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EX-10.1 - EXHIBIT 10.1 - RETAIL PROPERTIES OF AMERICA, INC.rpai-2015x331xex101.htm
EX-10.2 - EXHIBIT 10.2 - RETAIL PROPERTIES OF AMERICA, INC.rpai-2015x331xex102.htm
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EX-32.1 - EXHIBIT 32.1 - RETAIL PROPERTIES OF AMERICA, INC.rpai-2015x331xex321.htm
EX-31.1 - EXHIBIT 31.1 - RETAIL PROPERTIES OF AMERICA, INC.rpai-2015x331xex311.htm
EX-10.4 - EXHIBIT 10.4 - RETAIL PROPERTIES OF AMERICA, INC.rpai-2015x331xex104.htm

 

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 March 31, 2015
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 May 1, 2015:
Class A common stock:    237,186,483 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)

 
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
 
Investment properties:
 
 
 
 
Land
 
$
1,297,067

 
$
1,195,369

Building and other improvements
 
4,652,456

 
4,442,446

Developments in progress
 
42,983

 
42,561

 
 
5,992,506

 
5,680,376

Less accumulated depreciation
 
(1,411,423
)
 
(1,365,471
)
Net investment properties
 
4,581,083

 
4,314,905

Cash and cash equivalents
 
64,895

 
112,292

Accounts and notes receivable (net of allowances of $7,660 and $7,497, respectively)
 
77,937

 
86,013

Acquired lease intangible assets, net
 
151,437

 
125,490

Assets associated with investment properties held for sale
 
5,041

 
33,640

Other assets, net
 
112,817

 
131,520

Total assets
 
$
4,993,210

 
$
4,803,860

 
 
 
 
 
Liabilities and Equity
 
 
 
 
Liabilities:
 
 
 
 
Mortgages payable, net
 
$
1,560,956

 
$
1,634,465

Unsecured notes payable, net
 
498,822

 
250,000

Unsecured term loan
 
450,000

 
450,000

Unsecured revolving line of credit
 
35,000

 

Accounts payable and accrued expenses
 
54,563

 
61,129

Distributions payable
 
39,284

 
39,187

Acquired lease intangible liabilities, net
 
117,502

 
100,641

Liabilities associated with investment properties held for sale
 
320

 
8,203

Other liabilities
 
75,575

 
70,860

Total liabilities
 
2,832,022

 
2,614,485

 
 
 
 
 
Commitments and contingencies (Note 14)
 

 

 
 
 
 
 
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 as of March 31, 2015
and December 31, 2014; liquidation preference $135,000
 
5

 
5

Class A common stock, $0.001 par value, 475,000 shares authorized, 237,186 and 236,602
shares issued and outstanding as of March 31, 2015 and December 31, 2014, respectively
 
237

 
237

Additional paid-in capital
 
4,923,342

 
4,922,864

Accumulated distributions in excess of earnings
 
(2,763,258
)
 
(2,734,688
)
Accumulated other comprehensive loss
 
(632
)
 
(537
)
Total shareholders’ equity
 
2,159,694

 
2,187,881

Noncontrolling interests
 
1,494

 
1,494

Total equity
 
2,161,188

 
2,189,375

Total liabilities and equity
 
$
4,993,210

 
$
4,803,860


See accompanying notes to condensed consolidated financial statements

1


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

 
 
Three Months Ended March 31,
 
 
2015
 
2014
Revenues:
 
 
 
 
Rental income
 
$
119,788

 
$
117,531

Tenant recovery income
 
31,300

 
29,748

Other property income
 
2,109

 
1,912

Total revenues
 
153,197

 
149,191

 
 
 
 
 
Expenses:
 
 
 
 
Property operating expenses
 
25,695

 
26,526

Real estate taxes
 
20,510

 
18,414

Depreciation and amortization
 
54,676

 
53,830

Provision for impairment of investment properties
 

 
394

General and administrative expenses
 
10,992

 
8,450

Total expenses
 
111,873

 
107,614

 
 
 
 
 
Operating income
 
41,324

 
41,577

 
 
 
 
 
Gain on extinguishment of other liabilities
 

 
4,258

Equity in loss of unconsolidated joint ventures, net
 

 
(778
)
Interest expense
 
(34,045
)
 
(31,863
)
Other income, net
 
1,225

 
427

Income from continuing operations
 
8,504

 
13,621

 
 
 
 
 
Discontinued operations:
 
 
 
 
Loss, net
 

 
(148
)
Gain on sales of investment properties
 

 
655

Income from discontinued operations
 

 
507

Gain on sales of investment properties
 
4,572

 

Net income
 
13,076

 
14,128

Net income attributable to the Company
 
13,076

 
14,128

Preferred stock dividends
 
(2,362
)
 
(2,362
)
Net income attributable to common shareholders
 
$
10,714

 
$
11,766

 
 
 
 
 
Earnings per common share — basic and diluted:
 
 
 
 
Continuing operations
 
$
0.05

 
$
0.05

Discontinued operations
 

 

Net income per common share attributable to common shareholders
 
$
0.05

 
$
0.05

 
 
 
 
 
Net income
 
$
13,076

 
$
14,128

Other comprehensive loss:
 
 
 
 
Net unrealized loss on derivative instruments (Note 9)
 
(95
)
 
(18
)
Comprehensive income attributable to the Company
 
$
12,981

 
$
14,110

 
 
 
 
 
Weighted average number of common shares outstanding — basic
 
236,250

 
236,151

 
 
 
 
 
Weighted average number of common shares outstanding — diluted
 
236,253

 
236,153


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
 
Additional
Paid-in
Capital
 
Accumulated
Distributions
in Excess of
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
Balance as of 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

 

 

 

 

 
14,128

 

 
14,128

 

 
14,128

Other comprehensive loss

 

 

 

 

 

 
(18
)
 
(18
)
 

 
(18
)
Distributions declared to preferred shareholders ($0.4375 per share)

 

 

 

 

 
(2,362
)
 

 
(2,362
)
 

 
(2,362
)
Distributions declared to common shareholders ($0.165625 per share)

 

 

 

 

 
(39,181
)
 

 
(39,181
)
 

 
(39,181
)
Issuance of common stock, net of offering costs

 

 

 

 
(37
)
 

 

 
(37
)
 

 
(37
)
Issuance of restricted common stock

 

 
262

 
1

 

 

 

 
1

 

 
1

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

 

 

 

 
589

 

 

 
589

 

 
589

Balance as of March 31, 2014
5,400

 
$
5

 
236,564

 
$
237

 
$
4,920,185

 
$
(2,639,211
)
 
$
(756
)
 
$
2,280,460

 
$
1,494

 
$
2,281,954

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of January 1, 2015
5,400

 
$
5

 
236,602

 
$
237

 
$
4,922,864

 
$
(2,734,688
)
 
$
(537
)
 
$
2,187,881

 
$
1,494

 
$
2,189,375

Net income

 

 

 

 

 
13,076

 

 
13,076

 

 
13,076

Other comprehensive loss

 

 

 

 

 

 
(95
)
 
(95
)
 

 
(95
)
Distributions declared to preferred shareholders ($0.4375 per share)

 

 

 

 

 
(2,362
)
 

 
(2,362
)
 

 
(2,362
)
Distributions declared to common shareholders ($0.165625 per share)

 

 

 

 

 
(39,284
)
 

 
(39,284
)
 

 
(39,284
)
Issuance of common stock, net of offering costs

 

 

 

 
(40
)
 

 

 
(40
)
 

 
(40
)
Issuance of restricted common stock

 

 
637

 

 

 

 

 

 

 

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

 

 
(53
)
 

 
518

 

 

 
518

 

 
518

Balance as of March 31, 2015
5,400

 
$
5

 
237,186

 
$
237

 
$
4,923,342

 
$
(2,763,258
)
 
$
(632
)
 
$
2,159,694

 
$
1,494

 
$
2,161,188


See accompanying notes to condensed consolidated financial statements


3



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

 
Three Months Ended March 31,
 
2015
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
13,076

 
$
14,128

Adjustments to reconcile net income to net cash provided by operating activities
(including discontinued operations):
 
 
 
Depreciation and amortization
54,676

 
53,830

Provision for impairment of investment properties

 
394

Gain on sales of investment properties
(4,572
)
 
(655
)
Gain on extinguishment of other liabilities

 
(4,258
)
Amortization of loan fees and debt premium and discount, net
992

 
1,599

Amortization of stock-based compensation
1,369

 
589

Premium paid in connection with defeasance of mortgages payable
2,604

 

Equity in loss of unconsolidated joint ventures, net

 
778

Distributions on investments in unconsolidated joint ventures

 
755

Payment of leasing fees and inducements
(1,539
)
 
(2,277
)
Changes in accounts receivable, net
10,286

 
5,945

Changes in accounts payable and accrued expenses, net
(12,714
)
 
(10,808
)
Changes in other operating assets and liabilities, net
6,356

 
(1,164
)
Other, net
593

 
(705
)
Net cash provided by operating activities
71,127

 
58,151

 
 
 
 
Cash flows from investing activities:
 
 
 
Changes in restricted escrows, net
17,673

 
1,499

Purchase of investment properties
(316,200
)
 
(28,324
)
Capital expenditures and tenant improvements
(10,946
)
 
(9,558
)
Proceeds from sales of investment properties
35,343

 
9,204

Investment in developments in progress
(380
)
 
