Document
Table of Contents


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549 
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
OR
¨
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: 1-07533 
FEDERAL REALTY INVESTMENT TRUST
(Exact Name of Registrant as Specified in its Declaration of Trust) 
Maryland
 
52-0782497
(State of Organization)
 
(IRS Employer Identification No.)
 
 
1626 East Jefferson Street, Rockville, Maryland
 
20852
(Address of Principal Executive Offices)
 
(Zip Code)
(301) 998-8100
(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.    ý  Yes    ¨  No
Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    ý  Yes    ¨  No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated filer
¨
 
 
 
 
Non-Accelerated Filer
o 
Smaller reporting company
¨
 
 
 
 
 
 
Emerging growth company
¨
 
 
 
 
If an emerging growth company, indicate by checkmark if the registrant has elected not use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨  Yes    ý  No
The number of Registrant’s common shares outstanding on October 26, 2018 was 73,863,142.


Table of Contents

FEDERAL REALTY INVESTMENT TRUST
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2018

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION
 
 
Item 1.
Financial Statements
 
 
Consolidated Balance Sheets as of September 30, 2018 (unaudited) and December 31, 2017
 
 
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2018 and 2017
 
 
Consolidated Statement of Shareholders' Equity (unaudited) for the nine months ended September 30, 2018
 
 
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2018 and 2017
 
 
Notes to Consolidated Financial Statements (unaudited)
 
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
 
Item 4.
Controls and Procedures
 
 
 
 
PART II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosures
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
 
SIGNATURES



2

Table of Contents


Federal Realty Investment Trust
Consolidated Balance Sheets
 
 
September 30,
 
December 31,
 
2018
 
2017
 
(In thousands, except share and per share data)
 
(Unaudited)
 
 
ASSETS
 
 
 
Real estate, at cost
 
 
 
Operating (including $1,665,185 and $1,639,486 of consolidated variable interest entities, respectively)
$
7,256,876

 
$
6,950,188

Construction-in-progress (including $60,937 and $43,393 of consolidated variable interest entities, respectively)
481,994

 
684,873

Assets held for sale
21,990

 

 
7,760,860

 
7,635,061

Less accumulated depreciation and amortization (including $280,028 and $247,410 of consolidated variable interest entities, respectively)
(2,018,627
)
 
(1,876,544
)
Net real estate
5,742,233

 
5,758,517

Cash and cash equivalents
41,872

 
15,188

Accounts and notes receivable, net
151,403

 
209,877

Mortgage notes receivable, net
30,429

 
30,429

Investment in real estate partnerships
27,647

 
23,941

Prepaid expenses and other assets
292,080

 
237,803

TOTAL ASSETS
$
6,285,664

 
$
6,275,755

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
Liabilities
 
 
 
Mortgages payable, net (including $445,831 and $460,372 of consolidated variable interest entities, respectively)
$
476,057

 
$
491,505

Capital lease obligations
71,529

 
71,556

Notes payable, net
305,483

 
320,265

Senior notes and debentures, net
2,403,565

 
2,401,440

Accounts payable and accrued expenses
184,683

 
196,332

Dividends payable
77,809

 
75,931

Security deposits payable
17,698

 
16,667

Other liabilities and deferred credits
173,953

 
169,388

Total liabilities
3,710,777

 
3,743,084

Commitments and contingencies (Note 6)

 

Redeemable noncontrolling interests
141,448

 
141,157

Shareholders’ equity
 
 
 
Preferred shares, authorized 15,000,000 shares, $.01 par:
 
 
 
5.0% Series C Cumulative Redeemable Preferred Shares, (stated at liquidation preference $25,000 per share), 6,000 shares issued and outstanding
150,000

 
150,000

5.417% Series 1 Cumulative Convertible Preferred Shares, (stated at liquidation preference $25 per share), 399,896 shares issued and outstanding
9,997

 
9,997

Common shares of beneficial interest, $.01 par, 100,000,000 shares authorized, 73,859,280 and 73,090,877 shares issued and outstanding, respectively
741

 
733

Additional paid-in capital
2,946,555

 
2,855,321

Accumulated dividends in excess of net income
(795,649
)
 
(749,367
)
Accumulated other comprehensive income
127

 
22

Total shareholders’ equity of the Trust
2,311,771

 
2,266,706

Noncontrolling interests
121,668

 
124,808

Total shareholders’ equity
2,433,439

 
2,391,514

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
$
6,285,664

 
$
6,275,755

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

3

Table of Contents

Federal Realty Investment Trust
Consolidated Statements of Comprehensive Income
(Unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
REVENUE
 
 
 
 
 
 
 
Rental income
$
223,777

 
$
212,048

 
$
664,834

 
$
620,741

Other property income
5,183

 
5,171

 
12,942

 
10,429

Mortgage interest income
793

 
734

 
2,284

 
2,221

Total revenue
229,753

 
217,953

 
680,060

 
633,391

EXPENSES
 
 
 
 
 
 
 
Rental expenses
41,909

 
41,250

 
126,587

 
119,487

Real estate taxes
29,086

 
27,492

 
85,841

 
79,104

General and administrative
7,638

 
9,103

 
23,980

 
26,013

Depreciation and amortization
60,778

 
55,611

 
177,269

 
159,656

Total operating expenses
139,411

 
133,456

 
413,677

 
384,260

OPERATING INCOME
90,342

 
84,497

 
266,383

 
249,131

Other interest income
319

 
79

 
657

 
253

Interest expense
(28,166
)
 
(26,287
)
 
(82,116
)
 
(73,952
)
Loss from real estate partnerships
(1,440
)
 
(182
)
 
(2,693
)
 
(296
)
INCOME FROM CONTINUING OPERATIONS
61,055

 
58,107

 
182,231

 
175,136

Gain on sale of real estate, net
3,125

 
50,775

 
10,413

 
69,949

NET INCOME
64,180

 
108,882

 
192,644

 
245,085

Net income attributable to noncontrolling interests
(1,622
)
 
(2,105
)
 
(5,244
)
 
(5,827
)
NET INCOME ATTRIBUTABLE TO THE TRUST
62,558

 
106,777

 
187,400

 
239,258

Dividends on preferred shares
(2,010
)
 
(177
)
 
(6,031
)
 
(448
)
NET INCOME AVAILABLE FOR COMMON SHAREHOLDERS
$
60,548

 
$
106,600

 
$
181,369

 
$
238,810

EARNINGS PER COMMON SHARE, BASIC:
 
 
 
 
 
 
 
       Net income available for common shareholders
$
0.82

 
$
1.47

 
$
2.47

 
$
3.31

Weighted average number of common shares
73,400

 
72,091

 
73,100

 
71,983

EARNINGS PER COMMON SHARE, DILUTED:

 

 

 

       Net income available for common shareholders
$
0.82

 
$
1.47

 
$
2.47

 
$
3.30

Weighted average number of common shares
73,408

 
72,206

 
73,136

 
72,110

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME
$
63,895

 
$
109,240

 
$
192,749

 
$
246,920

 
 
 
 
 
 
 
 
COMPREHENSIVE INCOME ATTRIBUTABLE TO THE TRUST
$
62,273

 
$
107,135

 
$
187,505

 
$
241,093


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

4

Table of Contents

Federal Realty Investment Trust
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2018
(Unaudited)
 
Shareholders’ Equity of the Trust
 
 
 
 
 
Preferred Shares
 
Common Shares
 
Additional
Paid-in
Capital
 
Accumulated
Dividends in
Excess of Net
Income
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling Interests
 
Total Shareholders' Equity
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
 
 
(In thousands, except share data)
BALANCE AT DECEMBER 31, 2017
405,896

 
$
159,997

 
73,090,877

 
$
733

 
$
2,855,321

 
$
(749,367
)
 
$
22

 
$
124,808

 
$
2,391,514

January 1, 2018 adoption of new accounting standard - See Note 2

 

 

 

 

 
(6,028
)
 

 

 
(6,028
)
Net income, excluding $2,920 attributable to redeemable noncontrolling interests

 

 

 

 

 
187,400

 

 
2,324

 
189,724

Other comprehensive income - change in fair value of interest rate swaps

 

 

 

 

 

 
105

 

 
105

Dividends declared to common shareholders

 

 

 

 

 
(221,623
)
 

 

 
(221,623
)
Dividends declared to preferred shareholders

 

 

 

 

 
(6,031
)
 

 

 
(6,031
)
Distributions declared to noncontrolling interests

 

 

 

 

 

 

 
(4,010
)
 
(4,010
)
Common shares issued, net

 

 
612,727

 
6

 
77,365

 

 

 

 
77,371

Exercise of stock options

 

 
93,593

 
1

 
4,040

 

 

 

 
4,041

Shares issued under dividend reinvestment plan

 

 
13,750

 

 
1,647

 

 

 

 
1,647

Share-based compensation expense, net of forfeitures

 

 
55,773

 
1

 
9,637

 

 

 

 
9,638

Shares withheld for employee taxes

 

 
(8,189
)
 

 
(927
)
 

 

 

 
(927
)
Conversion and redemption of OP units

 

 
749

 

 
(528
)
 

 

 
(5,378
)
 
(5,906
)
Contributions from noncontrolling interests

 

 

 

 

 

 

 
3,924

 
3,924

BALANCE AT SEPTEMBER 30, 2018
405,896

 
$
159,997

 
73,859,280

 
$
741

 
$
2,946,555

 
$
(795,649
)
 
$
127

 
$
121,668

 
$
2,433,439


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

5

Table of Contents

Federal Realty Investment Trust
Consolidated Statements of Cash Flows
 (Unaudited)
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In thousands)
OPERATING ACTIVITIES
 
Net income
$
192,644

 
$
245,085

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
177,269

 
159,656

Gain on sale of real estate, net
(10,413
)
 
(69,949
)
Loss from real estate partnerships
2,693

 
296

Other, net
3,251

 
(5,182
)
Changes in assets and liabilities, net of effects of acquisitions and dispositions:
 
 
 
Proceeds from new market tax credit transaction, net of deferred costs
12,353

 

Increase in accounts receivable, net
(4,514
)
 
(1,565
)
Increase in prepaid expenses and other assets
(11,682
)
 
(4,627
)
Increase in accounts payable and accrued expenses
2,896

 
12,619

Increase in security deposits and other liabilities
219

 
3,138

Net cash provided by operating activities
364,716

 
339,471

INVESTING ACTIVITIES
 
 
 
