XNYS:AKR Acadia Realty Trust Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 
Washington, D.C. 20549
 
FORM 10-Q
 
 
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 

For the quarterly period ended March 31, 2012
 
or
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 1-12002
 
ACADIA REALTY TRUST
 
(Exact name of registrant in its charter)
MARYLAND
 (State or other jurisdiction of
 incorporation or organization)
 
23-2715194
 (I.R.S. Employer
 Identification No.)
 
 
 
1311 MAMARONECK AVENUE, SUITE 260, WHITE PLAINS, NY
 (Address of principal executive offices)
 10605
 (Zip Code)
(914) 288-8100
(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.
YES x
 
NO o
            
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x
 
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
 
Accelerated Filer  o
 
 
 
Non-accelerated Filer  o
 
Smaller Reporting Company  o

 Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
 As of May 9, 2012 there were 43,883,941 common shares of beneficial interest, par value $.001 per share, outstanding.





ACADIA REALTY TRUST AND SUBSIDIARIES
 
FORM 10-Q
 
INDEX

 
 
Page
 
 
 
Part I:
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II:
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 






Part I. Financial Information

Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
March 31,
2012
 
December 31,
2011
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
303,538

 
$
285,622

Building and improvements
1,022,663

 
958,995

Construction in progress
11,742

 
7,483

 
1,337,943

 
1,252,100

Less: accumulated depreciation
188,243

 
180,796

Net operating real estate
1,149,700

 
1,071,304

Real estate under development
227,703

 
219,645

Notes receivable, net
77,180

 
59,989

Investments in and advances to unconsolidated affiliates
85,099

 
84,568

Cash and cash equivalents
49,670

 
89,812

Cash in escrow
18,701

 
20,969

Rents receivable, net
25,829

 
26,415

Deferred charges, net
26,016

 
25,854

Acquired lease intangibles, net
25,767

 
26,721

Prepaid expenses and other assets
39,289

 
26,667

Accounts receivable from related party
1,782

 
1,375

Total assets
$
1,726,736

 
$
1,653,319

LIABILITIES
 

 
 

Mortgage notes payable
$
811,700

 
$
787,910

Convertible notes payable
930

 
930

Distributions in excess of income from, and investments in, unconsolidated affiliates
21,863

 
21,710

Accounts payable and accrued expenses
34,705

 
39,647

Dividends and distributions payable
8,097

 
7,914

Acquired lease and other intangibles, net
5,173

 
5,462

Other liabilities
20,929

 
20,437

Total liabilities
903,397

 
884,010

EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 43,572,025 and 42,586,376 shares, respectively
44

 
43

Additional paid-in capital
368,978

 
348,667

Accumulated other comprehensive loss
(3,319
)
 
(3,913
)
Retained earnings
35,519

 
39,317

Total shareholders’ equity
401,222

 
384,114

Noncontrolling interests
422,117

 
385,195

Total equity
823,339

 
769,309

Total liabilities and equity
$
1,726,736

 
$
1,653,319

See accompanying notes

1




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 (unaudited)
 
Three Months Ended
 
March 31,
(dollars in thousands, except per share amounts)
2012
 
2011
Revenues
 
 
 
Rental income
$
30,583

 
$
26,388

Interest income
2,055

 
4,538

Expense reimbursements
6,002

 
5,204

Management fee income
433

 
629

Other
553

 
688

Total revenues
39,626

 
37,447

Operating Expenses
 

 
 

Property operating
6,921

 
7,421

Other operating
1,035

 

Real estate taxes
4,942

 
4,138

General and administrative
5,933

 
5,690

Depreciation and amortization
9,141

 
7,634

Total operating expenses
27,972

 
24,883

Operating income
11,654

 
12,564

Equity in losses of unconsolidated affiliates
(56
)
 
(148
)
Other interest income
54

 
34

Gain on debt extinguishment

 
1,673

Interest and other finance expense
(8,634
)
 
(8,953
)
Income from continuing operations before income taxes
3,018

 
5,170

Income tax provision
195

 
262

Income from continuing operations
2,823

 
4,908

Discontinued Operations
 
 
 
Operating income from discontinued operations

 
822

Gain on sale of property

 
3,922

Income from discontinued operations

 
4,744

Net income
2,823

 
9,652

Noncontrolling interests
 

 
 

Continuing operations
1,187

 
3,277

Discontinued operations

 
(3,506
)
Net loss (income) attributable to noncontrolling interests
1,187

 
(229
)
Net income attributable to Common Shareholders
$
4,010

 
$
9,423

Basic Earnings per Share
 

 
 