(1,441
)
Investment in unconsolidated joint ventures

 
(25
)
Other, net
(25
)
 

Net cash used in investing activities
(274,535
)
 
(28,645
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from mortgages payable
322

 
1,622

Principal payments on mortgages payable
(71,505
)
 
(50,114
)
Proceeds from unsecured notes payable
248,815

 

Proceeds from unsecured credit facility
335,000

 
101,000

Repayments of unsecured credit facility
(300,000
)
 
(36,000
)
Payment of loan fees and deposits, net
(1,812
)
 

Purchase of Treasury securities in connection with defeasance of mortgages payable
(12,379
)
 

Distributions paid
(41,549
)
 
(41,500
)
Other, net
(881
)
 
(37
)
Net cash provided by (used in) financing activities
156,011

 
(25,029
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(47,397
)
 
4,477

Cash and cash equivalents, at beginning of period
112,292

 
58,190

Cash and cash equivalents, at end of period
$
64,895

 
$
62,667

(continued)
 

4



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

 
Three Months Ended March 31,
 
2015
 
2014
Supplemental cash flow disclosure, including non-cash activities:
 
 
 
Cash paid for interest
$
24,662

 
$
26,813

Distributions payable
$
39,284

 
$
39,181

Accrued capital expenditures and tenant improvements
$
4,474

 
$
5,217

Accrued leasing fees and inducements
$
533

 
$
338

Accrued development expenditures
$
133

 
$
429

Treasury securities transferred in connection with defeasance of mortgages payable
$
12,379

 
$

Defeasance of mortgages payable
$
9,775

 
$

 
 
 
 
Purchase of investment properties (after credits at closing):
 
 
 
Land, building and other improvements, net
$
(308,728
)
 
$
(28,112
)
Accounts receivable, acquired lease intangible and other assets
(34,929
)
 
(1,492
)
Accounts payable, acquired lease intangible and other liabilities
27,457

 
1,280

 
$
(316,200
)
 
$
(28,324
)
 
 
 
 
Proceeds from sales of investment properties:
 
 
 
Land, building and other improvements, net
$
30,582

 
$
8,079

Accounts receivable, acquired lease intangible and other assets
207

 
494

Accounts payable, acquired lease intangible and other liabilities
(50
)
 
(24
)
Deferred gain
32

 

Gain on sales of investment properties
4,572

 
655

 
$
35,343

 
$
9,204


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, 2014, which are included in its 2014 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 corporate income tax on its undistributed taxable income. 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) and is subject to U.S. federal, state and local income taxes 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 and statutory trusts.
The Company’s property ownership as of March 31, 2015 is summarized below:

Wholly-owned
 
Consolidated
Joint Ventures (a)
Operating properties (b)
216

 

Development properties
2

 
1

(a)
The Company has a 50% ownership interest in one LLC.
(b)
Excludes one wholly-owned property classified as held for sale as of March 31, 2015.
As of March 31, 2015, the Company is the controlling member in one less-than-wholly-owned consolidated entity. The Company is entitled to a preferred return on its capital contributions to the entity. No adjustments to the carrying value of the noncontrolling interests for contributions, distributions or allocation of net income or loss were made during the three months ended March 31, 2015 and 2014.

6

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

During the three months ended March 31, 2014, the Company held investments in MS Inland Fund, LLC (MS Inland) and Oak Property & Casualty LLC (Oak), which were unconsolidated joint ventures accounted for under the equity method of accounting. The Company dissolved MS Inland and terminated its participation in Oak prior to December 31, 2014. The Company recorded net equity in loss of unconsolidated joint ventures of $778 and received net cash distributions of $730 during the three months ended March 31, 2014.
(2)   Summary of Significant Accounting Policies
Refer to the Company’s 2014 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 three months ended March 31, 2015.
Recent Accounting Pronouncements
Effective January 1, 2016 with early adoption permitted, the concept of extraordinary items will be eliminated from GAAP and entities will no longer be required to consider whether an underlying event or transaction is extraordinary. However, the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained. The Company has elected to early adopt this pronouncement effective January 1, 2015. The adoption of this pronouncement did not have any effect on the Company’s condensed consolidated financial statements.
Effective January 1, 2016 with early adoption permitted, companies will be required to present debt issuance costs related to a recognized debt liability as a direct deduction from the carrying amount of that debt liability on the balance sheet. The recognition and measurement guidance for debt issuance costs will not be affected. This pronouncement requires a full retrospective method of adoption and the adoption will result in the reclassification of unamortized capitalized loan fees from other assets to a direct reduction of the Company’s indebtedness on the condensed consolidated balance sheets.
Effective January 1, 2016 with early adoption permitted, 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 of this pronouncement will have a material effect on its condensed consolidated financial statements.
Effective January 1, 2016 with early adoption permitted, companies will be required to evaluate whether they should consolidate certain legal entities under a revised consolidation model. All legal entities are subject to reevaluation under the revised consolidation model, which modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities, eliminates the presumption that a general partner should consolidate a limited partnership, affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance for registered money market funds. This pronouncement allows either a full or a modified retrospective method of adoption. The Company does not expect the adoption of this pronouncement will have a material effect on its condensed consolidated financial statements.
Effective January 1, 2017 and currently awaiting Financial Accounting Standards Board approval of a proposal which could potentially defer the effective date by one year to January 1, 2018, companies will be required to apply a five-step model in accounting for revenue arising from contracts with customers. The core principle of this 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. This pronouncement allows either a full or a modified retrospective method of adoption. 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 of this pronouncement will have a material effect on its condensed 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)

(3)   Acquisitions
The Company closed on the following acquisitions during the three months ended March 31, 2015:
Date
 
Property Name
 
Metropolitan
Statistical Area
(MSA)
 
Property Type
 
Square
Footage
 
Acquisition
Price
January 8, 2015
 
Downtown Crown
 
Washington, D.C.
 
Multi-tenant retail
 
258,000

 
$
162,785

January 23, 2015
 
Merrifield Town Center
 
Washington, D.C.
 
Multi-tenant retail
 
85,000

 
56,500

January 23, 2015
 
Fort Evans Plaza II
 
Washington, D.C.
 
Multi-tenant retail
 
229,000

 
65,000

February 19, 2015
 
Cedar Park Town Center
 
Austin
 
Multi-tenant retail
 
179,000

 
39,057

March 24, 2015
 
Lake Worth Towne Crossing - Parcel (a)
 
Dallas
 
Land
 

 
400

 
 
 
 
 
 
 
 
751,000

 
$
323,742

(a)
The Company acquired a parcel located at its Lake Worth Towne Crossing multi-tenant retail operating property.
The Company closed on the following acquisitions during the three months ended March 31, 2014:
Date
 
Property Name
 
MSA
 
Property Type
 
Square
Footage
 
Acquisition
Price
February 27, 2014
 
Heritage Square
 
Seattle
 
Multi-tenant retail
 
53,100

 
$
18,022

February 27, 2014
 
Bed Bath & Beyond Plaza - Fee Interest (a)
 
Miami
 
Ground lease interest
 

 
10,350

 
 
 
 
 
 
 
 
53,100

 
$
28,372

(a)
The Company acquired the fee interest in an existing wholly-owned multi-tenant retail operating property located in Miami, Florida, which was previously subject to a ground lease with a third party. In conjunction with this 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 consolidated statements of operations and other comprehensive income.
The following table summarizes the acquisition date fair values, before prorations, the Company recorded in conjunction with the acquisitions discussed above:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Land
 
$
102,487

 
$
16,727

Building and other improvements
 
206,241

 
11,385

Acquired lease intangible assets (a)
 
33,631

 
1,492

Acquired lease intangible liabilities (b)
 
(18,617
)
 
(1,232
)
Net assets acquired
 
$
323,742

 
$
28,372

(a)
The weighted average amortization period for acquired lease intangible assets is 16 years and six years for acquisitions completed during the three months ended March 31, 2015 and 2014, respectively.
(b)
The weighted average amortization period for acquired lease intangible liabilities is 20 years and 12 years for acquisitions completed during the three months ended March 31, 2015 and 2014, respectively.
The above acquisitions were funded using a combination of available cash on hand and proceeds from the Company’s unsecured revolving line of credit. Transaction costs totaling $911 and $98 for the three months ended March 31, 2015 and 2014, respectively, were expensed as incurred and included within “General and administrative expenses” in the accompanying condensed consolidated statements of operations and other comprehensive income.
Included in the Company’s condensed consolidated statements of operations and other comprehensive income from the properties acquired are $4,675 and $161 in total revenues and $1,401 and $61 in net income attributable to common shareholders from the date of acquisition through March 31, 2015 and 2014, respectively.
Subsequent to March 31, 2015, the Company acquired Tysons Corner, a multi-tenant retail property located in the Washington, D.C. MSA, for a gross purchase price of $31,556. The property was acquired on May 4, 2015 and contains approximately 38,000 square feet. The Company has not completed the allocation of the acquisition date fair value for Tysons Corner; however, it expects that the purchase price of this property will primarily be allocated to building, land, and acquired lease intangibles.

