UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2020
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
(Exact Name of Registrant as Specified in its Declaration of Trust)
(State of Organization) | (IRS Employer Identification No.) | |||
(Address of Principal Executive Offices) (Zip Code)
(301 ) 998-8100
(Registrant’s Telephone Number, Including Area Code)
(Former name, former address and former fiscal year, if changed from last report)
Title of Each Class | Trading Symbol | Name of Each Exchange On Which Registered |
$.01 par value per share, with associated Common Share Purchase Rights | ||
of 5.00% Series C Cumulative Redeemable Preferred Stock, $.01 par value per share | ||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.:
☒ | Accelerated filer | ☐ | |
Non-Accelerated Filer | ☐ | 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. | ☐ | ||
The number of registrant’s common shares outstanding on November 2, 2020 was 75,647,142 .
FEDERAL REALTY INVESTMENT TRUST
QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2020
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION | |||
Item 1. | Financial Statements | ||
Consolidated Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019 | |||
Consolidated Statements of Comprehensive Income (unaudited) for the three and nine months ended September 30, 2020 and 2019 | |||
Consolidated Statements of Shareholders' Equity (unaudited) for the three and nine months ended September 30, 2020 and 2019 | |||
Consolidated Statements of Cash Flows (unaudited) for the nine months ended September 30, 2020 and 2019 | |||
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 | |||
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Federal Realty Investment Trust
Consolidated Balance Sheets
The accompanying notes are an integral part of these consolidated statements.
September 30, | December 31, | ||||||
2020 | 2019 | ||||||
(In thousands, except share and per share data) | |||||||
(Unaudited) | |||||||
ASSETS | |||||||
Real estate, at cost | |||||||
Operating (including $1,709,234 and $1,676,866 of consolidated variable interest entities, respectively) | $ | $ | |||||
Construction-in-progress (including $81,463 and $102,583 of consolidated variable interest entities, respectively) | |||||||
Assets held for sale | |||||||
Less accumulated depreciation and amortization (including $314,866 and $296,165 of consolidated variable interest entities, respectively) | ( | ) | ( | ) | |||
Net real estate | |||||||
Cash and cash equivalents | |||||||
Accounts and notes receivable, net | |||||||
Mortgage notes receivable, net | |||||||
Investment in partnerships | |||||||
Operating lease right of use assets | |||||||
Finance lease right of use assets | |||||||
Prepaid expenses and other assets | |||||||
TOTAL ASSETS | $ | $ | |||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
Liabilities | |||||||
Mortgages payable, net (including $474,775 and $469,184 of consolidated variable interest entities, respectively) | $ | $ | |||||
Notes payable, net | |||||||
Senior notes and debentures, net | |||||||
Accounts payable and accrued expenses | |||||||
Dividends payable | |||||||
Security deposits payable | |||||||
Operating lease liabilities | |||||||
Finance lease liabilities | |||||||
Other liabilities and deferred credits | |||||||
Total liabilities | |||||||
Commitments and contingencies (Note 6) | |||||||
Redeemable noncontrolling interests | |||||||
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 | |||||||
5.417% Series 1 Cumulative Convertible Preferred Shares, (stated at liquidation preference $25 per share), 399,896 shares issued and outstanding | |||||||
Common shares of beneficial interest, $.01 par, 100,000,000 shares authorized, 75,641,074 and 75,540,804 shares issued and outstanding, respectively | |||||||
Additional paid-in capital | |||||||
Accumulated dividends in excess of net income | ( | ) | ( | ) | |||
Accumulated other comprehensive loss | ( | ) | ( | ) | |||
Total shareholders’ equity of the Trust | |||||||
Noncontrolling interests | |||||||
Total shareholders’ equity | |||||||
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY | $ | $ | |||||
3
Federal Realty Investment Trust
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended September 30, | Nine Months Ended September 30, | ||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||
(In thousands, except per share data) | |||||||||||||||
REVENUE | |||||||||||||||
Rental income | $ | $ | $ | $ | |||||||||||
Mortgage interest income | |||||||||||||||
Total revenue | |||||||||||||||
EXPENSES | |||||||||||||||
Rental expenses | |||||||||||||||
Real estate taxes | |||||||||||||||
General and administrative | |||||||||||||||
Depreciation and amortization | |||||||||||||||
Total operating expenses | |||||||||||||||
Impairment charge | ( | ) | ( | ) | |||||||||||
Gain on sale of real estate, net of tax | |||||||||||||||
OPERATING INCOME | |||||||||||||||
OTHER INCOME/(EXPENSE) | |||||||||||||||