Income from continuing operations
$
0.09

 
$
0.20

Income from discontinued operations

 
0.03

Basic earnings per share
$
0.09

 
$
0.23

Diluted Earnings per Share
 

 
 

Income from continuing operations
$
0.09

 
$
0.20

Income from discontinued operations

 
0.03

Diluted earnings per share
$
0.09

 
$
0.23

 See accompanying notes

2





ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
 
 
 
 
Three Months Ended
 
 
 
March 31,
 
 
 
2012
 
2011
 
(dollars in thousands)
 
 
 
 
 
Net income
 
$
2,823

 
$
9,652

 
Other Comprehensive income
 

 

 
Unrealized income (loss) on valuation of swap agreements
 
57

 
(307
)
 
Reclassification of realized interest on swap agreements
 
637

 
885

 
Other comprehensive income
 
694

 
578

 

 
 
 
 
 
Comprehensive income
 
3,517

 
10,230

 

 
 
 
 
 
Comprehensive loss (income) attributable to noncontrolling interests
 
1,087

 
(312
)
 

 
 
 
 
 
Comprehensive income attributable to Common Shareholders
 
$
4,604

 
$
9,918

 
 
 
 
 
 
 
`
 See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011

(unaudited)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
(amounts in thousands, except per share amounts)
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2011
42,586

 
$
43

 
$
348,667

 
$
(3,913
)
 
$
39,317

 
$
384,114

 
$
385,195

 
$
769,309

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
161

 

 
2,534

 

 

 
2,534

 
(2,534
)
 

Issuance of Common Shares, net of issuance costs
808

 
1

 
17,760

 

 

 
17,761

 

 
17,761

Issuance of OP Units to acquire real estate

 

 

 

 

 

 
2,279

 
2,279

Dividends declared ($0.18 per Common Share)

 

 

 

 
(7,808
)
 
(7,808
)
 
(287
)
 
(8,095
)
Vesting of employee Restricted Share and LTIP awards
22

 

 
40

 

 

 
40

 
846

 
886

Common Shares issued under Employee Share Purchase Plan
1

 

 
20

 

 

 
20

 

 
20

Issuance of LTIP Unit awards to employees

 

 

 

 

 

 
2,577

 
2,577

Issuance of Common Shares to trustees

 

 
84

 

 

 
84

 

 
84

Exercise of Share options
1

 

 
23

 

 

 
23

 

 
23

Employee Restricted Shares cancelled
(7
)
 

 
(150
)
 

 

 
(150
)
 

 
(150
)
Noncontrolling interest distributions

 

 

 

 

 

 
(3,450
)
 
(3,450
)
Noncontrolling interest contributions

 

 

 

 

 

 
38,578

 
38,578

 
43,572

 
44

 
368,978

 
(3,913
)
 
31,509

 
396,618

 
423,204

 
819,822

Comprehensive income (loss):
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Net income (loss)

 

 

 

 
4,010

 
4,010

 
(1,187
)
 
2,823

Unrealized income (loss) on valuation of swap agreements

 

 

 
124

 

 
124

 
(67
)
 
57

Reclassification of realized interest on swap agreements

 

 

 
470

 

 
470

 
167

 
637

Total comprehensive income (loss)

 

 

 
594

 
4,010

 
4,604

 
(1,087
)
 
3,517

Balance at March 31, 2012
43,572

 
$
44

 
$
368,978

 
$
(3,319
)
 
$
35,519

 
$
401,222

 
$
422,117

 
$
823,339

 















4




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011 (continued)

(unaudited)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
(amounts in thousands, except per share amounts)
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2010
40,254

 
$
40

 
$
303,823

 
$
(2,857
)
 
$
17,206

 
$
318,212

 
$
269,310

 
$
587,522

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
10

 

 
40

 

 

 
40

 
(40
)
 

Dividends declared ($0.18 per Common Share)

 

 

 

 
(7,258
)
 
(7,258
)
 
(247
)
 
(7,505
)
Vesting of employee Restricted Share and LTIP awards
95

 

 
132

 

 

 
132

 
700

 
832

Common Shares issued under Employee Share Purchase Plan
1

 

 
24

 

 

 
24

 

 
24

Issuance of LTIP Unit awards to employees

 

 

 

 

 

 
2,441

 
2,441

Issuance of Common Shares to trustees

 

 
22

 

 

 
22

 

 
22

Exercise of Share options
1

 

 
7

 

 

 
7

 

 
7

Employee Restricted Shares cancelled
(40
)
 

 
(724
)
 

 

 
(724
)
 

 
(724
)
Noncontrolling interest distributions

 

 

 

 

 

 
(83
)
 