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 are included in the following unaudited condensed pro forma financial information as if these acquisitions had been completed as of the beginning of the year prior to the acquisition date. The following unaudited condensed pro forma financial information is presented as if the 2015 acquisitions, including the Tysons Corner acquisition, were completed as of January 1, 2014, and the 2014 acquisitions were completed as of January 1, 2013. The results of operations associated with the 2015 Lake Worth Towne Crossing and 2014 Bed Bath & Beyond Plaza acquisitions have not been included in the pro forma presentation as they have been accounted for as asset acquisitions. 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 March 31,
 
 
2015
 
2014
Total revenues
 
$
154,484

 
$
153,847

Net income
 
$
12,990

 
$
13,252

Net income attributable to common shareholders
 
$
10,628

 
$
10,890

Earnings per common share — basic and diluted
 
 
 
 
Net income per common share attributable to common shareholders
 
$
0.04

 
$
0.05

Weighted average number of common shares outstanding — basic
 
236,250

 
236,151

(4)   Dispositions
The Company monitors its investment properties to ensure that each property continues to meet investment 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 three months ended March 31, 2015:
Date
 
Property Name
 
Property Type
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Gain
January 20, 2015
 
Aon Hewitt East Campus
 
Single-user office
 
343,000

 
$
17,233

 
$
16,495

 
$

February 27, 2015
 
Promenade at Red Cliff
 
Multi-tenant retail
 
94,500

 
19,050

 
18,848

 
4,572

 
 
 
 
 
 
437,500

 
$
36,283

 
$
35,343

 
$
4,572

(a)
Aggregate proceeds are net of transaction costs.
The Company closed on the following property disposition during the three months ended March 31, 2014:
Date
 
Property Name
 
Property Type
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Gain
March 11, 2014
 
Riverpark Phase IIA
 
Single-user retail
 
64,300

 
$
9,269

 
$
9,204

 
$
655

(a)
Aggregate proceeds are net of transaction costs.
As of March 31, 2015, the Company had entered into a contract to sell Hartford Insurance Building, a 97,400 square foot single-user office property located in Maple Grove, Minnesota. This property qualified for held for sale accounting treatment upon meeting all applicable GAAP criteria during the quarter ended March 31, 2015, at which time depreciation and amortization were ceased. As such, the assets and liabilities associated with this property are separately classified as held for sale in the condensed consolidated balance sheet as of March 31, 2015. Promenade at Red Cliff and Aon Hewitt East Campus, both of which were sold during the three months ended March 31, 2015, were classified as held for sale as of December 31, 2014.

9

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

The following table presents the assets and liabilities associated with the investment properties classified as held for sale:
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
Land, building and other improvements
$
4,972

 
$
36,020

Accumulated depreciation
(58
)
 
(5,358
)
Net investment properties
4,914

 
30,662

Other assets
127

 
2,978

Assets associated with investment properties held for sale
$
5,041

 
$
33,640

 
 
 
 
Liabilities
 
 
 
Mortgage payable
$

 
$
8,075

Other liabilities
320

 
128

Liabilities associated with investment properties held for sale
$
320

 
$
8,203

There was no activity during the three months ended March 31, 2015 related to discontinued operations. The results of operations for the three months ended March 31, 2014 for the investment property accounted for as discontinued operations, Riverpark Phase IIA which was classified as held for sale as of December 31, 2013, were immaterial.
(5)   Compensation Plans
The Company’s 2014 Long-Term Equity Compensation Plan, subject to certain conditions, authorizes the issuance of incentive and non-qualified stock options, restricted stock, stock appreciation rights and other similar awards as well as 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 three months ended March 31, 2015:

Unvested
Restricted
Shares

Weighted Average
Grant Date Fair
Value per
Restricted Share
Balance as of January 1, 2015
396


$
14.26

Shares granted (a)
637


$
16.02

Shares vested
(162
)

$
14.03

Balance as of March 31, 2015
871


$
15.59

(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 March 31, 2015 and 2014, the Company recorded compensation expense of $1,369 and $587, respectively, related to unvested restricted shares. As of March 31, 2015, total unrecognized compensation expense related to unvested restricted shares was $10,919, which is expected to be amortized over a weighted average term of 1.5 years. The total fair value of shares vested during the three months ended March 31, 2015 was $2,613.
Prior to 2013, non-employee directors had been granted options to acquire shares under the Company’s Third Amended and Restated Independent Director Stock Option and Incentive Plan. As of March 31, 2015, options to purchase 84 shares of common stock had been granted, of which options to purchase three shares had been exercised, options to purchase six shares had expired and options to purchase 11 shares had been forfeited. The Company did not grant any options in 2014 or 2015 and did not record any compensation expense related to stock options during the three months ended March 31, 2015. Compensation expense of $2 related to stock options was recorded during the three months ended March 31, 2014.

10

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

(6)   Mortgages Payable
The following table summarizes the Company’s mortgages payable:
 
March 31, 2015
 
December 31, 2014

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)
$
1,542,858


6.01
%
 
3.9
 
$
1,616,063

 
6.03
%
 
4.0
Variable rate construction loan (b)
15,222


2.44
%
 
0.6
 
14,900

 
2.44
%
 
0.8
Mortgages payable
1,558,080

 
5.97
%
 
3.9
 
1,630,963

 
5.99
%
 
3.9
Premium, net of accumulated amortization
3,218

 
 
 
 
 
3,972

 
 
 
 
Discount, net of accumulated amortization
(342
)

 
 
 
 
(470
)
 
 
 
 
Mortgages payable, net
$
1,560,956


 
 
 
 
$
1,634,465

 
 
 
 
(a)
Includes $8,070 and $8,124 of variable rate mortgage debt that was swapped to a fixed rate as of March 31, 2015 and December 31, 2014, respectively, and excludes mortgages payable of $8,075 associated with one investment property classified as held for sale as of December 31, 2014. The fixed rate mortgages had interest rates ranging from 3.35% to 8.00% as of March 31, 2015 and December 31, 2014, 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 three months ended March 31, 2015, the Company repaid or defeased mortgages payable in the total amount of $77,135 (excluding scheduled principal payments of $4,145 related to amortizing loans). The loans repaid or defeased during the three months ended March 31, 2015 had a weighted average fixed interest rate of 6.53%.
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. Certain of 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 March 31, 2015, the Company had guaranteed $8,106 of the outstanding mortgage and construction loans with maturity dates ranging from November 2, 2015 through September 30, 2016 (see Note 14). 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 Company’s properties may secure the debt of another of the Company’s properties. As of March 31, 2015, the most significant cross-collateralized pool of mortgages was the IW JV 2009, LLC portfolio in the amount of $460,078, which is cross-collateralized by 53 properties.

11

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 March 31, 2015 for the remainder of 2015, each of the next four years and thereafter and the weighted average interest rates by year. The table does not reflect the impact of any debt activity that occurred after March 31, 2015.
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages payable (a)
$
305,135

 
$
67,703

 
$
321,090

 
$
12,376

 
$
501,308

 
$
335,246

 
$
1,542,858

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

 

 

 
300,000

 

 

 
300,000

Unsecured notes payable (c)

 

 

 

 

 
500,000

 
500,000

Total fixed rate debt
305,135

 
67,703

 
321,090

 
312,376

 
501,308

 
835,246

 
2,342,858

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction loan
15,222

 

 

 

 

 

 
15,222

Unsecured credit facility

 

 
35,000

 
150,000

 

 

 
185,000

Total variable rate debt
15,222

 

 
35,000

 
150,000

 

 

 
200,222

Total debt (d)
$
320,357

 
$
67,703

 
$
356,090

 
$
462,376

 
$
501,308

 
$
835,246

 
$
2,543,080

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate on debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
5.39
%
 
5.06
%
 
5.53
%
 
2.18
%
 
7.50
%
 
4.51
%
 
5.11
%
Variable rate debt (e)
2.44
%
 

 
1.68
%
 
1.63
%
 

 

 
1.70
%
Total
5.25
%
 
5.06
%
 
5.15
%
 
2.00
%
 
7.50
%
 
4.51
%
 
4.84
%
(a)
Includes $8,070 of variable rate mortgage debt that was swapped to a fixed rate as of March 31, 2015. Excludes mortgage premium of $3,218 and discount of $(342), net of accumulated amortization, which was outstanding as of March 31, 2015.
(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)
Excludes discount of $(1,178), net of accumulated amortization, which was outstanding as of March 31, 2015.
(d)
As of March 31, 2015, the weighted average years to maturity of consolidated indebtedness was 4.7 years.
(e)
Represents interest rates as of March 31, 2015.
The Company plans on addressing its debt maturities through a combination of proceeds from asset dispositions, capital markets transactions and its unsecured revolving line of credit.
(7)   Unsecured Notes Payable
On March 12, 2015, the Company completed a public offering of $250,000 in aggregate principal amount of its 4.00% senior unsecured notes due 2025 (4.00% notes). The 4.00% notes were priced at 99.526% of the principal amount to yield 4.058% to maturity. In addition, on June 30, 2014, the Company completed a private placement of $250,000 of unsecured notes, consisting of $100,000 of 4.12% Series A senior notes due 2021 and $150,000 of 4.58% Series B senior notes due 2024 (collectively, Series A and B notes). The proceeds from the 4.00% notes and the Series A and B notes were used to repay a portion of the Company’s unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities.