Other interest income | |||||||||||||||
Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Loss from partnerships | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
NET (LOSS) INCOME | ( | ) | |||||||||||||
Net loss (income) attributable to noncontrolling interests | ( | ) | ( | ) | |||||||||||
NET (LOSS) INCOME ATTRIBUTABLE TO THE TRUST | ( | ) | |||||||||||||
Dividends on preferred shares | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
NET (LOSS) INCOME AVAILABLE FOR COMMON SHAREHOLDERS | $ | ( | ) | $ | $ | $ | |||||||||
EARNINGS PER COMMON SHARE, BASIC AND DILUTED: | |||||||||||||||
Net (loss) income available for common shareholders | $ | ( | ) | $ | $ | $ | |||||||||
Weighted average number of common shares | |||||||||||||||
COMPREHENSIVE (LOSS) INCOME | $ | ( | ) | $ | $ | $ | |||||||||
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO THE TRUST | $ | ( | ) | $ | $ | $ | |||||||||
The accompanying notes are an integral part of these consolidated statements.
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Federal Realty Investment Trust
Consolidated Statements of Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2020
(Unaudited)
Shareholders’ Equity of the Trust | |||||||||||||||||||||||||||||||||
Preferred Shares | Common Shares | Additional Paid-in Capital | Accumulated Dividends in Excess of Net Income | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders' Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
January 1, 2020 adoption of new accounting standard - See Note 2 | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Net income (loss), excluding $1,627 attributable to redeemable noncontrolling interests | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||
Other comprehensive loss - change in fair value of interest rate swaps | — | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
Dividends declared to common shareholders ($3.16 per share) | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Dividends declared to preferred shareholders | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Distributions declared to noncontrolling interests | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Common shares issued, net | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares issued under dividend reinvestment plan | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share-based compensation expense, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares withheld for employee taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||
Redemption of OP units | — | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
BALANCE AT JUNE 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
Net income (loss), excluding $470 attributable to redeemable noncontrolling interests | — | — | — | — | — | ( | ) | — | ( | ) | ( | ) | |||||||||||||||||||||
Other comprehensive income - change in fair value of interest rate swaps | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Dividends declared to common shareholders ($1.06 per share) | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Dividends declared to preferred shareholders | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Distributions declared to noncontrolling interests | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Common shares issued, net | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares issued under dividend reinvestment plan | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share-based compensation expense, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares withheld for employee taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2020 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
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Federal Realty Investment Trust
Consolidated Statements of Shareholders’ Equity
For the Three and Nine Months Ended September 30, 2019
(Unaudited)
Shareholders’ Equity of the Trust | |||||||||||||||||||||||||||||||||
Preferred Shares | Common Shares | Additional Paid-in Capital | Accumulated Dividends in Excess of Net Income | Accumulated Other Comprehensive Loss | Noncontrolling Interests | Total Shareholders' Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||
(In thousands, except share data) | |||||||||||||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2018 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
January 1, 2019 adoption of new accounting standard | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Net income, excluding $2,604 attributable to redeemable noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive loss - change in fair value of interest rate swaps | — | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
Dividends declared to common shareholders ($3.09 per share) | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Dividends declared to preferred shareholders | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Distributions declared to noncontrolling interests | — | — | — | — | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||