Acquisition of real estate
(3,624
)
 
(437,772
)
Capital expenditures - development and redevelopment
(217,437
)
 
(335,666
)
Capital expenditures - other
(50,744
)
 
(52,875
)
Proceeds from sale of real estate and real estate partnership interests
142,711

 
127,538

Proceeds from partnership formation
37,998

 

Investment in real estate partnerships
(616
)
 
(502
)
Distribution from real estate partnership in excess of earnings
237

 
1,672

Leasing costs
(19,938
)
 
(11,295
)
Issuance of mortgage and other notes receivable, net
(360
)
 
(500
)
Net cash used in investing activities
(111,773
)
 
(709,400
)
FINANCING ACTIVITIES
 
 
 
Net (repayment) borrowings under revolving credit facility, net of costs
(14,500
)
 
41,500

Issuance of senior notes, net of costs

 
399,454

Repayment of mortgages and capital leases
(15,137
)
 
(54,844
)
Issuance of common shares, net of costs
81,628

 
51,189

Issuance of preferred shares, net of costs

 
145,456

Dividends paid to common and preferred shareholders
(224,311
)
 
(210,845
)
Shares withheld for employee taxes
(927
)
 
(4,216
)
Contributions from noncontrolling interests
2,753

 
13,312

Distributions to and redemptions of noncontrolling interests
(12,848
)
 
(12,882
)
Net cash (used in) provided by financing activities
(183,342
)
 
368,124

Increase (decrease) in cash, cash equivalents and restricted cash
69,601

 
(1,805
)
Cash, cash equivalents, and restricted cash at beginning of year
25,200

 
34,849

Cash, cash equivalents, and restricted cash at end of period
$
94,801

 
$
33,044


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


6

Table of Contents

Federal Realty Investment Trust
Notes to Consolidated Financial Statements
September 30, 2018
(Unaudited)

NOTE 1—BUSINESS AND ORGANIZATION
Federal Realty Investment Trust (the “Trust”) is an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of retail and mixed-use properties. Our properties are located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Mid-Atlantic and Northeast regions of the United States, California, and South Florida. As of September 30, 2018, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 105 predominantly retail real estate projects.
We operate in a manner intended to enable us to qualify as a REIT for federal income tax purposes. A REIT that distributes at least 90% of its taxable income to its shareholders each year and meets certain other conditions is not taxed on that portion of its taxable income which is distributed to its shareholders. Therefore, federal income taxes on our taxable income have been and are generally expected to be immaterial. We are obligated to pay state taxes, generally consisting of franchise or gross receipts taxes in certain states. Such state taxes also have not been material.

NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated balance sheet as of December 31, 2017, which has been derived from audited financial statements, and unaudited interim consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States (GAAP) have been omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Trust’s latest Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting of normal, recurring adjustments) necessary for a fair presentation for the periods presented have been included. The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the full year.
Principles of Consolidation
Our consolidated financial statements include the accounts of the Trust, its corporate subsidiaries, and all entities in which the Trust has a controlling interest or has been determined to be the primary beneficiary of a variable interest entity (“VIE”). The equity interests of other investors are reflected as noncontrolling interests or redeemable noncontrolling interests. All significant intercompany transactions and balances are eliminated in consolidation. We account for our interests in joint ventures, which we do not control, using the equity method of accounting. Certain 2017 amounts have been reclassified to conform to current period presentation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America, referred to as “GAAP,” requires management to make estimates and assumptions that in certain circumstances affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities, and revenues and expenses. These estimates are prepared using management’s best judgment, after considering past, current and expected events and economic conditions. Actual results could differ from these estimates.

7

Table of Contents

Recently Adopted and Issued Accounting Pronouncements
Standard
 
Description
 
Date of Adoption
 
Effect on the financial statements or significant matters
 
 
 
 
 
 
 
Recently Adopted:
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue from Contracts with Customers (Topic 606) and related updates:

ASU 2014-09, May
2014,
Revenue from
Contracts with
Customers

ASU 2015-14,
August 2015,
Revenue from
Contracts with
Customers: Deferral
of the Effective Date


ASU 2016-08,
March 2016,
Revenue from
Contracts with
Customers:
Principal versus
Agent
Considerations

ASU 2016-10, April
2016,
Revenue from
Contracts with
Customers:
Identifying
Performance
Obligations and
Licensing

ASU 2016-12, May
2016,
Revenue from
Contracts with
Customers:
Narrow-Scope
Improvements and
Practical
Expedients

ASU 2016-20,
December 2016,
Revenue from
Contracts with
Customers:
Technical
Corrections and
Improvements
 
In May 2014, the the FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09 as amended and interpreted by ASU 2015-14, ASU 2016-08, ASU 2016-10, ASU 2016-12, and ASU 2016-20, supersedes nearly all existing revenue recognition guidance under GAAP and replaces it with a core revenue recognition principle, that an entity will recognize revenue when it transfers control 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, and creates a five-step model for revenue recognition in accordance with this principle. ASU 2014-09 also requires new disclosures in both interim and annual reporting periods. The guidance in ASU 2014-09 does not apply to contracts within the scope of ASC 840, Leases.

ASU 2016-08 clarifies how to identify the unit of accounting for the principal versus agent evaluation, how to apply the control principle to certain types of arrangements, such as service transactions, and reframed the indicators in the guidance to focus on evidence that an entity is acting as a principal rather than as an agent.

ASU 2016-10 clarifies the existing guidance on identifying performance obligations and licensing implementation.

ASU 2016-12 adds practical expedients related to the transition for contract modifications and further defines a completed contract, clarifies the objective of the collectability assessment and how revenue is recognized if collectability is not probable,
and when non-cash considerations should be measured.

ASU 2016-20 corrects or improves guidance in thirteen narrowly focused aspects of the guidance.

The standard allows for either "full retrospective" adoption, meaning the standard is applied to all of the periods presented, or "modified retrospective" adoption, meaning the cumulative impact of applying the standard is recognized in accumulated dividends in excess of net income on the date of application.
 
January 2018
 
We implemented the new revenue recognition guidance retrospectively with the cumulative effect recognized in accumulated dividends in excess of net income at the date of initial application. The primary impact relates to condominium sales. Most of our revenue is accounted for under the leasing standard, and therefore is not subject to this standard.

In 2017, gains on contracted condominium sales were recognized using the percentage-of-completion method, with the gain recognized once certain criteria were met in advance of legal closing. Under the new guidance, condominium sale gains are recognized as the condominium units are legally sold, which is typically upon closing. $5.4 million of condominium gains (net of $1.4 million of income taxes) recorded under the percentage-of-completion method in 2017 were reversed through opening accumulated dividends in excess of net income.

With the exception of condominium sales, the adoption of the standard did not have a significant impact on our consolidated financial statements, with an additional cumulative effect of $0.6 million reflected in opening accumulated dividends in excess of net income.
 
 
 
 
 
 
 

8

Table of Contents

Standard
 
Description
 
Date of Adoption
 
Effect on the financial statements or significant matters
ASU 2016-15, August 2016, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
 
This ASU provides classification guidance for eight specific topics including debt extinguishment costs, contingent consideration payments made after a business combination, and distributions received from equity method investees.
 
January 2018
 
This standard did not have an impact on our consolidated financial statements.
 
 
 
 
 
 
 
ASU 2016-18, November 2016, Statement of Cash Flows (Topic 203) - Restricted Cash
 
This ASU requires that the statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or cash equivalents. Amounts generally described as restricted cash and equivalents should be included with cash and cash equivalents when reconciling the beginning and end of period total amounts on the statement of cash flows.
 
January 2018
 
Prior to the adoption of this standard, "net cash provided by operating activities" was $339.6 million and "net cash used in investing activities" was $708.3 million, for the nine months ended September 30, 2017. After the adoption, "net cash provided by operating activities" was $339.5 million and "net cash used in investing activities" was $709.4 million, for the nine months ended September 30, 2017. The reclassification is reflected in "increase in cash, cash equivalents, and restricted cash" in the Consolidated Statements of Cash Flows. See additional disclosures in "Consolidated Statement of Cash Flows - Supplemental Disclosures."
 
 
 
 
 
 
 
ASU 2017-05, February 2017, Other Income - Gains and Losses from the Recognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
 
This ASU clarifies that ASC 610-20 applies to all nonfinancial assets (including real estate) for which the counterparty is not a customer and also clarifies that all businesses are derecognized using the deconsolidation guidance. Additionally, it defines an insubstance nonfinancial asset as a financial asset that is promised to a counterparty in a contract in which substantially all of the fair value of the assets promised in the contract is concentrated in nonfinancial assets, which excludes cash or cash equivalents and liabilities.

Under the current guidance, a partial sale is recognized and carryover basis is used for the retained interest, however, the new guidance eliminates the use of carryover basis and generally requires a full gain to be recognized for prospective disposals of nonfinancial assets.
 
January 2018
 
The new guidance impacts the gain recognized when a real estate asset is sold to a non-customer and a noncontrolling interest is retained.
The adoption of this standard did not have a significant impact on our consolidated financial statements.
 
 
 
 
 
 
 
ASU 2017-09, May 2017, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
 
The ASU clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications. Under the new guidance, an entity will not apply modification accounting if the awards' fair value, vesting conditions, and the classification of the award as equity or a liability are the same immediately before and after the change. The new guidance is applied prospectively to awards granted or modified after the adoption date.
 
January 2018
 
The adoption of this standard did not have an impact to our financial statements, as there have been no modifications to awards for the nine months ended September 30, 2018.
 
 
 
 
 
 
 

9

Table of Contents

Standard
 
Description
 
Date of Adoption
 
Effect on the financial statements or significant matters
Not Yet Adopted:
 
 
 
 
 
 
 
 
 
 
 
 
 
Leases (Topic 842) and related updates:

ASU 2016-02,
  February 2016,
  Leases (Topic 842)

  ASU 2018-10, July
  2018, Codification
  improvements to Topic
  842, Leases
  
  ASU 2018-11, July
  2018, Leases (Topic
  842)
 
This ASU significantly changes the accounting for leases by requiring lessees to recognize assets and liabilities for leases greater than 12 months on their balance sheet. The lessor model stays substantially the same; however, there were modifications to conform lessor accounting with the lessee model, eliminate real estate specific guidance, further define certain lease and non-lease components, and change the definition of initial direct costs of leases requiring significantly more leasing related costs to be expensed upfront.