12

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

The following table summarizes the Company’s unsecured notes payable as of March 31, 2015:
Unsecured Notes Payable
 
Maturity Date
 
Principal Balance
 
Interest Rate/
Weighted Average
Interest Rate
Senior notes - 4.12% Series A due 2021
 
June 30, 2021
 
$
100,000

 
4.12
%
Senior notes - 4.58% Series B due 2024
 
June 30, 2024
 
150,000

 
4.58
%
Senior notes - 4.00% due 2025
 
March 15, 2025
 
250,000

 
4.00
%
 
 
 
 
500,000

 
4.20
%
Discount, net of accumulated amortization
 
 
 
(1,178
)
 
 
 
 
Total
 
$
498,822

 
 
The indenture, as supplemented, governing the 4.00% notes (the Indenture) contains customary covenants and events of default. Pursuant to the terms of the Indenture, the Company is subject to various financial covenants, including the requirement to maintain the following: (i) maximum secured and total leverage ratios; (ii) a debt service coverage ratio; and (iii) maintenance of an unencumbered assets to unsecured debt ratio.
The note purchase agreement governing the Series A and B notes 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 March 31, 2015, management believes the Company was in compliance with the financial covenants under the Indenture and the note purchase agreement.
(8)   Unsecured 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 $1,000,000. The unsecured credit facility consists of a $550,000 unsecured revolving line of credit and a $450,000 unsecured term loan (collectively, the Unsecured Credit Facility). The Company has the ability to increase available borrowings up to $1,450,000 in certain circumstances.
The Unsecured 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. The Company received investment grade credit ratings from two rating agencies in 2014. 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 March 31, 2015, 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 Unsecured Credit Facility:
 
 
 
 
March 31, 2015
 
December 31, 2014
Unsecured Credit Facility
 
Maturity Date
 
Balance
 
Interest Rate/
Weighted Average
Interest Rate
 
Balance
 
Interest Rate/
Weighted Average
Interest Rate
Term loan - fixed rate portion (a)
 
May 11, 2018
 
$
300,000

 
1.99
%
 
$
300,000

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

 
1.63
%
 
150,000

 
1.62
%
Revolving line of credit - variable rate
 
May 12, 2017 (b)
 
35,000

 
1.68
%
 

 
1.67
%
 
 
Total
 
$
485,000

 
1.86
%
 
$
450,000

 
1.87
%
(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 March 31, 2015 and December 31, 2014.

13

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

(b)
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 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 March 31, 2015, management believes the Company was in compliance with the financial covenants and default provisions under the unsecured credit agreement.
(9)   Derivatives
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 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 $607 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.
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
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Interest rate swaps
 
2

 
2

 
$
308,070

 
$
308,124

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 13 to the condensed consolidated financial statements.
 
 
Fair Value
 
 
March 31,
2015
 
December 31,
2014
Derivatives designated as cash flow hedges:
 
 
 
 
Interest rate swaps
 
$
632

 
$
562

The following table presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of operations and other comprehensive income for the three months ended March 31, 2015 and 2014:
Derivatives in
Cash Flow
Hedging
Relationships
 
Amount of 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
Recognized In
Income on Derivative
(Ineffective Portion
and Amount
Excluded from
Effectiveness Testing)
 
Amount of Gain
Recognized in Income
on Derivative
(Ineffective Portion and
Amount Excluded from
Effectiveness Testing)
 
 
2015
 
2014
 
 
 
2015
 
2014
 
 
 
2015
 
2014
Interest rate swaps
 
$
386

 
$
309

 
Interest expense
 
$
291

 
$
291

 
Other income, net
 
$
(25
)
 
$
(13
)

14

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

(10)  Equity
In March 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 or other growth initiatives.
The Company did not sell any shares under its ATM equity program during the three months ended March 31, 2015 and 2014.
As of March 31, 2015, the Company had Class A common shares having an aggregate offering price of up to $115,165 remaining available for sale under its ATM equity program.
(11) Earnings per Share
The following table summarizes the components used in the calculation of basic and diluted earnings per share (EPS):
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Numerator:
 
 
 
 
Income from continuing operations
$
8,504

 
$
13,621

 
Gain on sales of investment properties
4,572

 

 
Preferred stock dividends
(2,362
)
 
(2,362
)
 
Income from continuing operations attributable to common shareholders
10,714

 
11,259

 
Income from discontinued operations

 
507

 
Net income attributable to common shareholders
10,714

 
11,766

 
Distributions paid on unvested restricted shares
(66
)
 
(25
)
 
Net income attributable to common shareholders excluding
amounts attributable to unvested restricted shares
$
10,648

 
$
11,741

 

 
 
 
 
Denominator:
 
 
 
 
Denominator for earnings per common share — basic:
 
 
 
 
Weighted average number of common shares outstanding
236,250

(a)
236,151

(b)
Effect of dilutive securities — stock options
3

(c)
2

(c)
Denominator for earnings per common share — diluted:
 
 
 
 
Weighted average number of common and common equivalent shares outstanding
236,253

 
236,153

 
(a)
Excludes 871 shares of unvested restricted common stock, which equate to 611 shares on a weighted average basis for the three months ended March 31, 2015. These shares will continue to be excluded from the computation of basic EPS until contingencies are resolved and the shares are released.
(b)
Excludes 414 shares of unvested restricted common stock, which equate to 264 shares on a weighted average basis for the three months ended March 31, 2014. 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 64 and 78 shares of common stock as of March 31, 2015 and 2014, respectively, at a weighted average exercise price of $19.32 and $19.10, respectively. Of these totals, outstanding options to purchase 54 and 64 shares of common stock as of March 31, 2015 and 2014, respectively, at a weighted average exercise price of $20.72 and $20.71, respectively, have been excluded from the common shares used in calculating diluted earnings per share as including them would be anti-dilutive.

15

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

(12) Provision for Impairment of Investment Properties
As of March 31, 2015 and 2014, the Company identified indicators of impairment at certain of its properties. 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 following table summarizes the results of these analyses as of March 31, 2015 and 2014:
 
 
March 31, 2015
 
March 31, 2014
 
Number of properties for which indicators of impairment were identified
 
6

 
12

(a)
Less: Number of properties for which an impairment charge was recorded
 

 
1

 
Less: Number of properties that were held for sale as of the date the analysis was performed
for which indicators of impairment were identified but no impairment charge was recorded
 
1

(b)

 
Remaining properties for which indicators of impairment were identified
 
5

 
11

 
 
 
 
 
 
 
Weighted average percentage by which the projected undiscounted cash flows exceeded
its respective carrying value for each of the remaining properties (c)
 
66
%
 
19
%
 
(a)
Includes seven properties which were subsequently sold or classified as held for sale as of March 31, 2015.
(b)
Hartford Insurance Building was classified as held for sale as of March 31, 2015. This property was not considered impaired based upon the executed sales contract and it was sold on April 7, 2015 with an anticipated gain on sale of approximately $860.
(c)
Based upon the estimated holding period for each asset where an undiscounted cash flow analysis was performed.
The investment property impairment charge recorded by the Company during the three months ended March 31, 2014 is summarized below:
Property Name
 
Property Type
 
Impairment Date
 
Square
Footage
 
Provision for
Impairment of
Investment
Properties
Midtown Center (a)
 
Multi-tenant retail
 
March 31, 2014
 
408,500

 
$
394

 
 
Estimated fair value of impaired property as of impairment date
$
47,150

(a)
The Company recorded an impairment charge based upon the terms and conditions of an executed sales contract for this property, which was sold on April 1, 2014.
The Company can provide no assurance that material impairment charges with respect to its investment properties will not occur in future periods.
(13) 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.
 
March 31, 2015
 
December 31, 2014
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Financial liabilities:
 
 
 
 
 
 
 
Mortgages payable, net
$
1,560,956

 
$
1,679,271

 
$
1,634,465

 
$
1,749,671

Unsecured notes payable, net
$
498,822

 
$
519,560

 
$
250,000

 
$
258,360

Unsecured credit facility
$
485,000

 
$
487,205

 
$
450,000

 
$
451,502

Derivative liability
$
632

 
$
632

 
$
562

 
$
562

The carrying values of mortgages payable, net and unsecured notes payable, net in the table are included in the condensed consolidated balance sheets under the indicated captions. The carrying value of the Unsecured 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.

16

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

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.
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2015
 
 
 
 
 
 
 
Derivative liability
$

 
$
632

 
$

 
$
632

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Derivative liability
$

 
$
562

 
$

 
$
562

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 March 31, 2015 and December 31, 2014, 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.
Nonrecurring Fair Value Measurements
The Company did not have any assets measured at fair value on a nonrecurring basis as of March 31, 2015.
The following table presents the Company’s assets measured at fair value on a nonrecurring basis as of December 31, 2014 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 year ended December 31, 2014, except for those properties sold prior to December 31, 2014. Methods and assumptions used to estimate the fair value of these assets are described after the table.
 
Fair Value
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Provision for
Impairment (a)
December 31, 2014
 
 
 
 
 
 
 
 
 
Investment properties
$

 
$

 
$
86,500

(b)
$
86,500

 
$
59,352

Investment properties - held for sale (c)
$

 
$
17,233

 
$

 
$
17,233

 
$
563

(a)
Excludes impairment charges recorded on investment properties sold prior to December 31, 2014.
(b)
Represents the fair values of the Company’s Shaw’s Supermarket, The Gateway, Hartford Insurance Building and Citizen’s Property Insurance Building investment properties. 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 were the key Level 3 inputs used in estimating the fair value of Shaw’s Supermarket and The Gateway as of September 30, 2014.