Common shares issued, net | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares issued under dividend reinvestment plan | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share-based compensation expense, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares withheld for employee taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||
Conversion and redemption of OP units | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Adjustment to redeemable noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2019 | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||
BALANCE AT JUNE 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
Net income, excluding $821 attributable to redeemable noncontrolling interests | — | — | — | — | — | — | |||||||||||||||||||||||||||
Other comprehensive loss - change in fair value of interest rate swaps | — | — | — | — | — | — | ( | ) | — | ( | ) | ||||||||||||||||||||||
Dividends declared to common shareholders ($1.05 per share) | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Dividends declared to preferred shareholders | — | — | — | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||
Distributions declared to noncontrolling interests | — | — | — | — | — | — | ( | ) | ( | ) | |||||||||||||||||||||||
Common shares issued, net | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares issued under dividend reinvestment plan | — | — | — | — | — | — | |||||||||||||||||||||||||||
Share-based compensation expense, net of forfeitures | — | — | — | — | — | ||||||||||||||||||||||||||||
Shares withheld for employee taxes | — | — | ( | ) | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||
Redemption of OP units | — | — | ( | ) | — | — | ( | ) | ( | ) | |||||||||||||||||||||||
Contributions from noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
Adjustment to redeemable noncontrolling interests | — | — | — | — | — | — | — | ||||||||||||||||||||||||||
BALANCE AT SEPTEMBER 30, 2019 | $ | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | ||||||||||||||||||||||
The accompanying notes are an integral part of these consolidated statements.
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Federal Realty Investment Trust
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | |||||||
2020 | 2019 | ||||||
(In thousands) | |||||||
OPERATING ACTIVITIES | |||||||
Net income | $ | $ | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Depreciation and amortization | |||||||
Impairment charge | |||||||
Gain on sale of real estate, net of tax | ( | ) | ( | ) | |||
Loss from partnerships | |||||||
Other, net | ( | ) | |||||
Changes in assets and liabilities, net of effects of acquisitions and dispositions: | |||||||
Increase in accounts receivable, net | ( | ) | ( | ) | |||
Increase in prepaid expenses and other assets | ( | ) | ( | ) | |||
Increase in accounts payable and accrued expenses | |||||||
Decrease in security deposits and other liabilities | ( | ) | ( | ) | |||
Net cash provided by operating activities | |||||||
INVESTING ACTIVITIES | |||||||
Acquisition of real estate | ( | ) | ( | ) | |||
Capital expenditures - development and redevelopment | ( | ) | ( | ) | |||
Capital expenditures - other | ( | ) | ( | ) | |||
Costs associated with property sold under threat of condemnation, net | ( | ) | |||||
Proceeds from sale of real estate | |||||||
Investment in partnerships | ( | ) | ( | ) | |||
Distribution from partnerships in excess of earnings | |||||||
Leasing costs | ( | ) | ( | ) | |||
(Increase in) repayment of mortgage and other notes receivable, net | ( | ) | |||||
Net cash used in investing activities | ( | ) | ( | ) | |||
FINANCING ACTIVITIES | |||||||
Costs to amend revolving credit facility | ( | ) | ( | ) | |||
Issuance of senior notes, net of costs | |||||||
Issuance of notes payable, net of costs | |||||||
Repayment of mortgages, finance leases and notes payable | ( | ) | ( | ) | |||
Issuance of common shares, net of costs | |||||||
Dividends paid to common and preferred shareholders | ( | ) | ( | ) | |||
Shares withheld for employee taxes | ( | ) | ( | ) | |||
Contributions from noncontrolling interests | |||||||
Distributions to and redemptions of noncontrolling interests | ( | ) | ( | ) | |||
Net cash provided by (used in) financing activities | ( | ) | |||||
Increase in cash, cash equivalents and restricted cash | |||||||
Cash, cash equivalents, and restricted cash at beginning of year | |||||||
Cash, cash equivalents, and restricted cash at end of period | $ | $ | |||||
The accompanying notes are an integral part of these consolidated statements.
7
Federal Realty Investment Trust
Notes to Consolidated Financial Statements
September 30, 2020
(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, 2020, we owned or had a majority interest in community and neighborhood shopping centers and mixed-use properties which are operated as 104 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.
