September 30, 2014 and the year ended December 31, 2013, respectively, from additional transactions, including earnouts, pad sales and condemnations, at certain of our properties.

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Asset Acquisitions
During the fourth quarter of 2013, we began executing on our investment strategy of acquiring high quality, multi-tenant retail assets within our target markets. The following table highlights our asset acquisitions during 2013 and the nine months ended September 30, 2014:
 
 
Number of
Assets Acquired
 
Square
Footage
 
Acquisition
Price
 
Pro Rata
Acquisition
Price (a)
 
Mortgage
Debt
 
Pro Rata
Mortgage
Debt (a)
2014 Acquisitions (b)
 
9

 
1,256,400

 
$
327,241

 
$
268,741

 
$
141,698

 
$
113,358

2013 Acquisitions
 
7

 
1,088,100

 
$
317,213

 
$
292,256

 
$
67,864

 
$
54,291

(a)
Includes amounts associated with the 2014 acquisition of our partner’s 80% ownership interest in our MS Inland unconsolidated joint venture and the 2013 acquisition of our partner’s 80% ownership interest in five properties owned by our RioCan unconsolidated joint venture, as well as acquisitions from unaffiliated third parties.
(b)
Includes the acquisition of the fee interest in Bed Bath & Beyond Plaza, our existing consolidated multi-tenant retail operating property located in Miami, Florida that was previously subject to a ground lease with a third party, and the acquisition of a single-user outparcel at Southlake Town Square, our existing consolidated multi-tenant retail operating property located in Southlake, Texas. The total number of properties in our portfolio was not affected by these two transactions.
Statement of Cash Flows Comparison for the Nine Months Ended September 30, 2014 and 2013
Cash Flows from Operating Activities
Cash flows provided by operating activities were $197,952 and $177,967 for the nine months ended September 30, 2014 and 2013, respectively, which consist primarily of net income from property operations, adjusted for non-cash charges primarily including depreciation and amortization, provision for impairment of investment properties and gains on change in control of investment properties, extinguishment of debt and other liabilities and sales of investment properties. The $19,985 increase in operating cash flows is primarily attributable to a reduction in cash paid for interest of $16,772, an increase in NOI of $13,924 (including an increase in NOI from continuing operations of $30,518, partially offset by a decrease of $16,594 in NOI from discontinued operations) and a decrease in cash paid for leasing fees and inducements of $2,523, partially offset by a $7,011 decrease in net lease termination fees and bankruptcy distributions received, a $5,319 decrease in distributions on investments in unconsolidated joint ventures and a $1,889 decrease in joint venture management fees received.
Cash Flows from Investing Activities
Cash flows (used in) provided by investing activities were $(21,019) and $31,243, respectively, for the nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2014, $152,236 was used for the acquisitions of seven multi-tenant retail properties, one outparcel at an existing consolidated multi-tenant retail property and the fee interest in an existing consolidated multi-tenant retail operating property that was previously subject to a ground lease with a third party. No comparable activity occurred during the nine months ended September 30, 2013. We also invested $25 and $7,111, respectively, in unconsolidated joint ventures during the nine months ended September 30, 2014 and 2013. In addition, we sold certain properties and received proceeds from additional transactions, including earnouts and pad sales, which resulted in aggregate sales proceeds of $164,581 and $67,419, respectively, during the nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2014 and 2013, $31,254 and $31,456, respectively, were used for capital expenditures and tenant improvements.
We will continue to execute on our investment strategy by disposing of certain non-strategic and non-core properties. Substantially all of the proceeds from disposition activity in 2014 are expected to be redeployed into external growth initiatives, including strategic acquisitions. In addition, tenant improvement costs associated with re-leasing vacant space could continue to be significant.
Cash Flows from Financing Activities
Cash flows used in financing activities were $167,293 and $276,958, respectively, for the nine months ended September 30, 2014 and 2013. We used $292,521 and $237,173, respectively during these periods, in cash flow related to the net activity from our unsecured credit facility and principal payments on outstanding mortgages and notes payable, including the repayment of $125,000 of notes payable in 2013, and the payment of loan fees. In addition, during the nine months ended September 30, 2014, we issued $250,000 of senior unsecured notes. We paid $124,593 and $122,898, respectively, in total distributions to our preferred and common shareholders during the nine months ended September 30, 2014 and 2013. During the nine months ended September 30, 2013, we received $84,835 in proceeds from the issuance of common stock through our ATM equity program.