ASU 2018-10 provides narrow amendments that clarify how to apply certain aspects of the guidance in ASU 2016-02. ASU 2018-11 provides the option of an additional transition method, by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. It also provides lessors an option to not separate lease and non-lease components when certain criteria are met.
 
January 2019
 
We are currently assessing the full impact of this standard to our consolidated financial statements. We have, however, identified certain areas which will be impacted as follows:

We are currently a lessee for land underneath all or a portion of 14 properties that are subject to ground leases (in addition to 4 other properties that we currently account for as capital leases). Upon adoption, we will recognize the lease obligation for the 14 ground leases and a corresponding right of use asset on our consolidated balance sheet.

Additionally, we will no longer be able to capitalize certain internal leasing and external legal leasing costs. For the nine months ended September 30, 2018, we have capitalized approximately $5.3 million of internal leasing and external legal leasing costs, of which a portion will will be expensed when we adopt ASU 2016-02.

Consolidated Statements of Cash Flows—Supplemental Disclosures
The following tables provide supplemental disclosures related to the Consolidated Statements of Cash Flows:

 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
(In thousands)
SUPPLEMENTAL DISCLOSURES:
 
 
 
Total interest costs incurred
$
96,903

 
$
92,520

Interest capitalized
(14,787
)
 
(18,568
)
Interest expense
$
82,116

 
$
73,952

Cash paid for interest, net of amounts capitalized
$
85,614

 
$
70,486

Cash paid for income taxes
$
699

 
$
342

NON-CASH INVESTING AND FINANCING TRANSACTIONS (1):
 
 
 
Mortgage loan refinanced
$

 
$
166,823

Mortgage loans assumed with acquisition
$

 
$
79,401

DownREIT operating partnership units issued with acquisition of noncontrolling interest
$

 
$
5,918

DownREIT operating partnership units redeemed for common shares
$
101

 
$
2,569

Shares issued under dividend reinvestment plan
$
1,431

 
$
1,528

(1) See Note 3 for additional disclosures relating to our investment in the Assembly Row hotel joint venture.

10

Table of Contents

 
September 30,
 
December 31,
 
2018
 
2017
 
(In thousands)
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH:
 
 
 
Cash and cash equivalents
$
41,872

 
$
15,188

Restricted cash (1)
52,929

 
10,012

Total cash, cash equivalents, and restricted cash
$
94,801

 
$
25,200

(1)
Restricted cash balances are included in "prepaid expenses and other assets" on our consolidated balance sheets.


NOTE 3—REAL ESTATE
On June 15, 2018, we formed a new joint venture to develop Jordan Downs Plaza which, when completed, will be an approximately 113,000 square foot grocery anchored shopping center located in Los Angeles County, California. We initially invested $34.4 million as a result of a pre-funding requirement for equity to be advanced prior to the start of construction. We own approximately 91% of the venture, and control the 9.4 acre land parcel on which the shopping center will be constructed under a long-term ground lease that expires June 15, 2093 (including two 10-year option periods which may be exercised at our option). The Jordan Downs Plaza development is expected to generate income tax credits under the New Market Tax Credit Program ("NMTC") which was provided for in the Community Renewal Tax Relief Act of 2000 ("the Act") and is intended to induce investment in underserved areas of the United States. The Act permits taxpayers to claim credits against their Federal income taxes for qualified investments. A third party bank contributed $13.9 million to the development, and is entitled to the related tax credit benefits, but they do not have an interest in the underlying economics of the property. The transaction also includes a put/call provision whereby we may be obligated or entitled to purchase the third party bank’s interest. We believe the put will be exercised at its $1,000 strike price. Based on our assessment of control, we concluded that the project and certain other transaction related entities should be consolidated. The $13.9 million in proceeds received in exchange for the transfer of the tax credits has been deferred and will be recognized when the tax benefits are delivered to the third party bank without risk of recapture. Direct and incremental costs of $1.6 million incurred in structuring the NMTC transaction have also been deferred. The Trust anticipates recognizing the net cash received as revenue upon completion of the seven-year NMTC compliance period. Cash in escrow at September 30, 2018 of $39.7 million reflects cash that will ultimately be used for the development of the shopping center. The cash is held in escrow pursuant to the new market tax credit transaction documents and will be released as qualified development expenditures are incurred.
In August 2018, we contributed hotel related assets valued at $44.0 million to our Assembly Row hotel joint venture, and received a cash distribution of $38.0 million. At September 30, 2018, our investment in the venture was $5.6 million. The joint venture is considered a variable interest entity controlled by our partner, and as a result, we are using the equity method to account for our investment.
On August 16, 2018, we sold the residential building at our Chelsea Commons property in Chelsea, Massachusetts for a sales price of $15.0 million, resulting in a gain of $3.1 million.
During the three and nine months ended September 30, 2018, we closed on the sale of 8 and 167 condominium units, respectively, at our Assembly Row and Pike & Rose properties (combined) and received proceeds net of closing costs of $6.7 million and $128.1 million, respectively. For the nine months ended September 30, 2018, we recognized a gain of $7.3 million, net of $1.7 million of income taxes. The cost basis for remaining condominium units that are ready for their intended use as of September 30, 2018 is $22.0 million, and is included in "assets held for sale" on our consolidated balance sheets.

NOTE 4—DEBT
On March 1, 2018, we repaid the $10.5 million mortgage loan on The Grove at Shrewsbury (West) at par.
On August 10, 2018, we exercised our option to extend the maturity date of our $275.0 million unsecured term loan by one year to November 21, 2019.
During the three and nine months ended September 30, 2018, the maximum amount of borrowings outstanding under our $800.0 million revolving credit facility was $161.0 million and $177.0 million, respectively, and the weighted average interest rate, before amortization of debt fees, was 2.8% and 2.6%, respectively. During the three and nine months ended September 30, 2018, the weighted average borrowings outstanding were $85.9 million and $101.8 million, respectively. At September 30, 2018, the outstanding balance was $26.5 million. Our revolving credit facility, term loan and certain notes require us to comply

11

Table of Contents

with various financial covenants, including the maintenance of minimum shareholders' equity and debt coverage ratios and a maximum ratio of debt to net worth. As of September 30, 2018, we were in compliance with all default related debt covenants.

NOTE 5—FAIR VALUE OF FINANCIAL INSTRUMENTS
Except as disclosed below, the carrying amount of our financial instruments approximates their fair value. The fair value of our mortgages payable, notes payable and senior notes and debentures is sensitive to fluctuations in interest rates. Quoted market prices (Level 1) were used to estimate the fair value of our marketable senior notes and debentures and discounted cash flow analysis (Level 2) is generally used to estimate the fair value of our mortgages and notes payable. Considerable judgment is necessary to estimate the fair value of financial instruments. The estimates of fair value presented herein are not necessarily indicative of the amounts that could be realized upon disposition of the financial instruments. A summary of the carrying amount and fair value of our mortgages payable, notes payable and senior notes and debentures is as follows:

 
September 30, 2018
 
December 31, 2017
Carrying
Value
 
Fair Value
 
Carrying
Value
 
Fair Value
(In thousands)
Mortgages and notes payable
$
781,540

 
$
774,192

 
$
811,770

 
$
824,419

Senior notes and debentures
$
2,403,565

 
$
2,350,325

 
$
2,401,440

 
$
2,498,445

 
As of September 30, 2018, we have two interest rate swap agreements with a notional amount of $275.0 million that are measured at fair value on a recurring basis. The interest rate swap agreements fix the variable portion of our $275.0 million term loan at 1.72% through November 1, 2018. We assess effectiveness of our cash flow hedges both at inception and on an ongoing basis. The effective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into interest expense as interest is incurred on the related variable rate debt. Within the next 12 months, we expect to reclassify an estimated $0.1 million as a decrease to interest expense. Our cash flow hedges become ineffective if critical terms of the hedging instrument and the debt instrument do not perfectly match such as notional amounts, settlement dates, reset dates, calculation period and LIBOR rate. In addition, we evaluate the default risk of the counterparty by monitoring the credit-worthiness of the counterparty. When ineffectiveness exists, the ineffective portion of changes in fair value of the interest rate swaps associated with our cash flow hedges is recognized in earnings in the period affected. Hedge ineffectiveness has not impacted earnings as of September 30, 2018, and we do not anticipate it will have a significant effect in the future.
The fair values of the interest rate swap agreements are based on the estimated amounts we would receive or pay to terminate the contracts at the reporting date and are determined using interest rate pricing models and interest rate related observable inputs. The fair value of our swaps at September 30, 2018 was an asset of $0.1 million and is included in "prepaid expenses and other assets" on our consolidated balance sheets. For the three and nine months ended September 30, 2018, the change in valuation on our interest rate swaps resulted in a $0.3 million decrease in our derivative asset and a $0.1 million increase in our derivative asset, respectively, (including $0.2 million and $0.3 million, respectively, reclassified from other comprehensive income as a decrease to interest expense). The change in valuation on our interest rate swaps is included in "accumulated other comprehensive income."
A summary of our financial assets that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows:
 
September 30, 2018
 
December 31, 2017
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(In thousands)
Interest rate swaps
$

 
$
133

 
$

 
$
133

 
$

 
$
22

 
$

 
$
22

One of our equity method investees has two interest rate swaps which qualify for cash flow hedge accounting. During the three and nine months ended September 30, 2018 our share of the change in fair value of the related swaps included in "accumulated other comprehensive income" was less than $0.1 million.

12

Table of Contents


NOTE 6—COMMITMENTS AND CONTINGENCIES
We are sometimes involved in lawsuits, warranty claims, and environmental matters arising in the ordinary course of business. Management makes assumptions and estimates concerning the likelihood and amount of any potential loss relating to these matters.
We are currently a party to various legal proceedings. We accrue a liability for litigation if an unfavorable outcome is probable and the amount of loss can be reasonably estimated. If an unfavorable outcome is probable and a reasonable estimate of the loss is a range, we accrue the best estimate within the range; however, if no amount within the range is a better estimate than any other amount, the minimum within the range is accrued. Legal fees related to litigation are expensed as incurred. We do not believe that the ultimate outcome of these matters, either individually or in the aggregate, could have a material adverse effect on our financial position or overall trends in results of operations; however, litigation is subject to inherent uncertainties. Also under our leases, tenants are typically obligated to indemnify us from and against all liabilities, costs and expenses imposed upon or asserted against us (1) as owner of the properties due to certain matters relating to the operation of the properties by the tenant, and (2) where appropriate, due to certain matters relating to the ownership of the properties prior to their acquisition by us.
Under the terms of certain partnership agreements, the partners have the right to exchange their operating partnership units for cash or the same number of our common shares, at our option. A total of 739,287 downREIT operating partnership units are outstanding which have a total fair value of $93.5 million, based on our closing stock price on September 30, 2018.