Impacts of COVID-19 Pandemic
NOTE 2—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated balance sheet as of December 31, 2019, 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 our 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, 2020 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.
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.
Revenue Recognition and Accounts Receivable
Our leases with our tenants are classified as operating leases. When collection of substantially all lease payments during the lease term is considered probable, the lease qualifies for accrual accounting. Lease payments are recognized on a straight-line basis from the point in time when the tenant controls the space through the term of the related lease. Variable lease payments relating to percentage rent are recognized at the end of the lease year or earlier if we have determined the required sales level is achieved. Real estate tax and other cost reimbursements are recognized on an accrual basis over the periods in which the related
8
expenditures are incurred. For a tenant to terminate its lease agreement prior to the end of the agreed term, we may require that they pay a fee to cancel the lease agreement. Lease termination fees are generally recognized on the termination date if the tenant has relinquished control of the space. When a lease is terminated early but the tenant continues to control the space under a modified lease agreement, the lease termination fee is generally recognized evenly over the remaining term of the modified lease agreement. Lease concessions (unrelated to the COVID-19 pandemic) are evaluated to determine whether the concession represents a modification of the original lease contract. Modifications generally result in a reassessment of the lease term and lease classification, and remeasurement of lease payments received. Remeasured lease payments are recognized on a straight-line basis over the remaining term of the modified lease contract.
In April 2020, the Financial Accounting Standards Board ("FASB") issued interpretive guidance relating to the accounting for lease concessions provided as a result of the COVID-19 pandemic that allows entities to treat the concession as if it was a part of the existing contract instead of applying lease modification accounting. This guidance is only applicable to the COVID-19 pandemic related lease concessions that do not result in a substantial increase in the rights of the lessor or the obligations of the lessee. We have elected this option relating to qualifying rent deferral and rent abatement agreements. For qualifying lease modifications with rent deferrals, this results in no change to our revenue recognition but an increase in the lease receivable balance until the deferred rent has been repaid. For qualifying lease modifications that include rent abatement concessions, this results in a direct reduction of rental income in the current period. As of September 30, 2020, we have entered into rent deferral agreements related to the COVID-19 pandemic representing approximately $30 million of rent otherwise owed during the nine months ended September 30, 2020, and continue negotiations with other tenants.
When collection of substantially all lease payments during the lease term is not considered probable, total lease revenue is limited to the lesser of revenue recognized under accrual accounting or cash received. Determining the probability of collection of substantially all lease payments during a lease term requires significant judgment. This determination is impacted by numerous factors including our assessment of the tenant’s credit worthiness, economic conditions, tenant sales productivity in that location, historical experience with the tenant and tenants operating in the same industry, future prospects for the tenant and the industry in which it operates, and the length of the lease term. If leases currently classified as probable are subsequently reclassified as not probable, any outstanding lease receivables (including straight-line rent receivables) would be written-off with a corresponding decrease in rental income.
The actions taken by federal, state and local governments to mitigate the spread of COVID-19, initially by ordering closures of non-essential businesses and ordering residents to generally stay at home, and subsequent phased re-openings, as well as the general concern over the spread of COVID-19, have resulted in many of our tenants temporarily or even permanently closing their businesses, and for some, it has impacted their ability to pay rent. As a result, we revised our collectibility assumptions for many of our tenants most significantly impacted by COVID-19. Accordingly, during the three and nine months ended September 30, 2020, we recognized collectibility related adjustments of $29.4 million and $87.6 million, respectively. This includes changes in our collectibility assessments from probable to not probable, disputed rents, and any rent abatements, as well as the write-off of $1.7 million and $11.2 million of straight-line rent receivables primarily related to tenants changed to a cash basis of revenue recognition in the three and nine months ended September 30, 2020, respectively. As of September 30, 2020, the revenue from approximately 34 % of our tenants (based on total commercial leases) is being recognized on a cash basis. As of September 30, 2020 and December 31, 2019, our straight-line rent receivables balance was $102.9 million and $100.3 million, respectively, and is included in "accounts and notes receivable, net" on our consolidated balance sheet.