(83
)
 
40,321

 
40

 
303,324

 
(2,857
)
 
9,948

 
310,455

 
272,081

 
582,536

Comprehensive income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
9,423

 
9,423

 
229

 
9,652

Unrealized loss on valuation of swap agreements

 

 

 
(241
)
 

 
(241
)
 
(66
)
 
(307
)
Reclassification of realized interest on swap agreements

 

 

 
736

 

 
736

 
149

 
885

Total comprehensive income

 

 

 
495

 
9,423

 
9,918

 
312

 
10,230

Balance at March 31, 2011
40,321

 
$
40

 
$
303,324

 
$
(2,362
)
 
$
19,371

 
$
320,373

 
$
272,393

 
$
592,766




See accompanying notes
 


5




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Three Months Ended
(dollars in thousands)
March 31,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
2,823

 
$
9,652

Adjustments to reconcile net income to net cash provided by operating activities
 

 
 
Depreciation and amortization
9,141

 
8,240

Amortization of financing costs
683

 
944

Gain on sale of property

 
(3,922
)
Gain on debt extinguishment

 
(1,673
)
Non-cash accretion of notes receivable
(114
)
 
(406
)
Share compensation expense
970

 
853

Equity in losses of unconsolidated affiliates
56

 
148

Distributions of operating income from unconsolidated affiliates
128

 

Other, net
472

 
1,557

Changes in assets and liabilities
 

 
 
Cash in escrow
2,268

 
2,341

Rents receivable, net
168

 
(2,409
)
Prepaid expenses and other assets
(3,418
)
 
(6,504
)
Accounts payable and accrued expenses
(2,365
)
 
(1,057
)
Other liabilities
1,059

 
(3,006
)
Net cash provided by operating activities
11,871

 
4,758

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(48,689
)
 

Redevelopment and property improvement costs
(20,081
)

(13,225
)
Deferred acquisition and leasing costs
(1,035
)
 
(900
)
Investments in and advances to unconsolidated affiliates
(1,690
)
 
(40,618
)
Return of capital from unconsolidated affiliates
1,255

 
689

Repayments of notes receivable
3

 
874

Issuance of notes receivable
(17,080
)
 
(3,834
)
Proceeds from sale of property

 
7,977

Net cash used in investing activities
(87,317
)
 
(49,037
)

6




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
(unaudited)

 
Three Months Ended
(dollars in thousands)
March 31,
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage notes
(3,513
)
 
(8,411
)
Proceeds received from mortgage notes
4,250

 
48,149

Increase in deferred financing and other costs
(570
)
 
(512
)
Capital contributions from noncontrolling interests
38,578

 

Distributions to noncontrolling interests
(3,697
)
 
(254
)
Dividends paid to Common Shareholders
(7,666
)
 
(7,256
)
Proceeds from stock offering, net of issuance costs of $126
8,029

 

Repurchase and cancellation of Common Shares
(150
)
 
(725
)
Common Shares issued under Employee Share Purchase Plan
20

 
24

Exercise of options to purchase Common Shares
23

 
7

Net cash provided by financing activities
35,304

 
31,022

Decrease in cash and cash equivalents
(40,142
)
 
(13,257
)
Cash and cash equivalents, beginning of period
89,812

 
120,592

Cash and cash equivalents, end of period
$
49,670

 
$
107,335

Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $1,433 and $1,188, respectively
$
7,700

 
$
8,492

 
 
 
 
Cash paid for income taxes
$
70

 
$
3,343

 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
Acquisition of real estate through assumption of debt
$
23,062

 
$

Acquisition of real estate through issuance of OP Units
$
2,279

 
$

 
 
 
 

See accompanying notes




7

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

Acadia Realty Trust (the “Trust”) and subsidiaries (collectively, the “Company”), is a fully-integrated equity real estate investment trust (“REIT”) focused on the ownership, management and redevelopment of retail properties and urban/infill mixed-use properties with a retail component located primarily in high-barrier-to-entry, densely-populated metropolitan areas in the United States along the East Coast and in Chicago.

All of the Company's assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and entities in which the Operating Partnership owns an interest. As of March 31, 2012, the Trust controlled approximately 99% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”) and employees who have been awarded restricted OP units (“LTIP Units”) as long-term incentive compensation (Note 13). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Trust (“Common Shares”).