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We plan to continue to address our debt maturities by using available cash on hand, proceeds from our unsecured revolving line of credit and capital markets transactions.
Critical Accounting Policies and Estimates
Our 2013 Annual Report on Form 10-K contains a description of our critical accounting policies, including the acquisition of investment properties, impairment of long-lived assets, cost capitalization, depreciation and amortization, loss on lease terminations, investment properties held for sale, partially-owned entities, derivatives and hedging, revenue recognition, allowance for doubtful accounts and income taxes. For the nine months ended September 30, 2014, except for the adoption of a new accounting pronouncement related to the classification and presentation of discontinued operations, there were no significant changes to these policies. Refer to Note 2 — Summary of Significant Accounting Policies to our condensed consolidated financial statements contained herein for a discussion regarding the adoption of the new discontinued operations accounting pronouncement.
Impact of Recently Issued Accounting Pronouncements
See Note 2 — Summary of Significant Accounting Policies to our condensed consolidated financial statements contained herein regarding recently issued accounting pronouncements.
Subsequent Events
Subsequent to September 30, 2014, we:
repaid $20,000, net of borrowings, on our unsecured revolving line of credit using proceeds from dispositions;
closed on the sale of Gloucester Town Center, a 107,200 square foot multi-tenant retail property located in Gloucester, New Jersey for a sales price of $10,350 with no significant gain or loss on sale due to impairment charges previously recognized; and
closed on the sale of a portfolio of five single-user retail properties aggregating 65,400 square feet for a total sales price of $24,400 with an anticipated gain on sale of approximately $6,363.
On October 21, 2014, our board of directors declared the cash dividend for the fourth quarter of 2014 for our 7.00% Series A cumulative redeemable preferred stock. The dividend of $0.4375 per preferred share will be paid on December 31, 2014 to preferred shareholders of record at the close of business on December 19, 2014.
On October 21, 2014, our board of directors declared the distribution for the fourth quarter of 2014 of $0.165625 per share on our outstanding Class A common stock, which will be paid on January 9, 2015 to Class A common shareholders of record at the close of business on December 26, 2014.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk
We may be exposed to interest rate changes primarily as a result of long-term debt used to maintain liquidity and fund our operations and the expansion of our real estate investment portfolio. Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to lower our overall borrowing costs. To achieve our objectives, we borrow primarily at fixed rates, and in some cases variable rates with the ability to convert to fixed rates.
With regard to variable rate financing, we assess interest rate cash flow risk by continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows and by evaluating hedging opportunities. We maintain risk management control systems to monitor interest rate cash flow risk attributable to both our outstanding or forecasted debt obligations as well as our potential offsetting hedge positions. The risk management control systems involve the use of analytical techniques, including cash flow sensitivity analysis, to estimate the expected impact of changes in interest rates on our future cash flows.
As of September 30, 2014, we had $308,177 of variable rate debt based on LIBOR that was swapped to fixed rate debt through interest rate swaps. Our interest rate swaps are summarized in the following table:
 
 
Notional
Amount
 
Termination Date
 
Fair Value of Derivative Liability at
September 30, 2014
Fixed rate portion of credit facility
 
$
300,000

 
February 24, 2016
 
$
370

Heritage Towne Crossing
 
8,177

 
September 30, 2016
 
133

 
 
$
308,177

 
 
 
$
503

For a discussion concerning our scheduled debt maturities and principal amortization of our mortgages and notes payable and credit facility as of September 30, 2014 for the remainder of 2014, each of the next four years and thereafter and the weighted average interest rates by year to evaluate the expected cash flows and sensitivity to interest rate changes, refer to Note 6 to the condensed consolidated financial statements and “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — Debt Maturities.”
A decrease of 1% in market interest rates would result in a hypothetical increase in our net liability associated with our derivatives of approximately $2,003.
The combined carrying amount of our mortgages payable, unsecured notes payable and unsecured credit facility is approximately $143,230 lower than the fair value as of September 30, 2014.
We had $222,518 of variable rate debt, excluding $308,177 of variable rate debt that was swapped to fixed rate debt, with interest rates varying based upon LIBOR, with a weighted average interest rate of 1.68% at September 30, 2014. An increase in the variable interest rate on this debt constitutes a market risk. If interest rates increase by 1% based on debt outstanding as of September 30, 2014, interest expense would increase by approximately $2,225 on an annualized basis.
We may use additional derivative financial instruments to hedge exposures to changes in interest rates. To the extent we do, we are exposed to market and credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates. The market risk associated with interest rate contracts is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, we generally are not exposed to the credit risk of the counterparty. It is our policy to enter into these transactions with the same party providing the financing, with the right of offset. Alternatively, we will minimize the credit risk in derivative instruments by entering into transactions with highly rated counterparties.