Long-Lived Assets and Impairment
There are estimates and assumptions made by management in preparing the consolidated financial statements for which the actual results will be determined over long periods of time. This includes the recoverability of long-lived assets, including our properties that have been acquired or redeveloped and our investment in certain joint ventures. Management’s evaluation of impairment includes review for possible indicators of impairment as well as, in certain circumstances, undiscounted and discounted cash flow analysis. Since most of our investments in real estate are wholly-owned or controlled assets which are held for use, a property with impairment indicators is first tested for impairment by comparing the undiscounted cash flows, including residual value, to the current net book value of the property. If the undiscounted cash flows are less than the net book value, the property is written down to expected fair value. The calculation of both discounted and undiscounted cash flows requires management to make estimates of future cash flows including revenues, operating expenses, required maintenance and development expenditures, market conditions, demand for space by tenants and rental rates over long periods. Because our properties typically have a long life, the assumptions used to estimate the future recoverability of book value requires significant management judgment. Actual results could be significantly different from the estimates. These estimates have a direct impact on net income, because recording an impairment charge results in a negative adjustment to net income.
On September 1, 2020, the $60.6 million non-recourse mortgage loan on The Shops at Sunset Place matured. The mortgage was not repaid and thus the lender declared the loan in default. We are an approximately 90 % owner in the partnership that owns the property, and we consolidate the partnership as we are the primary beneficiary of this VIE. While we continue to evaluate our long-term plans for the property, taking into account current market conditions and prospective development and
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redevelopment returns, as well as the impact of COVID-19 on the revenue prospects for the property, we currently believe it is unlikely we will move forward with the planned redevelopment or repay the mortgage loan at the current balance, and thus, do not expect we will be long-term holders of this asset. While we continue to engage in negotiations with the lender, we expect our exit from the property would either be achieved through a short term extension of the loan and an orderly sales process commencing in 2021, or potentially, the lender taking control of the asset. Given these current expectations, we have recorded an impairment charge of $57.2 million during the three and nine months ended September 30, 2020.
The fair value estimate used to determine the impairment charge was determined by market comparable data and discounted cash flow analyses. The cash flows utilized in such analyses are comprised of unobservable inputs which include forecasted rental revenue and expenses based upon market conditions and future expectations. The capitalization rates and discount rates utilized in such analyses are based upon unobservable rates that we believe to be within a reasonable range of current market rates for the property. Based on these inputs, we have determined that the $57 million estimated valuation of the property is classified within Level 3 of the fair value hierarchy.
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Recently Adopted and Issued Accounting Pronouncements
Standard | Description | Effect on the financial statements or significant matters | ||
Adopted on January 1, 2020: | ||||
Financial Instruments - Credit Losses (Topic 326) and related updates: ASU 2016-13, June 2016, Financial Instruments - Credit Losses (Topic 326) ASU 2018-19, November 2018, Codification Improvements to Topic 326, Financial Instruments - Credit Losses | This ASU changes the impairment model for most financial assets and certain other instruments, requiring the use of an "expected credit loss" model and adding more disclosure requirements. ASU 2018-19 clarifies that impairment of receivables arising from operating leases should be accounted for in accordance with Topic 842, Leases. | Upon adoption of this standard, we recorded expected losses of $0.5 million in opening accumulated dividends in excess of net income. During the nine months ended September 30, 2020, we recorded additional expected losses of $0.4 million, which are included in rental expenses. | ||