NOTE 7—SHAREHOLDERS’ EQUITY
The following table provides a summary of dividends declared and paid per share:

 
Nine Months Ended September 30,
 
2018
 
2017
 
Declared
 
Paid
 
Declared
 
Paid
Common shares
$
3.020

 
$
3.000

 
$
2.960

 
$
2.940

5.417% Series 1 Cumulative Convertible Preferred shares
$
1.016

 
$
1.016

 
$
1.016

 
$
1.016

5.0% Series C Cumulative Redeemable Preferred shares (1)
$
0.938

 
$
0.993

 
$

 
$

(1)
Amount represents dividends per depository share, each representing 1/1000th of a share.

On May 7, 2018, we replaced our existing at-the-market (“ATM”) equity program with a new ATM program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three months ended September 30, 2018, we sold 413,395 common shares at a weighted average price per share of $129.01 for net cash proceeds of $52.8 million and paid $0.5 million in commissions and less than $0.1 million in additional offering expenses related to the sales of these common shares. For the nine months ended September 30, 2018, we sold 612,658 common shares at a weighted average price per share of $127.86 for net cash proceeds of $77.4 million and paid $0.8 million in commissions and $0.2 million in additional offering expenses related to the sales of these common shares. As of September 30, 2018, we had the capacity to issue up to $321.7 million in common shares under our ATM equity program.


13

Table of Contents


NOTE 8—COMPONENTS OF RENTAL INCOME
The principal components of rental income are as follows:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Minimum rents
 
 
 
 
 
 
 
Retail and commercial
$
153,923

 
$
147,971

 
$
459,496

 
$
434,390

Residential
18,746

 
13,837

 
51,866

 
40,781

Cost reimbursement
44,044

 
43,602

 
131,779

 
124,997

Percentage rents
2,392

 
2,304

 
7,873

 
7,524

Other
4,672

 
4,334

 
13,820

 
13,049

Total rental income
$
223,777

 
$
212,048

 
$
664,834

 
$
620,741


Minimum rents include the following:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In millions)
Straight-line rents
$
1.4

 
$
3.9

 
$
4.7

 
$
11.3

Amortization of above market leases
$
(1.2
)
 
$
(1.6
)
 
$
(4.2
)
 
$
(4.4
)
Amortization of below market leases
$
3.2

 
$
2.5

 
$
8.0

 
$
7.7


NOTE 9—SHARE-BASED COMPENSATION PLANS
A summary of share-based compensation expense included in net income is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Grants of common shares and options
$
2,494

 
$
2,945

 
$
9,638

 
$
9,402

Capitalized share-based compensation
157

 
(405
)
 
(769
)
 
(1,103
)
Share-based compensation expense
$
2,651

 
$
2,540

 
$
8,869

 
$
8,299


NOTE 10—EARNINGS PER SHARE
We have calculated earnings per share (“EPS”) under the two-class method. The two-class method is an earnings allocation methodology whereby EPS for each class of common stock and participating securities is calculated according to dividends declared and participation rights in undistributed earnings. For the three and nine months ended September 30, 2018 and 2017, we had 0.2 million weighted average unvested shares outstanding, which are considered participating securities. Therefore, we have allocated our earnings for basic and diluted EPS between common shares and unvested shares; the portion of earnings allocated to the unvested shares is reflected as “earnings allocated to unvested shares” in the reconciliation below.
In the dilutive EPS calculation, dilutive stock options were calculated using the treasury stock method consistent with prior periods. There were 682 anti-dilutive stock options for both the three and nine months ended September 30, 2018 and 2017. The conversions of downREIT operating partnership units and 5.417% Series 1 Cumulative Convertible Preferred Shares are anti-dilutive for all periods presented and accordingly, have been excluded from the weighted average common shares used to compute diluted EPS.

14

Table of Contents

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share data)
NUMERATOR
 
 
 
 
 
 
 
Income from continuing operations
$
61,055

 
$
58,107

 
$
182,231

 
$
175,136

Less: Preferred share dividends
(2,010
)
 
(177
)
 
(6,031
)
 
(448
)
Less: Income from continuing operations attributable to noncontrolling interests
(1,622
)
 
(2,105
)
 
(5,244
)
 
(5,537
)
Less: Earnings allocated to unvested shares
(211
)
 
(317
)
 
(719
)
 
(785
)
Income from continuing operations available for common shareholders
57,212

 
55,508

 
170,237

 
168,366

Gain on sale of real estate, net
3,125

 
50,775

 
10,413

 
69,659

Net income available for common shareholders, basic and diluted
$
60,337

 
$
106,283

 
$
180,650

 
$
238,025

DENOMINATOR
 
 
 
 
 
 
 
Weighted average common shares outstanding—basic
73,400

 
72,091

 
73,100

 
71,983

Stock options
8

 
115

 
36

 
127

Weighted average common shares outstanding—diluted
73,408

 
72,206

 
73,136

 
72,110

 
 
 
 
 
 
 
 
EARNINGS PER COMMON SHARE, BASIC:
 
 
 
 
 
 
 
Net income available for common shareholders
$
0.82

 
$
1.47

 
$
2.47

 
$
3.31

EARNINGS PER COMMON SHARE, DILUTED:
 
 
 
 
 
 
 
Net income available for common shareholders
$
0.82

 
$
1.47

 
$
2.47

 
$
3.30

Income from continuing operations attributable to the Trust
$
59,433

 
$
56,002

 
$
176,987

 
$
169,599



15

Table of Contents

ITEM 2.    MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
The following discussion should be read in conjunction with the consolidated interim financial statements and notes thereto appearing in Item 1 of this report and the more detailed information contained in our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”) on February 13, 2018.
This Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, Section 21E of the Securities Exchange Act of 1934 and the Private Securities Litigation Reform Act of 1995. When we refer to forward-looking statements or information, sometimes we use words such as “may,” “will,” “could,” “should,” “plans,” “intends,” “expects,” “believes,” “estimates,” “anticipates” and “continues.” Forward-looking statements are not historical facts or guarantees of future performance and involve certain known and unknown risks, uncertainties, and other factors, many of which are outside our control, that could cause actual results to differ materially from those we describe.
Given these uncertainties, readers are cautioned not to place undue reliance on any forward-looking statements that we make, including those in this Quarterly Report on Form 10-Q. Except as may be required by law, we make no promise to update any of the forward-looking statements as a result of new information, future events or otherwise. You should carefully review the risks and the risk factors included in our Annual Report on Form 10-K for the year ended December 31, 2017 and under Part II, Item 1A in this Quarterly Report on Form 10-Q, before making any investments in us.
Overview
We are an equity real estate investment trust (“REIT”) specializing in the ownership, management, and redevelopment of high quality retail and mixed-use properties located primarily in densely populated and affluent communities in strategically selected metropolitan markets in the Northeast and Mid-Atlantic regions of the United States, California, and South Florida. As of September 30, 2018, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 105 predominantly retail real estate projects comprising approximately 24.3 million square feet. In total, the real estate projects were 94.8% leased and 93.7% occupied at September 30, 2018.
2018 Property Acquisitions and Dispositions
On June 15, 2018, we formed a new joint venture to develop Jordan Downs Plaza which, when completed, will be an approximately 113,000 square foot grocery anchored shopping center located in Los Angeles County, California. The total investment at September 30, 2018 was $34.4 million as a result of a pre-funding requirement for equity to be advanced prior to the start of construction. We own approximately 91% of the venture, and control the 9.4 acre land parcel on which the shopping center will be constructed under a long-term ground lease that expires June 15, 2093 (including two 10-year option periods which may be exercised at our option). The Jordan Downs Plaza development is expected to generate income tax credits under the New Market Tax Credit Program ("NMTC") which was provided for in the Community Renewal Tax Relief Act of 2000 ("the Act") and is intended to induce investment in underserved areas of the United States. The Act permits taxpayers to claim credits against their Federal income taxes for qualified investments. A third party bank contributed $13.9 million to the development, and is entitled to the related tax credit benefits, but they do not have an interest in the underlying economics of the property. The transaction also includes a put/call provision whereby we may be obligated or entitled to purchase the third party bank’s interest. We believe the put will be exercised at its $1,000 strike price. Based on our assessment of control, we concluded that the project and certain other transaction related entities should be consolidated. The $13.9 million in proceeds received in exchange for the transfer of the tax credits has been deferred and will be recognized when the tax benefits are delivered to the third party bank without risk of recapture. Direct and incremental costs of $1.6 million incurred in structuring the NMTC transaction have also been deferred. The Trust anticipates recognizing the net cash received as revenue upon completion of the seven-year NMTC compliance period. Cash in escrow at September 30, 2018 of $39.7 million reflects cash that will ultimately be used for the development of the shopping center. The cash is held in escrow pursuant to the new market tax credit transaction documents and will be released as qualified development expenditures are incurred.
In August 2018, we contributed hotel related assets valued at $44.0 million to our Assembly Row hotel joint venture, and received a cash distribution of $38.0 million. At September 30, 2018, our investment in the venture was $5.6 million. The joint venture is considered a variable interest entity controlled by our partner, and as a result, we are using the equity method to account for our investment.
On August 16, 2018, we sold the residential building at our Chelsea Commons property in Chelsea, Massachusetts for a sales price of $15.0 million, resulting in a gain of $3.1 million.