17

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

 
 
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.
The estimated fair values of Hartford Insurance Building and Citizen’s Property Insurance Building of $5,000 and $3,000, respectively, were based upon third party comparable sales prices, which contain unobservable inputs used by these third parties to determine the estimated fair values.
(c)
Represents an impairment charge recorded during the three months ended December 31, 2014 for Aon Hewitt East Campus, which was classified as held for sale as of December 31, 2014. Such charge, calculated as the expected sales price from the executed sales contract less estimated transaction costs as compared to the Company’s carrying value of its investment, was determined to be a Level 2 input. The estimated transaction costs totaling $738 are not reflected as a reduction to the fair value disclosed in the table above but were included in the calculation of the impairment charge.
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 those measurements fall. Methods and assumptions used to estimate the fair value of these instruments are described after the table.
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
March 31, 2015
 
 
 
 
 
 
 
Mortgages payable, net
$

 
$

 
$
1,679,271

 
$
1,679,271

Unsecured notes payable, net
$
252,285

 
$

 
$
267,275

 
$
519,560

Unsecured credit facility
$

 
$

 
$
487,205

 
$
487,205

 
 
 
 
 
 
 
 
December 31, 2014
 
 
 
 
 
 
 
Mortgages payable, net
$

 
$

 
$
1,749,671

 
$
1,749,671

Unsecured notes payable
$

 
$

 
$
258,360

 
$
258,360

Unsecured credit facility
$

 
$

 
$
451,502

 
$
451,502

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 2.2% to 5.5% and 2.2% to 4.0% as of March 31, 2015 and December 31, 2014, respectively.
Unsecured notes payable, net: The quoted market price as of March 31, 2015 was used to value the Company’s 4.00% notes. The Company estimates the fair value of its Series A and B notes 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 3.59% and 3.97% as of March 31, 2015 and December 31, 2014, respectively.
Unsecured Credit Facility:  The Company estimates the fair value of its Unsecured 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 to discount the credit spreads were 1.30% and 1.35% for the unsecured term loan as of March 31, 2015 and December 31, 2014, respectively, and 1.35% for the unsecured revolving line of credit as of March 31, 2015. There were no amounts drawn on the unsecured revolving line of credit as of December 31, 2014.

18

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

There were no transfers between the levels of the fair value hierarchy during the three months ended March 31, 2015.
(14) Commitments and Contingencies
Insurance Captive
On December 1, 2014, the Company formed a wholly-owned captive insurance company, Birch Property and Casualty LLC (Birch), which insures the Company’s first layer of property and general liability insurance claims subject to certain limitations. The Company capitalized Birch in accordance with the applicable regulatory requirements and Birch established annual premiums based on projections derived from the past loss experience of the Company’s properties.
Guarantees
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 March 31, 2015, the Company has guaranteed $8,106 of its outstanding mortgage and construction loans, with maturity dates ranging from November 2, 2015 through September 30, 2016.
(15) Litigation
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 condensed consolidated financial statements of the Company.
(16) Subsequent Events
Subsequent to March 31, 2015, the Company:
drew $60,000 on its unsecured revolving line of credit and used the proceeds to:
acquire Tysons Corner, a 38,000 square foot multi-tenant retail property located in Vienna, Virginia, for a gross purchase price of $31,556; and
repay a mortgage payable with a principal balance of $21,684 and an interest rate of 8.00%;
closed on the disposition of Hartford Insurance Building, a 97,400 square foot single-user office property located in Maple Grove, Minnesota, for a sales price of $6,015 with an anticipated gain on sale of approximately $860; and
closed on the disposition of Rasmussen College, a 26,700 square foot single-user office property located in Brooklyn Park, Minnesota, for a sales price of $4,800 with an anticipated gain on sale of approximately $1,334.
On April 27, 2015, the Company’s board of directors declared the cash dividend for the second quarter of 2015 for the Company’s 7.00% Series A cumulative redeemable preferred stock. The dividend of $0.4375 per preferred share will be paid on June 30, 2015 to preferred shareholders of record at the close of business on June 19, 2015.
On April 27, 2015, the Company’s board of directors declared the distribution for the second quarter of 2015 of $0.165625 per share on the Company’s outstanding Class A common stock, which will be paid on July 10, 2015 to Class A common shareholders of record at the close of business on June 26, 2015.

19


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 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 state of Texas, 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;
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 impact 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;
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 laws and rates and similar matters;
our compliance with laws, rules and regulations;

20


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 and in our Annual Report on Form 10-K for the year ended December 31, 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 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 March 31, 2015, we owned 212 retail operating properties representing 31,277,000 square feet of gross leasable area (GLA). Our retail operating portfolio includes power centers, neighborhood and community centers, and lifestyle centers and predominantly multi-tenant retail mixed-use properties, as well as single-user retail properties.
The following table summarizes our operating portfolio, including our office properties, as of March 31, 2015:
Property Type
 
Number of 
Properties
 
GLA
(in thousands)
 
Occupancy
 
Percent Leased 
Including Leases 
Signed (a)
Operating portfolio:
 
 
 
 
 
 
 
 
Multi-tenant retail
 
 
 
 
 
 
 
 
Power centers
 
61

 
15,008

 
94.1
%
 
95.5
%
Neighborhood and community centers
 
90

 
10,725

 
92.2
%
 
94.3
%
Lifestyle centers and mixed-use properties
 
11

 
4,186

 
89.2
%
 
90.1
%
Total multi-tenant retail
 
162

 
29,919

 
92.7
%
 
94.3
%
Single-user retail
 
50

 
1,358

 
100.0
%
 
100.0
%
Total retail operating portfolio
 
212

 
31,277

 
93.0
%
 
94.5
%
Office
 
4

 
1,033

 
100.0
%
 
100.0
%
Total operating portfolio (b)
 
216

 
32,310

 
93.3
%
 
94.7
%
(a)
Includes leases signed but not commenced.
(b)
Excludes one single-user office property classified as held for sale as of March 31, 2015.
In addition to our operating portfolio, as of March 31, 2015, we held interests in three retail development properties, one of which is currently under active development and held in a consolidated joint venture.

21


Company Highlights — Three Months Ended March 31, 2015
Leasing Activity
The following table summarizes the leasing activity in our retail operating portfolio during the three months ended March 31, 2015. Leases with terms of less than 12 months have been excluded from the table.
 
 
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
 
89

 
488

 
$
16.99

 
$
16.17

 
5.1
%
 
4.60

 
$
0.94

Comparable New Leases
 
13

 
76

 
$
15.56

 
$
12.59

 
23.6
%
 
7.95

 
$
26.10

Non-Comparable New and
Renewal Leases (b)
 
37

 
201

 
$
18.36

 
n/a

 
n/a

 
8.08

 
$
42.39

Total
 
139

 
765

 
$
16.80

 
$
15.69

 
7.1
%
 
5.87

 
$
14.35

(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.
Leasing activity in our retail operating portfolio remained strong during the three months ended March 31, 2015, with 139 leases signed for a total of approximately 765,000 square feet. Our renewal rate was 60.6% for the three months ended March 31, 2015 as we began experiencing the impact of various strategic remerchandising efforts with nine anchor spaces vacating during the quarter. Rental rates on comparable new leases signed during 2015 increased approximately 23.6% and rental rates on comparable renewal leases signed during 2015 increased by approximately 5.1% over previous rental rates, for a combined comparable re-leasing spread of approximately 7.1% for the three months ended March 31, 2015. We anticipate volatility in our reported leasing metrics on a quarterly basis throughout 2015 as we continue to pursue additional strategic remerchandising opportunities across the portfolio. In addition, as portfolio occupancy increases and available inventory of vacant space decreases, we anticipate that a greater proportion of our new leasing activity in 2015 will be non-comparable in nature as the leased space is more likely to have been vacant for longer than 12 months.
Acquisitions
During the first quarter of 2015, we continued executing on our investment strategy of acquiring high quality, multi-tenant retail assets within our target markets. We paid a total of $323,742 for the acquisitions of four multi-tenant retail operating properties and one parcel at an existing wholly-owned multi-tenant retail operating property during the first quarter, as detailed below.
We acquired the following three multi-tenant retail properties located in the Washington, D.C. metropolitan statistical area (MSA): the retail portion of Downtown Crown, a 258,000 square foot lifestyle center for a purchase price of $162,785; Merrifield Town Center, an 85,000 square foot lifestyle center for a purchase price of $56,500; and Fort Evans Plaza II, a 229,000 square foot power center for a purchase price of $65,000. We acquired Cedar Park Town Center, a 179,000 square foot community center located in the Austin MSA for a purchase price of $39,057. In addition, we acquired a land parcel at Lake Worth Towne Crossing, one of our existing multi-tenant retail operating properties located in the Dallas MSA, for a purchase price of $400.
Dispositions
During the first quarter of 2015, we continued to pursue targeted dispositions of select non-strategic and non-core properties. Consideration from dispositions totaled $36,283 and included the sale of a 94,500 square foot multi-tenant retail operating property for consideration of $19,050 and a 343,000 square foot single-user office property for consideration of $17,233.
Capital Markets
On March 12, 2015, we completed a public offering of $250,000 in aggregate principal amount of our 4.00% senior unsecured notes due 2025 (4.00% notes). The 4.00% notes were priced at 99.526% of the principal amount to yield 4.058% to maturity and will mature on March 15, 2025, unless earlier redeemed. The proceeds were used to repay a portion of our unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities.