ASU 2018-15, August 2018, Intangibles - Goodwill and Other Internal Use Software: Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract | This ASU requires a customer in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract to follow the internal-use software guidance in ASC 350-40 to determine which implementation costs to capitalize as assets. Capitalized implementation costs related to a hosting arrangement that is a service contract will be amortized over the term of the hosting arrangement. Entities will expense costs during the preliminary project and post-implementation stages as they are incurred. The guidance can be applied prospectively to all implementation costs incurred after the date of adoption or retrospectively in accordance with ASC 250-10-45-5 through ASC 250-10-45-10. | The adoption of this standard does not have a significant impact to our consolidated financial statements. | ||
Issued in 2020: | ||||
ASU 2020-04, March 2020, Reference Rate Reform (Topic 848) | This ASU provides companies with optional practical expedients to ease the accounting burden for contract modifications associated with transitioning away from LIBOR and other interbank offered rates that are expected to be discontinued as part of reference rate reform. For hedges, the guidance generally allows changes to the reference rate and other critical terms without having to de-designate the hedging relationship, as well as allows the shortcut method to continue to be applied. For contract modifications, changes in the reference rate or other critical terms will be treated as a continuation of the prior contract. This guidance can be applied immediately, however, is generally only available through December 31, 2022. | We are still evaluating the impact of reference rate reform and whether we will apply any of these practical expedients. | ||
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Standard | Description | Effect on the financial statements or significant matters | ||
ASU 2020-06, August 2020, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity | This ASU simplifies the accounting for convertible instruments by removing the requirements to separately present certain conversion features in equity, simplifying the settlement assessment that entities are required to perform to determine whether a contract qualifies for equity classification, and generally requiring use of the if-converted method for all convertible instruments in the diluted EPS calculation and include the effect of potential share settlement (if the effect is more dilutive). The guidance is effective for annual periods beginning after December 15, 2021, and interim periods therein. | The adoption of this standard is not expected to have a significant impact to our consolidated financial statements. | ||
The following tables provide supplemental disclosures related to the Consolidated Statements of Cash Flows:
Nine Months Ended | |||||||
September 30, | |||||||
2020 | 2019 | ||||||
(In thousands) | |||||||
SUPPLEMENTAL DISCLOSURES: | |||||||
Total interest costs incurred | $ | $ | |||||
Interest capitalized | ( | ) | ( | ) | |||
Interest expense | $ | $ | |||||
Cash paid for interest, net of amounts capitalized | $ | $ | |||||
Cash paid for income taxes | $ | $ | |||||
NON-CASH INVESTING AND FINANCING TRANSACTIONS: | |||||||
DownREIT operating partnership units issued with acquisition | $ | $ | |||||
Mortgage loans assumed with acquisition | $ | $ | |||||
DownREIT operating partnership units redeemed for common shares | $ | $ | |||||
Shares issued under dividend reinvestment plan | $ | $ | |||||
September 30, | December 31, | ||||||
2020 | 2019 | ||||||
(In thousands) | |||||||
RECONCILIATION OF CASH, CASH EQUIVALENTS, AND RESTRICTED CASH: | |||||||
Cash and cash equivalents | $ | $ | |||||
Restricted cash (1) | |||||||
Total cash, cash equivalents, and restricted cash | $ | $ | |||||
(1) | Restricted cash balances are included in "prepaid expenses and other assets" on our consolidated balance sheets. |
NOTE 3—REAL ESTATE
On January 10, 2020, we acquired a 49,000 square foot shopping center in Fairfax, Virginia for $22.3 million. This property is adjacent to, and will be operated as part of our Fairfax Junction property. This purchase price was paid with a combination of cash and the issuance of 163,322 downREIT operating partnership units. Approximately $0.5 million and $0.4 million of net assets acquired were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively.
On February 12, 2020, we acquired two buildings totaling 12,000 square feet in Hoboken, New Jersey for $14.3 million, including the assumption of $8.9 million of mortgage debt. This acquisition is in addition to the 37 buildings previously
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acquired, and was completed through the joint venture that was formed in 2019, for which we own a 90 % interest. Less than $0.1 million and approximately $3.3 million of net assets acquired were allocated to other assets for "above market leases," and other liabilities for "below market leases," respectively.
On April 21, 2020, we sold a building in Pasadena, California for $16.1 million, which resulted in a gain of $11.7 million.
NOTE 4—DEBT
In connection with the two buildings we acquired in Hoboken, New Jersey on February 12, 2020, we assumed two mortgage loans with a net face amount of $8.9 million and a fair value of $9.0 million. The mortgage loans bear interest at 4.00 % and mature on July 27, 2027.