16

Table of Contents

During the three and nine months ended September 30, 2018, we closed on the sale of 8 and 167 condominium units, respectively, at our Assembly Row and Pike & Rose properties (combined) and received proceeds net of closing costs of $6.7 million and $128.1 million, respectively. For the nine months ended September 30, 2018, we recognized a gain of $7.3 million, net of $1.7 million of income taxes. The cost basis for remaining condominium units that are ready for their intended use as of September 30, 2018 is $22.0 million, and is included in "assets held for sale" on our consolidated balance sheets.
2018 Significant Debt and Equity Transactions
On March 1, 2018, we repaid the $10.5 million mortgage loan on The Grove at Shrewsbury (West) at par.
On August 10, 2018, we exercised our option to extend the maturity date of our $275.0 million unsecured term loan by one year to November 21, 2019.
On May 7, 2018, we replaced our existing at-the-market (“ATM”) equity program with a new ATM program in which we may from time to time offer and sell common shares having an aggregate offering price of up to $400.0 million. We intend to use the net proceeds to fund potential acquisition opportunities, fund our development and redevelopment pipeline, repay amounts outstanding under our revolving credit facility and/or for general corporate purposes. For the three months ended September 30, 2018, we sold 413,395 common shares at a weighted average price per share of $129.01 for net cash proceeds of $52.8 million and paid $0.5 million in commissions and less than $0.1 million in additional offering expenses related to the sales of these common shares. For the nine months ended September 30, 2018, we sold 612,658 common shares at a weighted average price per share of $127.86 for net cash proceeds of $77.4 million and paid $0.8 million in commissions and $0.2 million in additional offering expenses related to the sales of these common shares. As of September 30, 2018, we had the capacity to issue up to $321.7 million in common shares under our ATM equity program.
Capitalized Costs
Certain external and internal costs directly related to the development, redevelopment and leasing of real estate, including pre-construction costs, real estate taxes, insurance, construction costs and salaries and related costs of personnel directly involved, are capitalized. We capitalized certain external and internal costs related to both development and redevelopment activities of $203 million and $6 million, respectively, for the nine months ended September 30, 2018, and $320 million and $6 million, respectively, for the nine months ended September 30, 2017. We capitalized external and internal costs related to other property improvements of $43 million and $2 million, respectively, for the nine months ended September 30, 2018, and $47 million and $2 million for the nine months ended September 30, 2017. We capitalized external and internal costs related to leasing activities of $16 million and $5 million, respectively, for the nine months ended September 30, 2018, and $6 million and $5 million, respectively, for the nine months ended September 30, 2017. The amount of capitalized internal costs for salaries and related benefits for development and redevelopment activities, other property improvements, and leasing activities were $6 million, $2 million, and $4 million, respectively, for the nine months ended September 30, 2018, and $6 million, $2 million, and $5 million, respectively, for the nine months ended September 30, 2017. Total capitalized costs were $275 million and $386 million for the nine months ended September 30, 2018 and 2017, respectively.
Recently Adopted and Issued Accounting Pronouncements
See Note 2 to the consolidated financial statements.
Outlook
We seek growth in earnings, funds from operations, and cash flows primarily through a combination of the following:
growth in our comparable property portfolio,
growth in our portfolio from property development and redevelopments, and
expansion of our portfolio through property acquisitions.
Our comparable property growth is primarily driven by increases in rental rates on new leases and lease renewals, changes in portfolio occupancy, and the redevelopment of those assets. Over the long-term, the infill nature and strong demographics of our properties provide a strategic advantage allowing us to maintain relatively high occupancy and generally increase rental rates. We continue to see strong levels of interest from prospective tenants for our retail spaces; however, the time it takes to complete new lease deals is longer, as tenants have become more selective and more deliberate in their decision-making process. We have also experienced extended periods of time for some government agencies to process permits and inspections further delaying rent commencement on newly leased spaces. Additionally, we have seen an overall decrease in the number of tenants available to fill anchor spaces, and have seen an uptick in the number of retail tenants closing early and/or filing for bankruptcy. We believe the locations and nature of our centers and diverse tenant base partially mitigates any potential negative

17

Table of Contents

changes in the economic environment. However, any significant reduction in our tenants' abilities to pay base rent, percentage rent or other charges will adversely affect our financial condition and results of operations. We seek to maintain a mix of strong national, regional, and local retailers. At September 30, 2018, no single tenant accounted for more than 2.7% of annualized base rent.
Our properties are located primarily in densely populated and/or affluent areas with high barriers to entry which allow us to take advantage of redevelopment opportunities that enhance our operating performance through renovation, expansion, reconfiguration, and/or retenanting. We evaluate our properties on an ongoing basis to identify these types of opportunities. We currently have redevelopment projects underway with a projected total cost of approximately $208 million that we expect to stabilize in the next several years.
We continue our ongoing redevelopment efforts at Santana Row and are under construction on an eight story 301,000 square foot office building which will include an additional 18,000 square feet of retail space and 1,300 parking spaces. The building is expected to cost between $205 million and $215 million, to be delivered in 2019, and the office portion is 100% pre-leased. After current phases, we have approximately 4 acres remaining for further redevelopment and entitlements in place for an additional 395 residential units and 321,000 square feet of commercial space. Additionally, we control 12 acres of land across from Santana Row, which has approximately 1 million square feet of commercial space entitlements.
We continue to invest in our long-term multi-phased mixed-use development projects at Assembly Row in Somerville, Massachusetts and Pike & Rose in North Bethesda, Maryland which we expect to be involved in over the coming years.
Construction continues on Phase II of Assembly Row which includes approximately 161,000 square feet of retail space, 447 residential units, and a 158 room boutique hotel (owned and operated by a joint venture in which we are a partner). Total expected costs range from $290 million to $305 million and delivery is expected to continue through early 2019. As of September 30, 2018, approximately 117,000 square feet of retail space and the 158 room hotel have opened, and all of the residential units have been completed. Phase II also includes 122 for-sale condominium units of which 107 units have closed as of September 30, 2018. The condominium units have an expected total cost of $81 million. Additionally, Partners HealthCare built a 741,500 square foot office building as a part of Phase II.
Construction also continues on Phase II of Pike & Rose which includes approximately 216,000 square feet of retail space, 272 residential units, and a 177 room boutique hotel (owned and operated by a joint venture in which we are a partner). As of September 30, 2018, approximately 182,000 square feet of retail space and the 177 room hotel have opened, and all of the residential units have been completed. Total expected costs range from $200 million to $207 million and remaining delivery is expected to continue through 2019. As of September 30, 2018, we closed on the sale of 60 of the 99 for-sale condominium units in Phase II. The condominium units have an expected total cost of $62 million.
Additionally, at Pike & Rose, we have commenced construction on a 212,000 square foot office building (which includes 4,000 square feet of ground floor retail space), and will include over 600 additional parking spaces. The building is expected to cost between $128 million and $135 million and is projected to open beginning in 2021.
Including costs incurred in the first nine months of 2018, we expect to invest between $70 million and $85 million at Assembly Row and Pike & Rose in 2018.
The development of future phases of Assembly Row, Pike & Rose and Santana Row will be pursued opportunistically based on, among other things, market conditions, tenant demand, and our evaluation of whether those phases will generate an appropriate financial return.
We continue to review acquisition opportunities in our primary markets that complement our portfolio and provide long-term growth opportunities. Initially, some of our acquisitions do not contribute significantly to earnings growth; however, we believe they provide long-term re-leasing growth, redevelopment opportunities, and other strategic opportunities. Any growth from acquisitions is contingent on our ability to find properties that meet our qualitative standards at prices that meet our financial hurdles. Changes in interest rates may affect our success in achieving earnings growth through acquisitions by affecting both the price that must be paid to acquire a property, as well as our ability to economically finance the property acquisition. Generally, our acquisitions are initially financed by available cash and/or borrowings under our revolving credit facility which may be repaid later with funds raised through the issuance of new equity or new long-term debt. We may also finance our acquisitions through the issuance of common shares, preferred shares, or downREIT units as well as through new or assumed mortgages and property sales.
At September 30, 2018, the leasable square feet in our properties was 94.8% leased and 93.7% occupied. The leased rate is higher than the occupied rate due to leased spaces that are being redeveloped or improved or that are awaiting permits and, therefore, are not yet ready to be occupied. Our occupancy and leased rates are subject to variability over time due to factors

18

Table of Contents

including acquisitions, the timing of the start and stabilization of our redevelopment projects, lease expirations and tenant closings and bankruptcies.
Lease Rollovers
For the third quarter of 2018, we signed leases for a total of 469,000 square feet of retail space including 448,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 6% on a cash basis and 18% on a straight-line basis. New leases for comparable spaces were signed for 152,000 square feet at an average rental increase of 13% on a cash basis and 27% on a straight-line basis. Renewals for comparable spaces were signed for 296,000 square feet at an average rental increase of 2% on a cash basis and 13% on a straight-line basis. Tenant improvements and incentives for comparable spaces were $25.91 per square foot, of which, $73.96 per square foot was for new leases and $1.29 per square foot was for renewals for the three months ended September 30, 2018.