22


Additionally, during the first quarter of 2015, we continued to enhance our balance sheet flexibility by repaying or defeasing mortgage debt, including certain longer dated maturities, in amounts totaling $77,135 (excluding scheduled principal payments of $4,145 related to amortizing loans). We also borrowed $35,000, net of repayments, on our unsecured revolving line of credit.
Distributions
We declared a quarterly distribution of $0.4375 per share of preferred stock and a quarterly distribution of $0.165625 per share of common stock during the three months ended March 31, 2015.
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 intangibles 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 March 31, 2015 and 2014
The following table presents NOI for our same store portfolio and “Other investment properties” along with a reconciliation to net income attributable to common shareholders. As of March 31, 2015, our same store portfolio consisted of 201 operating properties acquired or placed in service and stabilized prior to January 1, 2014. The number of properties in our same store portfolio increased to 201 as of March 31, 2015 from 197 as of December 31, 2014 as a result of the following:
the addition of seven investment properties acquired during the fourth quarter of 2013;
partially offset by the removal of
one same store investment property classified as held for sale as of March 31, 2015;
one investment property that was impaired below its debt balance during 2014; and
one investment property where we have begun activities in anticipation of a redevelopment, which we expect to have a significant impact to property NOI during 2015.
The sales of Aon Hewitt East Campus on January 20, 2015 and Promenade at Red Cliff on February 27, 2015 did not impact the number of same store properties as they were classified as held for sale as of December 31, 2014.
The properties and financial results reported in “Other investment properties” primarily include the properties acquired in 2014 and 2015, our development properties, two properties where we have begun activities in anticipation of future redevelopment, one property that was impaired below its debt balance during 2014, the investment properties that were sold or held for sale in 2014 and 2015 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. In addition, the financial results reported in “Other investment properties” for the three months ended March 31, 2015 include the net income from our wholly-owned captive insurance company, which was formed on December 1, 2014, and the financial results reported in “Other investment properties” for the three months ended March 31, 2014 include the historical intercompany expense elimination related to our former insurance captive unconsolidated joint venture investment, in which we terminated our participation effective December 1, 2014. For the three months ended March 31, 2014, the historical captive insurance expense related to our portfolio was recorded in equity in loss of unconsolidated joint ventures, net.

23


 
Three Months Ended March 31,
 
 
 
 
 
2015
 
2014
 
Change
 
Percentage
Operating revenues:
 
 
 
 
 
 
 
Same store investment properties (201 properties):
 
 
 
 
 
 
 
Rental income
$
104,691

 
$
101,634

 
$
3,057

 
3.0

Tenant recovery income
26,891

 
26,268

 
623

 
2.4

Other property income
1,041

 
839

 
202

 
24.1

Other investment properties:
 
 
 
 
 
 
 
Rental income
13,823

 
13,600

 
223

 
 
Tenant recovery income
4,409

 
3,480

 
929

 
 
Other property income
934

 
943

 
(9
)
 
 
Operating expenses:
 
 
 
 
 
 
 
Same store investment properties (201 properties):
 
 
 
 
 
 
 
Property operating expenses
(20,318
)
 
(21,983
)
 
1,665

 
7.6

Real estate taxes
(17,726
)
 
(16,564
)
 
(1,162
)
 
(7.0
)
Other investment properties:
 
 
 
 
 
 
 
Property operating expenses
(4,583
)
 
(3,636
)
 
(947
)
 
 
Real estate taxes
(2,784
)
 
(1,850
)
 
(934
)
 
 
NOI from continuing operations:
 
 
 
 
 
 
 
Same store investment properties
94,579

 
90,194

 
4,385

 
4.9

Other investment properties
11,799

 
12,537

 
(738
)
 
 
Total NOI from continuing operations
106,378

 
102,731

 
3,647

 
3.6

 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
Straight-line rental income, net
1,012

 
1,943

 
(931
)
 
 
Amortization of acquired above and below market lease intangibles, net
451

 
512

 
(61
)
 
 
Amortization of lease inducements
(189
)
 
(158
)
 
(31
)
 
 
Lease termination fees
134

 
105

 
29

 
 
Straight-line ground rent expense
(934
)
 
(1,022
)
 
88

 
 
Amortization of acquired ground lease intangibles
140

 
140

 

 
 
Depreciation and amortization
(54,676
)
 
(53,830
)
 
(846
)
 
 
Provision for impairment of investment properties

 
(394
)
 
394

 
 
General and administrative expenses
(10,992
)
 
(8,450
)
 
(2,542
)
 
 
Gain on extinguishment of other liabilities

 
4,258

 
(4,258
)
 
 
Equity in loss of unconsolidated joint ventures, net

 
(778
)
 
778

 
 
Interest expense
(34,045
)
 
(31,863
)
 
(2,182
)
 
 
Other income, net
1,225

 
427

 
798

 
 
Total other expense
(97,874
)
 
(89,110
)
 
(8,764
)
 
 
 
 
 
 
 
 
 
 
Income from continuing operations
8,504

 
13,621

 
(5,117
)
 
 
Discontinued operations:
 
 
 
 
 
 
 
Loss, net

 
(148
)
 
148

 
 
Gain on sales of investment properties

 
655

 
(655
)
 
 
Income from discontinued operations

 
507

 
(507
)
 
 
Gain on sales of investment properties
4,572

 

 
4,572

 
 
Net income
13,076

 
14,128

 
(1,052
)
 
 
Net income attributable to the Company
13,076

 
14,128

 
(1,052
)
 
 
Preferred stock dividends
(2,362
)
 
(2,362
)
 

 
 
Net income attributable to common shareholders
$
10,714

 
$
11,766

 
$
(1,052
)
 
 
Same store NOI increased $4,385, or 4.9%, primarily due to the following:
rental income increased $3,057 primarily due to an increase of $1,514 from occupancy growth, $970 from contractual rent increases and $699 from re-leasing spreads;
total operating expenses, net of tenant recovery income, decreased $1,126 primarily as a result of a decrease in certain non-recoverable property operating expenses, partially offset by an increase in bad debt expense.
We expect same store NOI growth to moderate throughout the remainder of 2015, in part due to anticipated strategic remerchandising efforts at some of our same store properties as well as more difficult period-over-period comparable results throughout 2014.

24


Total NOI increased $3,647, or 3.6%, due to an increase of $4,385 from the same store portfolio described above, partially offset by a decrease from “Other investment properties.”
Other income (expense). Total other expense increased $8,764, or 9.8%, primarily due to:
a $4,258 gain on extinguishment of other liabilities recognized during the three months ended March 31, 2014 related to the acquisition of the fee interest in one of our existing investment properties that was previously subject to a ground lease with a third party. The amount recognized represents the reversal of a straight-line ground rent liability associated with the ground lease;
a $2,542 increase in general and administrative expenses primarily consisting of an increase in compensation expense, including bonuses and amortization of restricted stock awards, of $2,409; and
a $2,182 increase in interest expense primarily consisting of:
$3,303 in interest on our unsecured notes payable, which were issued in June 2014 and March 2015; and
a $1,081 increase in prepayment penalties and defeasance premiums;
partially offset by
a $1,446 decrease in interest on mortgages payable due to the repayment of mortgage debt; and
a $616 increase in the amortization of mortgage premium resulting from the assumption of mortgages payable in connection with the dissolution of our MS Inland unconsolidated joint venture during the second quarter of 2014.
Discontinued operations. No discontinued operations were reported for the three months ended March 31, 2015. Discontinued operations for the three months ended March 31, 2014 consists of one property, Riverpark Phase IIA, which was classified as held for sale as of December 31, 2013 and, therefore, qualified for discontinued operations treatment under the previous standard, and was sold on March 11, 2014.
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 performance measure known as funds from operations (FFO). 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 of discrete non-operating transactions and other events 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.
We believe that FFO and Operating FFO, which are non-GAAP performance measures, provide additional and useful means to assess the operating performance of REITs. 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.

25


FFO and Operating FFO are calculated as follows:
 
Three Months Ended March 31,
 
2015
 
2014
Net income attributable to common shareholders
$
10,714

 
$
11,766

Depreciation and amortization
54,401

 
54,243

Provision for impairment of investment properties

 
394

Gain on sales of investment properties
(4,572
)
 
(655
)
FFO
$
60,543

 
$
65,748

 
 
 
 
Impact on earnings from the early extinguishment of debt, net
2,786

 
1,680

Provision for hedge ineffectiveness
(25
)
 
(13
)
Gain on extinguishment of other liabilities

 
(4,258
)
Other (a)
(1,000
)
 
(115
)
Operating FFO
$
62,304

 
$
63,042

(a)
Consists of settlement and easement proceeds, which are included in “Other income, net” in the condensed consolidated statements of operations and other comprehensive income.
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 revolving line of credit and our unsecured term loan (collectively, the 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 dispositions
 
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 which we have accomplished through a combination of the repayment and refinancing of maturing debt. We have funded debt repayments primarily through asset dispositions and capital markets transactions, including public offerings of our common and preferred stock and private and public offerings of senior unsecured notes. As of March 31, 2015, we had $320,357 of debt scheduled to mature through the end of 2015, which we plan on satisfying through a combination of proceeds from asset dispositions, capital markets transactions and our unsecured revolving line of credit.