In March 2020, in order to strengthen our financial position and balance sheet, to maximize our liquidity, and to provide maximum financial flexibility to continue our business initiatives as the effects of COVID-19 continue to evolve, we borrowed $990.0 million under our revolving credit facility, representing a draw-down of almost the entirety of our $1.0 billion revolving credit facility. This amount was subsequently repaid when we entered into a $400.0 million unsecured term loan on May 6, 2020 and issued $700.0 million of fixed rate unsecured senior notes on May 11, 2020.
The unsecured term loan matures on May 6, 2021, plus one twelve month extension at our option, and bears interest at LIBOR plus 135 basis points based on our current credit rating. Our net proceeds from this transaction after underwriting fees and other costs were $398.7 million.
The $700.0 million of unsecured senior notes issued in May 2020 comprise a $300.0 million reopening of our 3.95 % senior notes maturing on January 15, 2024 and a $400.0 million issuance of 3.50 % senior notes maturing on June 1, 2030. The 3.95 % senior notes were offered at 103.257 % of the principal amount with a yield to maturity of 2.944 %, and have the same terms and are of the same series as the $300.0 million senior notes issued on December 9, 2013. The 3.50 % senior notes were offered at 98.911 % of the principal amount with a yield to maturity of 3.630 %. Our net proceeds from these transactions after the net issuance premium, underwriting fees, and other costs were $700.1 million.
On September 1, 2020, the $60.6 million non-recourse mortgage loan on The Shops at Sunset Place matured. The mortgage was not repaid and thus the lender declared the loan in default. We continue to engage in negotiations with the lender. The default did not trigger a cross default with any of our other indebtedness. At September 30, 2020, accrued interest and other fees payable to the lender total $0.8 million.
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, 2020 | December 31, 2019 | ||||||||||||||
Carrying Value | Fair Value | Carrying Value | Fair Value | ||||||||||||
(In thousands) | |||||||||||||||
Mortgages and notes payable | $ | $ | $ | $ | |||||||||||
Senior notes and debentures | $ | $ | $ | $ | |||||||||||
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As of September 30, 2020, we have two interest rate swap agreements with notional amounts of $56.5 million that are measured at fair value on a recurring basis. The interest rate swap agreements fix the interest rate on $56.5 million of mortgage payables at 3.67 % through December 15, 2029. 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, 2020 was a liability of $5.7 million and is included in "other liabilities and deferred credits" on our consolidated balance sheet. For the three and nine months ended September 30, 2020, the value of our interest rate swaps increased $0.3 million and decreased $5.9 million, respectively (including $0.2 million and 0.4 million, respectively, reclassified from other comprehensive loss to interest expense). A summary of our financial (liabilities) assets that are measured at fair value on a recurring basis, by level within the fair value hierarchy is as follows:
September 30, 2020 | December 31, 2019 | ||||||||||||||||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||
Interest rate swaps | $ | $ | ( | ) | $ | $ | ( | ) | $ | $ | $ | $ | |||||||||||||||||||
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 common shares, at our option. A total of 744,617 downREIT operating partnership units are outstanding which have a total fair value of approximately $54.7 million, which is calculated by multiplying the outstanding number of downREIT partnership units by our closing stock price on September 30, 2020.
NOTE 7—SHAREHOLDERS’ EQUITY
The following table provides a summary of dividends declared and paid per share:
Nine Months Ended September 30, | |||||||||||||||
2020 | 2019 | ||||||||||||||
Declared | Paid | Declared | Paid | ||||||||||||
Common shares | $ | $ | $ | $ | |||||||||||
5.417% Series 1 Cumulative Convertible Preferred shares | $ | $ | $ | $ | |||||||||||
5.0% Series C Cumulative Redeemable Preferred shares (1) | $ | $ | $ | $ | |||||||||||
(1) | Amount represents dividends per depository share, each representing 1/1000th of a share. |
We have an at-the-market (“ATM”) equity program in which we may from time to time offer and sell common shares having an aggregate offering price of up to