For the nine months ended September 30, 2018, we signed leases for a total of 1,349,000 square feet of retail space including 1,300,000 square feet of comparable space leases (leases for which there was a prior tenant) at an average rental increase of 11% on a cash basis and 22% on a straight-line basis. New leases for comparable spaces were signed for 559,000 square feet at an average rental increase of 21% on a cash basis and 34% on a straight-line basis. Renewals for comparable spaces were signed for 742,000 square feet at an average rental increase of 4% on a cash basis and 14% on a straight-line basis. Tenant improvements and incentives for comparable spaces were $28.06 per square foot, of which, $62.75 per square foot was for new leases and $1.94 per square foot was for renewals for the nine months ended September 30, 2018.
The rental increases associated with comparable spaces generally include all leases signed in arms-length transactions reflecting market leverage between landlords and tenants during the period. The comparison between average rent for expiring leases and new leases is determined by including minimum rent and percentage rent paid on the expiring lease and minimum rent and in some instances, projections of first lease year percentage rent, to be paid on the new lease. In atypical circumstances, management may exercise judgment as to how to most effectively reflect the comparability of spaces reported in this calculation. The change in rental income on comparable space leases is impacted by numerous factors including current market rates, location, individual tenant creditworthiness, use of space, market conditions when the expiring lease was signed, capital investment made in the space and the specific lease structure. Tenant improvements and incentives include the total dollars committed for the improvement (fit out) of a space as it relates to a specific lease and, except for redevelopments, may also include base building costs (i.e. expansion, escalators or new entrances) which are required to make the space leasable. Incentives include amounts paid to tenants as inducement to sign a lease that do not represent building improvements.
The leases signed in 2018 generally become effective over the following two years though some may not become effective until 2021 and beyond. Further, there is risk that some new tenants will not ultimately take possession of their space and that tenants for both new and renewal leases may not pay all of their contractual rent due to operating, financing or other matters. However, these increases do provide information about the tenant/landlord relationship and the potential increase we may achieve in rental income over time.
Historically, we have executed comparable space leases for 1.2 to 1.6 million square feet of retail space each year, and expect that volume for 2018 will be in line with overall positive increases in rental income. However, changes in rental income associated with individual signed leases on comparable spaces may be positive or negative, and we can provide no assurance that the rents on new leases will continue to increase at the above disclosed levels, if at all.
Comparable Properties
Throughout this section, we have provided certain information on a “comparable property” basis. Information provided on a comparable property basis includes the results of properties that we owned and operated for the entirety of both periods being compared except for properties that are currently under development or are being repositioned for significant redevelopment and investment. For the three and nine months ended September 30, 2018, all or a portion of 94 and 91 properties, respectively, were considered comparable properties and seven properties were considered non-comparable properties for both periods. For the nine months ended September 30, 2018, six properties were moved from acquisitions to comparable properties and one portion of a property was moved from non-comparable to comparable properties, compared to the designations for the year ended December 31, 2017, which were 85 properties or portions of properties considered comparable and seven considered non-comparable. For the three months ended September 30, 2018, one property was moved from acquisitions to comparable properties. While there is judgment surrounding changes in designations, we typically move non-comparable properties to comparable properties once they have stabilized, which is typically considered 90% physical occupancy or when the growth expected from the redevelopment has been included in the comparable periods. We typically remove properties from comparable properties when the repositioning of the asset has commenced and has or is expected to have a significant impact to property operating income within the calendar year. Acquisitions are moved to comparable properties once we have owned the

19

Table of Contents

property for the entirety of comparable periods and the property is not under development or being repositioned for significant redevelopment and investment. Comparable property information replaces our previous same center designations.

RESULTS OF OPERATIONS - THREE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017
 
 
 
 
 
Change
 
2018
 
2017
 
Dollars
 
%
 
(Dollar amounts in thousands)
Rental income
$
223,777

 
$
212,048

 
$
11,729

 
5.5
 %
Other property income
5,183

 
5,171

 
12

 
0.2
 %
Mortgage interest income
793

 
734

 
59

 
8.0
 %
Total property revenue
229,753

 
217,953

 
11,800

 
5.4
 %
Rental expenses
41,909

 
41,250

 
659

 
1.6
 %
Real estate taxes
29,086

 
27,492

 
1,594

 
5.8
 %
Total property expenses
70,995

 
68,742

 
2,253

 
3.3
 %
Property operating income (1)
158,758

 
149,211

 
9,547

 
6.4
 %
General and administrative expense
(7,638
)
 
(9,103
)
 
1,465

 
(16.1
)%
Depreciation and amortization
(60,778
)
 
(55,611
)
 
(5,167
)
 
9.3
 %
Operating Income
90,342

 
84,497

 
5,845

 
6.9
 %
Other interest income
319

 
79

 
240

 
303.8
 %
Interest expense
(28,166
)
 
(26,287
)
 
(1,879
)
 
7.1
 %
Loss from real estate partnerships
(1,440
)
 
(182
)
 
(1,258
)
 
(691.2
)%
Total other, net
(29,287
)
 
(26,390
)
 
(2,897
)
 
11.0
 %
Income from continuing operations
61,055

 
58,107

 
2,948

 
5.1
 %
Gain on sale of real estate, net
3,125

 
50,775

 
(47,650
)
 
(93.8
)%
Net income
64,180

 
108,882

 
(44,702
)
 
(41.1
)%
Net income attributable to noncontrolling interests
(1,622
)
 
(2,105
)
 
483

 
(22.9
)%
Net income attributable to the Trust
$
62,558

 
$
106,777

 
$
(44,219
)
 
(41.4
)%
(1)
Property operating income is a non-GAAP measure that consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of property operations and we consider it to be a significant measure. Property operating income should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP.

Property Revenues
Total property revenue increased $11.8 million, or 5.4%, to $229.8 million in the three months ended September 30, 2018 compared to $218.0 million in the three months ended September 30, 2017. The percentage occupied at our shopping centers was 93.7% at September 30, 2018 compared to 93.8% at September 30, 2017. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $11.7 million, or 5.5%, to $223.8 million in the three months ended September 30, 2018 compared to $212.0 million in the three months ended September 30, 2017 due primarily to the following:
an increase of $6.4 million at non-comparable properties due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018 and the lease-up of two other redevelopments, partially offset by lower occupancy at two of our Florida properties in the beginning stages of redevelopment,
an increase of $4.3 million from the acquisition of six shopping centers acquired in Los Angeles County, California in August 2017, and
an increase of $2.7 million at comparable properties due primarily to higher rental rates of approximately $2.6 million, and higher average occupancy of approximately $0.5 million, partially offset by lower recoveries of $0.6 million (due to recoverable expense reductions),

20

Table of Contents

partially offset by
a decrease of $1.2 million from property sales.
Property Expenses
Total property expenses increased $2.3 million, or 3.3%, to $71.0 million in the three months ended September 30, 2018 compared to $68.7 million in the three months ended September 30, 2017. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $0.7 million, or 1.6%, to $41.9 million in the three months ended September 30, 2018 compared to $41.3 million in the three months ended September 30, 2017. This increase is primarily due to the following:
an increase of $1.4 million from the acquisition of six shopping centers acquired in Los Angeles County, California in August 2017,
partially offset by
a decrease of $0.5 million from comparable properties due primarily to lower repairs and maintenance costs, and
a decrease of $0.4 million from property sales.
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 18.3% in the three months ended September 30, 2018 from 19.0% in the three months ended September 30, 2017.
Real Estate Taxes
Real estate tax expense increased $1.6 million, or 5.8%, to $29.1 million in the three months ended September 30, 2018 compared to $27.5 million in the three months ended September 30, 2017 due primarily to the following:
an increase of $1.2 million at non-comparable properties due primarily to increases in assessments as a result of our redevelopment activities, and
an increase of $0.6 million from the acquisition of six shopping centers in Los Angeles County, California in August 2017.
Property Operating Income
Property operating income increased $9.5 million, or 6.4%, to $158.8 million in the three months ended September 30, 2018 compared to $149.2 million in the three months ended September 30, 2017. This increase is primarily due to growth in earnings at comparable properties, our acquisition of six shopping centers in Los Angeles County, California in August 2017, and Assembly Row and Pike & Rose, partially offset by property sales.
Other Operating Expenses
General and Administrative
General and administrative expense decreased $1.5 million, or 16.1%, to $7.6 million in the three months ended September 30, 2018 from $9.1 million in the three months ended September 30, 2017. The decrease is primarily due to lower personnel costs and lower acquisition and other transaction costs.
Depreciation and Amortization
Depreciation and amortization expense increased $5.2 million, or 9.3%, to $60.8 million in the three months ended September 30, 2018 from $55.6 million in the three months ended September 30, 2017. This increase is primarily due to portions of Phase II of Assembly Row and Pike & Rose being placed in service, our investment in comparable properties, and our acquisition of six shopping centers in Los Angeles County, California in August 2017.
Operating Income
Operating income increased $5.8 million, or 6.9%, to $90.3 million in the three months ended September 30, 2018 compared to $84.5 million in the three months ended September 30, 2017. This increase is primarily due to growth in earnings at our comparable properties, lower personnel and transaction costs, the opening of Phase II of Assembly Row and Pike & Rose, and our acquisition of six shopping centers in Los Angeles County, California in August 2017.

21

Table of Contents

Other
Interest Expense
Interest expense increased $1.9 million, or 7.1%, to $28.2 million in the three months ended September 30, 2018 compared to $26.3 million in the three months ended September 30, 2017. This increase is due primarily to the following:
a decrease of $2.9 million in capitalized interest, primarily attributable to portions of Phase II of Assembly Row and Pike & Rose being placed in service,
partially offset by
a decrease of $0.5 million due to a lower overall weighted average borrowing rate, and
a decrease of $0.5 million due to lower weighted average borrowings (primarily our revolving credit facility).
Gross interest costs were $32.2 million and $33.2 million in the three months ended September 30, 2018 and 2017, respectively. Capitalized interest was $4.1 million and $6.9 million in the three months ended September 30, 2018 and 2017, respectively.
Loss from Real Estate Partnerships
The $1.4 million loss from real estate partnerships for the three months ended September 30, 2018 is due primarily to our share of losses related to the hotel joint ventures at Assembly Row (hotel opened in August 2018) and Pike & Rose (hotel opened in March 2018).
Gain on Sale of Real Estate, Net
The $3.1 million net gain for the three months ended September 30, 2018 is due to the sale of the residential building at our Chelsea Commons property in August 2018.
The $50.8 million gain for the three months ended September 30, 2017 is primarily due to the following:
$45.2 million gain related to the sale of our 150 Post Street property in August 2017,
$4.9 million gain related to the sale of our North Lake Commons property in September 2017, and
$0.6 million net percentage-of-completion gain, related to condominiums under binding contract at our Assembly Row property (see discussion in Note 2 to the Consolidated Financial Statements with respect to the change in accounting for condominium gains).