26


The table below summarizes our consolidated indebtedness as of March 31, 2015:
Debt
 
Aggregate
Principal
Amount
 
Weighted
Average
Interest Rate
 
Maturity Date
 
Weighted
Average Years
to Maturity
Fixed rate mortgages payable (a)
 
$
1,542,858

 
6.01
%
 
Various
 
3.9 years
Variable rate construction loan
 
15,222

 
2.44
%
 
November 2, 2015
 
0.6 years
Total mortgages payable
 
1,558,080

 
5.97
%
 
 
 
3.9 years
Premium, net of accumulated amortization
 
3,218

 
 
 
 
 
 
Discount, net of accumulated amortization
 
(342
)
 
 
 
 
 
 
Total mortgages payable, net
 
1,560,956

 
 
 
 
 
 
Unsecured notes payable:
 
 
 
 
 
 
 
 
Senior notes - 4.12% Series A due 2021
 
100,000

 
4.12
%
 
June 30, 2021
 
6.3 years
Senior notes - 4.58% Series B due 2024
 
150,000

 
4.58
%
 
June 30, 2024
 
9.3 years
Senior notes - 4.00% due 2025
 
250,000

 
4.00
%
 
March 15, 2025
 
10.0 years
Subtotal
 
500,000

 
4.20
%
 
 
 
9.0 years
Discount, net of accumulated amortization
 
(1,178
)
 
 
 
 
 
 
Total unsecured notes payable, net
 
498,822

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

 
1.99
%
 
May 11, 2018
 
3.1 years
Variable rate portion of term loan
 
150,000

 
1.63
%
 
May 11, 2018
 
3.1 years
Variable rate revolving line of credit (c)
 
35,000

 
1.68
%
 
May 12, 2017
 
2.1 years
Total unsecured credit facility
 
485,000

 
1.86
%
 
 
 
3.0 years
 
 
 
 
 
 
 
 
 
Total consolidated indebtedness, net
 
$
2,544,778

 
4.84
%
 
 
 
4.7 years
(a)
Includes $8,070 of variable rate mortgage debt that was swapped to a fixed rate as of March 31, 2015.
(b)
Reflects $300,000 of variable rate debt that matures in May 2018 and is 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 2016. The applicable margin was 1.45% as of March 31, 2015.
(c)
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.
Mortgages Payable
During the three months ended March 31, 2015, we repaid or defeased mortgages payable in the total amount of $77,135 (excluding scheduled principal payments of $4,145 related to amortizing loans). The loans repaid or defeased during the three months ended March 31, 2015 had a weighted average fixed interest rate of 6.53%.
Unsecured Notes Payable
On March 12, 2015, we completed a public offering of $250,000 in aggregate principal amount of our 4.00% notes. The 4.00% notes were priced at 99.526% of the principal amount to yield 4.058% to maturity. The proceeds were used to repay a portion of our unsecured revolving line of credit in anticipation of the repayment of future secured debt maturities.
The indenture, as supplemented, governing the 4.00% notes (the Indenture) contains customary covenants and events of default. Pursuant to the terms of the Indenture, we are subject to various financial covenants, including the requirement to maintain the following: (i) maximum secured and total leverage ratios; (ii) a debt service coverage ratio; and (iii) maintenance of an unencumbered assets to unsecured debt ratio.
The note purchase agreement governing the 4.12% Series A senior notes due 2021 and 4.58% Series B senior notes due 2024 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 March 31, 2015, management believes we were in compliance with the financial covenants under the Indenture and the note purchase agreement.

27


Unsecured Credit Facility
In May 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. The Unsecured Credit Facility contains an accordion feature that allows us to increase the availability thereunder to up to $1,450,000 in certain circumstances.
The Unsecured 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. We received investment grade credit ratings from two rating agencies in 2014. 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 March 31, 2015, 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 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 March 31, 2015, management believes we were in compliance with the financial covenants and default provisions under the unsecured credit agreement.
Debt Maturities
The following table shows the scheduled maturities and principal amortization of our indebtedness as of March 31, 2015 for the remainder of 2015, each of the next four years and thereafter and the weighted average interest rates by year, as well as the fair value of our indebtedness as of March 31, 2015. The table does not reflect the impact of any debt activity that occurred after March 31, 2015.
 
2015
 
2016
 
2017
 
2018
 
2019
 
Thereafter
 
Total
 
Fair Value
Debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Mortgages payable (a)
$
305,135

 
$
67,703

 
$
321,090

 
$
12,376

 
$
501,308

 
$
335,246

 
$
1,542,858

 
$
1,664,049

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

 

 

 
300,000

 

 

 
300,000

 
301,395

Unsecured notes payable (c)

 

 

 

 

 
500,000

 
500,000

 
519,560

Total fixed rate debt
305,135

 
67,703

 
321,090

 
312,376

 
501,308

 
835,246

 
2,342,858

 
2,485,004

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Variable rate debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Construction loan
15,222

 

 

 

 

 

 
15,222

 
15,222

Unsecured credit facility

 

 
35,000

 
150,000

 

 

 
185,000

 
185,810

Total variable rate debt
15,222

 

 
35,000

 
150,000

 

 

 
200,222

 
201,032

Total debt (d)
$
320,357

 
$
67,703

 
$
356,090

 
$
462,376

 
$
501,308

 
$
835,246

 
$
2,543,080

 
$
2,686,036

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average interest rate on debt:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed rate debt
5.39
%
 
5.06
%
 
5.53
%
 
2.18
%
 
7.50
%
 
4.51
%
 
5.11
%
 
 
Variable rate debt (e)
2.44
%
 

 
1.68
%
 
1.63
%
 

 

 
1.70
%
 
 
Total
5.25
%
 
5.06
%
 
5.15
%
 
2.00
%
 
7.50
%
 
4.51
%
 
4.84
%
 
 
(a)
Includes $8,070 of variable rate mortgage debt that was swapped to a fixed rate as of March 31, 2015. Excludes mortgage premium of $3,218 and discount of $(342), net of accumulated amortization, which was outstanding as of March 31, 2015.
(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)
Excludes discount of $(1,178), net of accumulated amortization, which was outstanding as of March 31, 2015.
(d)
As of March 31, 2015, the weighted average years to maturity of consolidated indebtedness was 4.7 years.
(e)
Represents interest rates as of March 31, 2015.

28


We plan on addressing our debt maturities through a combination of proceeds from asset dispositions, capital markets transactions and our unsecured revolving line of credit.
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 to its shareholders at least 90% of its taxable income, prior to the deduction for dividends paid and excluding 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 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 unsecured 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 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.
In March 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 or other growth initiatives. We did not sell any shares under our ATM equity program during the three months ended March 31, 2015. As of March 31, 2015, we had Class A 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 March 31, 2015, including one consolidated joint venture and three wholly-owned properties. As of March 31, 2015, 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
 
Construction
Loan Balance
Henderson, Nevada
 
Green Valley Crossing
 
50.0%
 
$
3,445

(a)
$
15,222

Billings, Montana
 
South Billings Center
 
100.0%
 
5,154

 

Nashville, Tennessee
 
Bellevue Mall
 
100.0%
 
23,524

(b)

Henderson, Nevada
 
Lake Mead Crossing
 
100.0%
 
10,860

 

 
 
 
 
 
 
$
42,983

(c)
$
15,222

(a)
The carrying value represents the portion of the property under development and excludes $26,407 of costs, net of accumulated depreciation, previously placed in service. The construction loan encumbers the entire property, including the portion placed in service as well as the portion currently under development.

29


(b)
The carrying value represents the portion of the property under development and excludes $3,056 of land.
(c)
There is no income attributable to developments in progress.
Asset Dispositions
During 2014 and in the first quarter of 2015, we continued to execute on our long-term portfolio repositioning strategy of disposing of select non-strategic and non-core properties in order to facilitate our external growth initiatives. The following table highlights our asset dispositions during 2014 and the three months ended March 31, 2015:
 
 
Number of
Assets Sold
 
Square
Footage
 
Consideration
 
Aggregate
Proceeds, Net (a)
 
Mortgage Debt
Extinguished (b)
2015 Dispositions (through March 31, 2015)
 
2

 
437,500

 
$
36,283

 
$
35,343

 
$
9,775

2014 Dispositions
 
24

 
2,490,100

 
$
322,989

 
$
314,377

 
$
9,713

(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 above table, we received net proceeds of $1,023 from other transactions, including condemnation awards and the sale of parcels at certain of our properties, during the year ended December 31, 2014.
Asset Acquisitions
During 2014 and in the first quarter of 2015, we continued to execute on our investment strategy of acquiring high quality, multi-tenant retail assets within our target markets. The following table highlights our asset acquisitions during 2014 and the three months ended March 31, 2015:
 
 
Number of
Assets Acquired
 
Square
Footage
 
Acquisition
Price
 
Pro Rata
Acquisition
Price (a)
 
Mortgage
Debt
 
Pro Rata
Mortgage
Debt (a)
2015 Acquisitions (b)
 
5

 
751,000

 
$
323,742

 
$
323,742

 
$

 
$

2014 Acquisitions (c)
 
11

 
1,339,400

 
$
348,061

 
$
289,561

 
$
141,698

 
$
113,358

(a)
Includes amounts associated with the 2014 acquisition of our partner’s 80% ownership interest in our MS Inland unconsolidated joint venture as well as acquisitions from unaffiliated third parties.
(b)
2015 acquisitions include the purchase of a land parcel at our Lake Worth Towne Crossing multi-tenant retail operating property. The total number of properties in our portfolio was not affected by this transaction.
(c)
2014 acquisitions include the purchase of the following: 1) the fee interest in our Bed Bath & Beyond Plaza multi-tenant retail operating property that was previously subject to a ground lease with a third party, 2) a single-user outparcel located at our Southlake Town Square multi-tenant retail operating property that was subject to a ground lease with us prior to the transaction, and 3) a parcel located at our Lakewood Town Center multi-tenant retail operating property. The total number of properties in our portfolio was not affected by these transactions.
Summary of Cash Flows
Cash flows during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014 are summarized as follows:
 