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Item 4.  Controls and Procedures
We have established disclosure controls and procedures to ensure that material information relating to us, including our consolidated subsidiaries, is made known to the officers who certify our financial reports and to the members of senior management and the Board of Directors.
Based on management’s evaluation as of September 30, 2014, our president and chief executive officer and our executive vice president, chief financial officer and treasurer have concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our president and chief executive officer and our executive vice president, chief financial officer and treasurer to allow timely decisions regarding required disclosure.
There were no changes to our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

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Part II — Other Information
Item 1. Legal Proceedings
As previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, in 2012, certain of our shareholders filed putative class action lawsuits against us and certain of our officers and directors.
On June 10, 2014, the U.S. District Court in the Northern District of Illinois (the Court) dismissed four of the five lawsuits with prejudice and entered judgment in favor of us and our officers and directors. The Court dismissed the fifth lawsuit without prejudice and granted the plaintiff in that case permission to file an amended complaint. The amended complaint did not name us or our officers and directors as defendants. On August 6, 2014, in the fifth lawsuit, the Court entered judgment in favor of us and our officers and directors. The plaintiffs did not file a timely appeal from the June 10, 2014 dismissal order and judgments, and the time to appeal has now expired in all five lawsuits. Consequently, the lawsuits against us and our officers and directors are now closed.
We are subject, from time to time, to various legal proceedings and claims that arise in the ordinary course of business. While the resolution of such matters cannot be predicted with certainty, we believe, based on currently available information, that the final outcome of such matters will not have a material effect on our financial statements.
Item 1A. Risk Factors
Except to the extent updated below or to the extent additional factual information disclosed elsewhere in this Quarterly Report on Form 10-Q relates to such factors (including, without limitation, the matters discussed in Part I, “Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations”), there have been no material changes to our risk factors during the three months ended September 30, 2014 compared to those risk factors presented in Part I, “Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013 and our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2014 and June 30, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Not applicable.
Item 3.  Defaults Upon Senior Securities
Not applicable.
Item 4. Mine Safety Disclosures
Not applicable.
Item 5.  Other Information
None.

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Item 6.  Exhibits
Exhibit No.
 
Description
 
 
 
31.1
 
Certification of President and Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
31.2
 
Certification of Executive Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934 (filed herewith).
32.1
 
Certification of President and Chief Executive Officer and Executive Vice President, Chief Financial Officer and Treasurer pursuant to Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350 (furnished herewith).
101
 
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive (Loss) Income for the Three-Month Periods and Nine-Month Periods Ended September 30, 2014 and 2013, (iii) Condensed Consolidated Statements of Equity for the Nine-Month Periods Ended September 30, 2014 and 2013, (iv) Condensed Consolidated Statements of Cash Flows for the Nine-Month Periods Ended September 30, 2014 and 2013, and (v) Notes to Condensed Consolidated Financial Statements.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
RETAIL PROPERTIES OF AMERICA, INC.
By:
/s/ STEVEN P. GRIMES
 
 
 
 
 
Steven P. Grimes
 
 
President and Chief Executive Officer
 
 
 
 
Date:
October 28, 2014
 
 
 
 
By:
/s/ ANGELA M. AMAN
 
 
 
 
 
Angela M. Aman
 
 
Executive Vice President,
 
 
Chief Financial Officer and Treasurer (Principal Financial Officer)
 
 
 
Date:
October 28, 2014
 
 
 
 
By:
/s/ JULIE M. SWINEHART
 
 
 
 
 
Julie M. Swinehart
 
 
Senior Vice President and Corporate Controller (Principal Accounting Officer)
 
 
 
Date:
October 28, 2014
 



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