22

Table of Contents

RESULTS OF OPERATIONS - NINE MONTHS ENDED SEPTEMBER 30, 2018 AND 2017

 
 
 
 
 
Change
 
2018
 
2017
 
Dollars
 
%
 
(Dollar amounts in thousands)
Rental income
$
664,834

 
$
620,741

 
$
44,093

 
7.1
 %
Other property income
12,942

 
10,429

 
2,513

 
24.1
 %
Mortgage interest income
2,284

 
2,221

 
63

 
2.8
 %
Total property revenue
680,060

 
633,391

 
46,669

 
7.4
 %
Rental expenses
126,587

 
119,487

 
7,100

 
5.9
 %
Real estate taxes
85,841

 
79,104

 
6,737

 
8.5
 %
Total property expenses
212,428

 
198,591

 
13,837

 
7.0
 %
Property operating income (1)
467,632

 
434,800

 
32,832

 
7.6
 %
General and administrative expense
(23,980
)
 
(26,013
)
 
2,033

 
(7.8
)%
Depreciation and amortization
(177,269
)
 
(159,656
)
 
(17,613
)
 
11.0
 %
Operating Income
266,383

 
249,131

 
17,252

 
6.9
 %
Other interest income
657

 
253

 
404

 
159.7
 %
Interest expense
(82,116
)
 
(73,952
)
 
(8,164
)
 
11.0
 %
Loss from real estate partnerships
(2,693
)
 
(296
)
 
(2,397
)
 
809.8
 %
Total other, net
(84,152
)
 
(73,995
)
 
(10,157
)
 
13.7
 %
Income from continuing operations
182,231

 
175,136

 
7,095

 
4.1
 %
Gain on sale of real estate, net
10,413

 
69,949

 
(59,536
)
 
(85.1
)%
Net income
192,644

 
245,085

 
(52,441
)
 
(21.4
)%
Net income attributable to noncontrolling interests
(5,244
)
 
(5,827
)
 
583

 
(10.0
)%
Net income attributable to the Trust
$
187,400

 
$
239,258

 
$
(51,858
)
 
(21.7
)%
(1)
Property operating income is a non-GAAP measure that consists of rental income, other property income and mortgage interest income, less rental expenses and real estate taxes. This measure is used internally to evaluate the performance of property operations and we consider it to be a significant measure. Property operating income should not be considered an alternative measure of operating results or cash flow from operations as determined in accordance with GAAP.

Property Revenues
Total property revenue increased $46.7 million, or 7.4%, to $680.1 million in the nine months ended September 30, 2018 compared to $633.4 million in the nine months ended September 30, 2017. The percentage occupied at our shopping centers was 93.7% at September 30, 2018 compared to 93.8% at September 30, 2017. Changes in the components of property revenue are discussed below.
Rental Income
Rental income consists primarily of minimum rent, cost reimbursements from tenants and percentage rent. Rental income increased $44.1 million, or 7.1%, to $664.8 million in the nine months ended September 30, 2018 compared to $620.7 million in the nine months ended September 30, 2017 due primarily to the following:
an increase of $21.8 million from acquisitions, primarily related to the six shopping centers acquired in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017,
an increase of $14.4 million at non-comparable properties due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018 and the lease-up of two other redevelopments, partially offset by lower occupancy at two of our Florida properties in the beginning stages of redevelopment, and
an increase of $13.6 million at comparable properties due primarily to higher rental rates of approximately $8.6 million, higher average occupancy of approximately $3.1 million, and higher recoveries of $0.9 million,
partially offset by
a decrease of $5.1 million from property sales.

23

Table of Contents

Other Property Income
Other property income increased $2.5 million, or 24.1%, to $12.9 million in the nine months ended September 30, 2018 compared to $10.4 million in the nine months ended September 30, 2017. Included in other property income are items which, although recurring, inherently tend to fluctuate more than rental income from period to period, such as lease termination fees. This increase is primarily related to higher lease termination fees.
Property Expenses
Total property expenses increased $13.8 million, or 7.0%, to $212.4 million in the nine months ended September 30, 2018 compared to $198.6 million in the nine months ended September 30, 2017. Changes in the components of property expenses are discussed below.
Rental Expenses
Rental expenses increased $7.1 million, or 5.9%, to $126.6 million in the nine months ended September 30, 2018 compared to $119.5 million in the nine months ended September 30, 2017. This increase is primarily due to the following:
an increase of $5.5 million from acquisitions, primarily related to six shopping centers acquired in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, and
an increase of $2.3 million from non-comparable and other properties, due primarily to the opening of Phase II at Assembly Row and Pike & Rose during the second half of 2017 into 2018, partially offset by lower expenses at two of our Florida properties in the beginning stages of redevelopment,
partially offset by
a decrease of $1.0 million from property sales.
As a result of the changes in rental income and rental expenses as discussed above, rental expenses as a percentage of rental income plus other property income decreased to 18.7% in the nine months ended September 30, 2018 from 18.9% the nine months ended September 30, 2018 and 2017.
Real Estate Taxes
Real estate tax expense increased $6.7 million, or 8.5%, to $85.8 million in the nine months ended September 30, 2018 compared to $79.1 million in the nine months ended September 30, 2017 due primarily to:
an increase of $3.7 million from acquisitions, primarily related to our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017,
an increase of $2.9 million at non-comparable properties due primarily to increases in assessments as a result of our redevelopment activities,
an increase of $1.2 million at comparable properties primarily due to higher assessments,
partially offset by
a decrease of $1.0 million from property sales.
Property Operating Income
Property operating income increased $32.8 million, or 7.6%, to $467.6 million in the nine months ended September 30, 2018 compared to $434.8 million in the nine months ended September 30, 2017. This increase is primarily due to growth in earnings at comparable properties, our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, and the opening of Phase II at Assembly Row and Pike & Rose, partially offset by property sales.
Other Operating Expenses
General and Administrative
General and administrative expense decreased $2.0 million, or 7.8%, to $24.0 million in the nine months ended September 30, 2018 from $26.0 million in the nine months ended September 30, 2017. The decrease is primarily due to lower personnel related costs and lower costs from acquisitions and other transactions.

24

Table of Contents

Depreciation and Amortization
Depreciation and amortization expense increased $17.6 million, or 11.0%, to $177.3 million in the nine months ended September 30, 2018 from $159.7 million in the nine months ended September 30, 2017. This increase is primarily due to our acquisition of six shopping centers in Los Angeles County, California in August 2017, Phase II of Assembly Row and Pike & Rose being placed in service, and investment in comparable properties, partially offset by two of our Florida properties in the early stages of redevelopment and property sales.
Operating Income
Operating income increased $17.3 million, or 6.9%, to $266.4 million in the nine months ended September 30, 2018 compared to $249.1 million in the nine months ended September 30, 2017. This increase is primarily due to growth in earnings at comparable properties, higher lease termination fees and lower general and administrative costs, our acquisition of six shopping centers in Los Angeles County, California in August 2017 and Riverpoint Center in March 2017, and the opening of Phase II at Assembly Row and Pike & Rose, partially offset by property sales.
Other
Interest Expense
Interest expense increased $8.2 million, or 11.0%, to $82.1 million in the nine months ended September 30, 2018 compared to $74.0 million in the nine months ended September 30, 2017. This increase is due primarily to the following:
an increase of $6.7 million due to higher borrowings primarily attributable to the $475 million issuance of 3.25% senior notes ($300 million issued in June 2017 and $175 million issued in December 2017) and the $100 million reopening in June 2017 of the 4.50% senior notes, partially offset by the early redemption of our $150 million 5.90% senior notes in December 2017, and
a decrease of $3.8 million in capitalized interest,
partially offset by
a decrease of $2.3 million due to a lower overall weighted average borrowing rate.
Gross interest costs were $96.9 million and $92.5 million in the nine months ended September 30, 2018 and 2017, respectively. Capitalized interest was $14.8 million and $18.6 million in the nine months ended September 30, 2018 and 2017, respectively.
Loss from Real Estate Partnerships
The $2.7 million loss from real estate partnerships for the nine months ended September 30, 2018 is due primarily to our share of losses related to the hotel joint ventures at Assembly Row (hotel opened in August 2018) and Pike & Rose (hotel opened in March 2018).
Gain on Sale of Real Estate, Net
The $10.4 million net gain on sale of real estate and change in control of interests, net for the nine months ended September 30, 2018 is primarily due to the following:
$7.3 million net gain related to condominium unit sales that have closed at our Assembly Row and Pike & Rose properties, and
$3.1 million gain related to the sale of the residential building at our Chelsea Commons property in August 2018.
The $69.9 million gain on sale of real estate and change in control of interests, net for the nine months ended September 30, 2017 is primarily due to the following:
$45.2 million gain related to the sale of our 150 Post Street property in August 2017,
$15.4 million gain related to the sale transactions on our ground lease parcels at our Assembly Row property in Somerville, Massachusetts,
$4.9 million gain related to the sale of our North Lake Commons property in September 2017, and
$3.9 million net percentage-of-completion gain, related to condominiums under binding contract at our Assembly Row property (see discussion in Note 2 to the Consolidated Financial Statements with respect to the change in accounting for condominium gains).


25

Table of Contents

Liquidity and Capital Resources
Due to the nature of our business and strategy, we typically generate significant amounts of cash from operations. The cash generated from operations is largely paid to our common and preferred shareholders in the form of dividends. As a REIT, we must generally make annual distributions to shareholders of at least 90% of our taxable income.
Our short-term liquidity requirements consist primarily of normal recurring operating expenses, obligations under our capital and operating leases, regular debt service requirements (including debt service relating to additional or replacement debt, as well as scheduled debt maturities), recurring expenditures, non-recurring expenditures (such as tenant improvements and redevelopments) and dividends to common and preferred shareholders. Our long-term capital requirements consist primarily of maturities under our long-term debt agreements, development and redevelopment costs and potential acquisitions.
We intend to operate with and maintain a conservative capital structure that will allow us to maintain strong debt service coverage and fixed-charge coverage ratios as part of our commitment to investment-grade debt ratings. In the short and long term, we may seek to obtain funds through the issuance of additional equity, unsecured and/or secured debt financings, joint venture relationships relating to existing properties or new acquisitions, and property dispositions that are consistent with this conservative structure.
At September 30, 2018, we had cash and cash equivalents of $41.9 million and $26.5 million outstanding on our $800.0 million unsecured revolving credit facility which matures on April 20, 2020, subject to two six-month extensions at our option. In addition, we have an option (subject to bank approval) to increase the credit facility through an accordion feature to $1.5 billion. For the nine months ended September 30, 2018, the maximum amount of borrowings outstanding under our revolving credit facility was $177.0 million, the weighted average amount of borrowings outstanding was $101.8 million and the weighted average interest rate, before amortization of debt fees, was 2.6%. We have no debt maturing for the remainder of 2018. During the nine months ended September 30, 2018, we raised $77.4 million, after fees and other costs, under our ATM equity program, which as of September 30, 2018, had the capacity to issue up to $321.7 million in common shares. We currently believe that cash flows from operations, cash on hand, our ATM program, our revolving credit facility and our general ability to access the capital markets will be sufficient to finance our operations and fund our debt service requirements and capital expenditures.
Our overall capital requirements for the remainder of 2018 will depend upon acquisition opportunities, the level of improvements and redevelopments on existing properties and the timing and cost of development of Assembly Row, Pike & Rose and future phases of Santana Row. While the amount of future expenditures will depend on numerous factors, we expect to to see a reduced level of capital investments in our properties under development and redevelopment compared to recent years, which is the result of completing construction on Phase II at both Assembly Row and Pike & Rose. With respect to other capital investments related to our existing properties, we expect to incur levels consistent with prior years. Our capital investments will be funded on a short-term basis with cash flow from operations, cash on hand and/or our revolving credit facility, and on a long-term basis, with long-term debt or equity including shares issued under our ATM equity program. If necessary, we may access the debt or equity capital markets to finance significant acquisitions. Given our past ability to access the capital markets, we expect debt or equity to be available to us. Although there is no intent at this time, if market conditions deteriorate, we may delay the timing of certain development and redevelopment projects as well as limit future acquisitions, reduce our operating expenditures, or re-evaluate our dividend policy.
In addition to conditions in the capital markets which could affect our ability to access those markets, the following factors could affect our ability to meet our liquidity requirements:
restrictions in our debt instruments or preferred shares may limit us from incurring debt or issuing equity at all, or on acceptable terms under then-prevailing market conditions; and
we may be unable to service additional or replacement debt due to increases in interest rates or a decline in our operating performance.