 
Three Months Ended March 31,
 
 
2015
 
2014
 
Impact
Cash provided by operating activities
 
$
71,127

 
$
58,151

 
$
12,976

Cash used in investing activities
 
(274,535
)
 
(28,645
)
 
(245,890
)
Cash provided by (used in) financing activities
 
156,011

 
(25,029
)
 
181,040

(Decrease) increase in cash and cash equivalents
 
(47,397
)
 
4,477

 
(51,874
)
Cash and cash equivalents, at beginning of period
 
112,292

 
58,190

 
 
Cash and cash equivalents, at end of period
 
$
64,895

 
$
62,667

 
 

30


Cash Flows from Operating Activities
Net cash provided by operating activities consists primarily of net income from property operations, adjusted for the following, among others, (i) depreciation and amortization, (ii) provision for impairment of investment properties, (iii) gain on sales of investment properties, and (iv) gain on extinguishment of other liabilities. Net cash provided by operating activities during the three months ended March 31, 2015 increased $12,976 primarily due to the following:
a $3,728 increase in NOI (including an increase in NOI from continuing operations of $3,647);
a $2,151 reduction in cash paid for interest;
a $738 decrease in cash paid for leasing fees and inducements; and
ordinary course fluctuations in working capital accounts.
Cash Flows used in Investing Activities
Net cash used in investing activities consists primarily of cash paid to purchase investment properties and to fund capital expenditures and tenant improvements, net of proceeds from the sales of investment properties, in addition to changes in restricted escrows. Net cash used in investing activities during the three months ended March 31, 2015 increased $245,890 primarily due to the following:
a $287,876 increase in cash paid to purchase investment properties;
partially offset by
a $16,174 net change in restricted escrow activity, of which $21,010 relates to acquisition deposits made in 2014 in connection with 2015 acquisition activity; and
a $26,139 increase in proceeds from the sales of investment properties.
We will continue to execute on our investment strategy by disposing of certain non-strategic and non-core properties. The majority of the proceeds from disposition activity for the remainder of 2015 is expected to be used to address debt maturities and repay other secured debt. In addition, tenant improvement costs associated with re-leasing vacant space and strategic remerchandising efforts across the portfolio may continue to be significant.
Cash Flows from Financing Activities
Net cash provided by financing activities primarily consists of proceeds from our Unsecured Credit Facility and the issuance of debt instruments and equity securities, partially offset by repayments on our Unsecured Credit Facility and principal payments on mortgages payable. Net cash provided by financing activities during the three months ended March 31, 2015 increased $181,040 primarily due to the following:
a $248,815 increase in proceeds from the issuance of unsecured notes in an underwritten public offering in 2015;
partially offset by
a $30,000 decrease in net proceeds from our Unsecured Credit Facility;
a $21,391 increase in principal payments on mortgages payable; and
the purchase of $12,379 of Treasury securities in connection with defeasance of mortgages payable during the three months ended March 31, 2015.
We plan to continue to address our debt maturities through a combination of proceeds from asset dispositions, capital markets transactions and our unsecured revolving line of credit.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.

31


Contractual Obligations
During the three months ended March 31, 2015, there were no material changes outside the normal course of business to the contractual obligations identified in our Annual Report on Form 10-K for the year ended December 31, 2014.
Critical Accounting Policies and Estimates
Our 2014 Annual Report on Form 10-K contains a description of our critical accounting policies, including those relating to the acquisition of investment properties, impairment of long-lived assets and unconsolidated joint ventures, cost capitalization, depreciation and amortization, development and redevelopment, investment properties held for sale, partially-owned entities, derivative and hedging, revenue recognition, accounts and notes receivable and allowance for doubtful accounts and income taxes. For the three months ended March 31, 2015, there were no significant changes to these policies.
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 March 31, 2015, we:
drew $60,000 on our unsecured revolving line of credit and used the proceeds to:
acquire Tysons Corner, a 38,000 square foot multi-tenant retail property located in Vienna, Virginia, for a gross purchase price of $31,556; and
repay a mortgage payable with a principal balance of $21,684 and an interest rate of 8.00%;
closed on the disposition of Hartford Insurance Building, a 97,400 square foot single-user office property located in Maple Grove, Minnesota, for a sales price of $6,015 with an anticipated gain on sale of approximately $860; and
closed on the disposition of Rasmussen College, a 26,700 square foot single-user office property located in Brooklyn Park, Minnesota, for a sales price of $4,800 with an anticipated gain on sale of approximately $1,334.
On April 27, 2015, our board of directors declared the cash dividend for the second quarter of 2015 for our 7.00% Series A cumulative redeemable preferred stock. The dividend of $0.4375 per preferred share will be paid on June 30, 2015 to preferred shareholders of record at the close of business on June 19, 2015.
On April 27, 2015, our board of directors declared the distribution for the second quarter of 2015 of $0.165625 per share on our outstanding Class A common stock, which will be paid on July 10, 2015 to Class A common shareholders of record at the close of business on June 26, 2015.

32


Item 3. Quantitative and Qualitative Disclosures about Market Risk
We may be exposed to interest rate changes primarily as a result of our long-term debt that is used to maintain liquidity and fund our operations. 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 March 31, 2015, we had $308,070 of variable rate debt based on LIBOR that was swapped to fixed rate debt through interest rate swaps. Our interest rate swaps as of March 31, 2015 are summarized in the following table:
 
 
Notional
Amount
 
Termination Date
 
Fair Value of
Derivative
Liability
Fixed rate portion of unsecured credit facility
 
$
300,000

 
February 24, 2016
 
$
513

Heritage Towne Crossing
 
8,070

 
September 30, 2016
 
119

 
 
$
308,070

 
 
 
$
632

For a discussion concerning the scheduled debt maturities and principal amortization of our indebtedness as of March 31, 2015 for the remainder of 2015, 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 derivative liability of approximately $994.
The combined carrying amount of our mortgages payable, unsecured notes payable and Unsecured Credit Facility is approximately $141,258 lower than the fair value as of March 31, 2015.
We had $200,222 of variable rate debt, excluding $308,070 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 1.70% as of March 31, 2015. 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 March 31, 2015, interest expense would increase by approximately $2,002 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. We minimize credit risk in derivative instruments by entering into transactions with the same party providing the financing, with the right of offset, or 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 March 31, 2015, 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 March 31, 2015 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
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 condensed consolidated 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 March 31, 2015 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, 2014.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
Not applicable.
(b)
Not applicable.
(c)
Issuer Purchases of Equity Securities
The following table summarizes the amount of shares of Class A common stock surrendered to the Company by employees to satisfy such employees’ tax withholding obligations in connection with the vesting of restricted common stock for the specified periods.
Period
 
Total number
of shares of
Class A common
stock purchased
 
Average price
paid per share
of Class A
common stock
 
Total number of
shares purchased
as part of publicly
announced plans
or programs
 
Maximum number
(or approximate dollar
value) of shares that
may yet be purchased
under the plans
or programs
January 1, 2015 to January 31, 2015
 

 
$

 
N/A
 
N/A
February 1, 2015 to February 28, 2015
 
48,400

 
$
16.06

 
N/A
 
N/A
March 1, 2015 to March 31, 2015
 
4,656

 
$
15.73

 
N/A
 
N/A
Total
 
53,056

 
$
16.03

 
N/A
 
N/A
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
 
 
 
4.1
 
Indenture, dated March 12, 2015, by and between Retail Properties of America, Inc., as issuer, and U.S. Bank National Association, as trustee (Incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed on March 12, 2015).
4.2
 
First Supplemental Indenture, dated March 12, 2015, by and between Retail Properties of America, Inc., as issuer, and U.S. Bank National Association, as trustee (Incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed on March 12, 2015).
4.3
 
Form of 4.00% Senior Notes due 2025 (Incorporated herein by reference to Exhibit 4.3 to the Registrant’s Current Report on Form 8-K filed on March 12, 2015).
10.1
 
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Steven P. Grimes (filed herewith).
10.2
 
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Angela M. Aman (filed herewith).
10.3
 
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Niall J. Byrne (filed herewith).
10.4
 
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Shane C. Garrison (filed herewith).
10.5
 
Amendment to Retention Agreement dated February 19, 2015 by and between Registrant and Dennis K. Holland (filed herewith).
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 March 31, 2015 and December 31, 2014, (ii) Condensed Consolidated Statements of Operations and Other Comprehensive Income for the Three-Month Periods Ended March 31, 2015 and 2014, (iii) Condensed Consolidated Statements of Equity for the Three-Month Periods Ended March 31, 2015 and 2014, (iv) Condensed Consolidated Statements of Cash Flows for the Three-Month Periods Ended March 31, 2015 and 2014, 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:
May 5, 2015
 
 
 
 
By:
/s/ ANGELA M. AMAN
 
 
 
 
 
Angela M. Aman
 
 
Executive Vice President,
 
 
Chief Financial Officer and Treasurer (Principal Financial Officer)
 
 
 
Date:
May 5, 2015
 
 
 
 
By:
/s/ JULIE M. SWINEHART
 
 
 
 
 
Julie M. Swinehart
 
 
Senior Vice President and Corporate Controller (Principal Accounting Officer)
 
 
 
Date:
May 5, 2015
 



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