26

Table of Contents

Summary of Cash Flows
 
Nine Months Ended September 30,
 
2018
 
2017
 
(In thousands)
Cash provided by operating activities
$
364,716

 
$
339,471

Cash used in investing activities
(111,773
)
 
(709,400
)
Cash (used in) provided by financing activities
(183,342
)
 
368,124

Increase (decrease) in cash, cash equivalents and restricted cash
69,601

 
(1,805
)
Cash, cash equivalents and restricted cash, beginning of year
25,200

 
34,849

Cash, cash equivalents and restricted cash, end of period
$
94,801

 
$
33,044


Net cash provided by operating activities increased $25.2 million to $364.7 million during the nine months ended September 30, 2018 from $339.5 million during the nine months ended September 30, 2017. The increase was primarily attributable to higher net income before certain non-cash items and $12.4 million in net proceeds from the Jordan Downs new market tax credit transaction (see Note 3 to the Consolidated Financial Statements for further discussion), partially offset by timing of interest payments on our senior notes and timing of cash receipts.
Net cash used in investing activities decreased $597.6 million to $111.8 million during the nine months ended September 30, 2018 from $709.4 million during the nine months ended September 30, 2017. The decrease was primarily attributable to:
a $434.1 million decrease in acquisitions of real estate, primarily due to the 2017 acquisitions of six shopping centers in Los Angeles County, California and our Riverpoint Center, Hastings Ranch, and Fourth Street properties,
a $120.4 million decrease in capital expenditures as we complete portions of Phase II of both our Assembly Row and Pike & Rose projects,
$38.0 million in proceeds from our Assembly Row hotel joint venture formation (see Note 3 to the Consolidated Financial Statements for further discussion), and
a $15.2 million increase in proceeds from sale of real estate primarily due to the sale of condominiums at our Assembly Row and Pike & Rose properties in 2018.
Net cash used in financing activities increased $551.5 million to $183.3 million used during the nine months ended September 30, 2018 from $368.1 million provided during the nine months ended September 30, 2017. The increase was primarily attributable to:
$399.5 million in net proceeds from the June 2017 issuance of $300.0 million of 3.25% senior unsecured notes and $100.0 million of 4.50% notes,
$145.5 million in net proceeds from the September 2017 issuance of 6,000 Series C Preferred Shares,
$14.5 million of repayments on our revolving credit facility in 2018 as compared to $41.5 million of borrowings in 2017,
a $13.5 million increase in dividends paid to shareholders due to an increase in the common share dividend rate, an increase in the number of common shares outstanding, and preferred dividends related to the issuance of our Series C Preferred Shares in September 2017, and
a $10.6 million decrease in contributions from noncontrolling interests primarily due to contributions to fund the $50.0 million repayment of the Plaza El Segundo mortgage loan in June 2017,
partially offset by
a $39.7 million decrease in repayment of mortgages and capital leases due to the $10.5 million payoff of the mortgage loan on the Grove at Shrewsbury (West) in March 2018, as compared to the $50.0 million paydown of the Plaza El Segundo mortgage loan in June 2017, and
a $30.4 million increase in net proceeds from the issuance of 0.6 million common shares under our ATM program at a weighted average price of $127.86 during the nine months ended September 30, 2018, as compared to 0.3 million common shares at a weighted average price of $133.09 in 2017.


27

Table of Contents

Debt Financing Arrangements
The following is a summary of our total debt outstanding as of September 30, 2018:
Description of Debt
Original
Debt
Issued
 
Principal Balance as of September 30, 2018
 
Stated Interest Rate as of September 30, 2018
 
Maturity Date
 
(Dollar amounts in thousands)
 
 
 
 
Mortgages payable
 
 
 
 
 
 
 
Secured fixed rate
 
 
 
 
 
 
 
Rollingwood Apartments
$
24,050

 
$
20,457

 
5.54
%
 
May 1, 2019
The Shops at Sunset Place
Acquired

 
65,004

 
5.62
%
 
September 1, 2020
29th Place
Acquired

 
4,174

 
5.91
%
 
January 31, 2021
Sylmar Towne Center
Acquired

 
17,097

 
5.39
%
 
June 6, 2021
Plaza Del Sol
Acquired

 
8,453

 
5.23
%
 
December 1, 2021
The AVENUE at White Marsh
52,705

 
52,705

 
3.35
%
 
January 1, 2022
Montrose Crossing
80,000

 
69,753

 
4.20
%
 
January 10, 2022
Azalea
Acquired

 
40,000

 
3.73
%
 
November 1, 2025
Bell Gardens
Acquired

 
12,999

 
4.06
%
 
August 1, 2026
Plaza El Segundo
125,000

 
125,000

 
3.83
%
 
June 5, 2027
The Grove at Shrewsbury (East)
43,600

 
43,600

 
3.77
%
 
September 1, 2027
Brook 35
11,500

 
11,500

 
4.65
%
 
July 1, 2029
Chelsea
Acquired

 
6,024

 
5.36
%
 
January 15, 2031
Subtotal
 
 
476,766

 
 
 
 
Net unamortized premium and debt issuance costs
 
 
(709
)
 
 
 
 
Total mortgages payable, net
 
 
476,057

 
 
 
 
Notes payable
 
 
 
 
 
 
 
Unsecured fixed rate
 
 
 
 
 
 
 
Term loan (1)
275,000

 
275,000

 
LIBOR + 0.90%

 
November 21, 2019
Various
7,239

 
4,433

 
11.31%

 
Various through 2028
Unsecured variable rate
 
 
 
 
 
 
 
Revolving credit facility (2)
800,000

 
26,500

 
LIBOR + 0.825%

 
April 20, 2020
Subtotal
 
 
305,933

 
 
 
 
Net unamortized debt issuance costs
 
 
(450
)
 
 
 
 
Total notes payable, net
 
 
305,483

 
 
 
 
 
 
 
 
 
 
 
 
Senior notes and debentures
 
 
 
 
 
 
 
Unsecured fixed rate
 
 
 
 
 
 
 
2.55% notes
250,000

 
250,000

 
2.55
%
 
January 15, 2021
3.00% notes
250,000

 
250,000

 
3.00
%
 
August 1, 2022
2.75% notes
275,000

 
275,000

 
2.75
%
 
June 1, 2023
3.95% notes
300,000

 
300,000

 
3.95
%
 
January 15, 2024
7.48% debentures
50,000

 
29,200

 
7.48
%
 
August 15, 2026
3.25% notes
475,000

 
475,000

 
3.25
%
 
July 15, 2027
6.82% medium term notes
40,000

 
40,000

 
6.82
%
 
August 1, 2027
4.50% notes
550,000

 
550,000

 
4.50
%
 
December 1, 2044
3.625% notes
250,000

 
250,000

 
3.625
%
 
August 1, 2046
Subtotal
 
 
2,419,200

 
 
 
 
Net unamortized discount and debt issuance costs
 
 
(15,635
)
 
 
 
 
Total senior notes and debentures, net
 
 
2,403,565

 
 
 
 
Capital lease obligations
 
 
 
 
 
 
 
Various
 
 
71,529

 
Various

 
Various through 2106
Total debt and capital lease obligations, net
 
 
$
3,256,634

 
 
 
 
_____________________
1)
Our two interest rate swap agreements fix the variable rate portion of the interest rate on the term loan at 1.72% through November 1, 2018. The spread on the term loan is 90 basis points resulting in a fixed rate of 2.62%.
2)
The maximum amount drawn under our revolving credit facility during the nine months ended September 30, 2018 was $177.0 million, and the weighted average interest rate on borrowings under our revolving credit facility, before amortization of debt fees, was 2.6%.
Our revolving credit facility, term loan and other debt agreements include financial and other covenants that may limit our operating activities in the future. As of September 30, 2018, we were in compliance with all financial and other covenants related to our revolving credit facility, term loan and senior notes. Additionally, as of September 30, 2018, we were in

28

Table of Contents

compliance with all of the financial and other covenants that could trigger loan default on our mortgage loans. If we were to breach any of these financial and other covenants and did not cure the breach within an applicable cure period, our lenders could require us to repay the debt immediately and, if the debt is secured, could immediately begin proceedings to take possession of the property securing the loan. Many of our debt arrangements, including our public notes, term loan and our revolving credit facility, are cross-defaulted, which means that the lenders under those debt arrangements can put us in default and require immediate repayment of their debt if we breach and fail to cure a default under certain of our other debt obligations. As a result, any default under our debt covenants could have an adverse effect on our financial condition, our results of operations, our ability to meet our obligations and the market value of our shares. Our organizational documents do not limit the level or amount of debt that we may incur.
The following is a summary of our scheduled principal repayments as of September 30, 2018:
 
 
Unsecured
 
Secured
 
Capital Lease
 
Total
 
 
(In thousands)
 
2018
$
120

 
$
1,433

 
$
14

 
$
1,567

 
2019
275,563

 
25,820

 
42

 
301,425

  
2020
27,124

(1)
65,539

 
46

 
92,709

  
2021
250,694

 
30,541

 
51

 
281,286

  
2022
250,771

 
117,018

 
56

 
367,845

  
Thereafter
1,920,861

 
236,415

 
71,320