As of March 31, 2012, the Company has ownership interests in 54 properties within its core portfolio, which consist of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through its opportunity funds (“Core Portfolio”). The Company also has ownership interests in 35 properties within its three opportunity funds, Acadia Strategic Opportunity Fund L.P. (“Fund I”), Acadia Strategic Opportunity Fund II, LLC (“Fund II”) and Acadia Strategic Opportunity Fund III LLC (“Fund III” and together with Fund I and Fund II, the “Opportunity Funds”). The 89 Core Portfolio and Opportunity Fund properties consist of commercial properties, primarily neighborhood and community shopping centers, mixed-use properties with a retail component and self-storage properties. In addition, the Company also invests in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I”), Acadia Mervyn Investors II, LLC (“Mervyns II”) and Fund II, all on a non-recourse basis. These investments comprise and are referred to as the Company's Retailer Controlled Property initiative (“RCP Venture”). The Operating Partnership has the following equity interests in the Opportunity Funds, Mervyns I and Mervyns II:
Entity
Equity Interest Held By Operating Partnership
Fund I and Mervyns I
22.2%
Fund II and Mervyns II
20.0%
Fund III
19.9%

In addition, with respect to each of the Opportunity Funds, Mervyns I and Mervyns II, the Operating Partnership is entitled to a profit participation in excess of its equity interest percentage based on certain investment return thresholds (“Promote”).
 
Basis of Presentation

The consolidated financial statements include the consolidated accounts of the Company and its investments in partnerships and limited liability companies in which the Company is presumed to have control in accordance with the consolidation guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”). Investments in entities for which the Company has the ability to exercise significant influence but does not have financial or operating control, are accounted for under the equity method of accounting. Accordingly, the Company's share of the net earnings (or losses) of entities accounted for under the equity method are included in consolidated net income under the caption, Equity in Earnings (Losses) of Unconsolidated Affiliates. Investments in entities for which the Company does not have the ability to exercise any influence are accounted for under the cost method.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.


8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Actual results could differ from these estimates. Operating results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim period. These consolidated financial statements should be read in conjunction with the Company's 2011 Annual Report on Form 10-K, as filed with the SEC on February 28, 2012.
Reclassifications
Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 presentation.

Real Estate

The Company reviews its operating long-lived assets for impairment when there is an event or change in circumstances that indicates that the carrying amount may not be recoverable. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held-for-sale, the Company reduces its carrying value to the fair value less costs to dispose. Management does not believe that the values of any of the Company's properties are impaired as of March 31, 2012.

Involuntary Conversion of Asset
The Company experienced significant flooding that resulted in extensive damage to one of its properties during September 2011. Costs related to the clean-up and redevelopment are insured to a limit sufficient that the Company believes will allow for full restoration of the property. Loss of rents during the redevelopment are covered by business interruption insurance subject to a $0.1 million deductible. The Company plans to restore the improvements that were damaged by the flooding and expects that the costs of such restoration and rebuilding will be recoverable from insurance proceeds. In accordance with ASC Topic 360 “Property, Plant and Equipment,” and as a result of the above-described property damage, the Company has recorded a write-down of the asset's carrying value in the accompanying consolidated balance sheets of approximately $1.4 million as of March 31, 2012. In addition, the Company has recorded an insurance recovery in the same amount that is included in Prepaid Expenses and Other Assets in the accompanying consolidated balance sheets. The Company has also provided a $0.1 million provision in the 2011 year-end consolidated statement of income of the Company's 2011 Annual Report on Form 10-K, as filed with the SEC for its exposure to the insurance deductible attributable to the loss of rents. As of March 31, 2012, the Company has received initial insurance proceeds of approximately $6.9 million.

Recent Accounting Pronouncements

During May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 amended ASC 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards (“IFRS”). The amendments, which primarily require additional fair value disclosure, are to be applied prospectively. ASU 2011-04 is effective for interim and annual periods beginning after December 15, 2011. The adoption of ASU No. 2011-04 did not have a material impact on the Company's financial condition or results of operations.

During June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which companies present comprehensive income. Under ASU No. 2011-05, companies may present comprehensive income, which is net income adjusted for the components of other comprehensive income, either in a single continuous statement of comprehensive income or by using two separate but consecutive statements. Regardless of the alternative chosen, companies must display adjustments for items reclassified from other comprehensive income into net income within the presentation of both net income and other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011, on a retrospective basis. The Company adopted ASU 2011-05 as of December 31, 2011 and the adoption did not have a material impact on the Company's financial condition or results of operations.




9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

During December 2011, the FASB issued ASU No. 2011-10, “Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate - a Scope Clarification" which clarifies current guidance found in ASC Topic 810 as to the proper accounting in situations when a reporting entity ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary's nonrecourse debt. ASU No. 2011-10 is effective for fiscal years, and interim periods within those years,beginning on or after June 15, 2012. The adoption of ASU No. 2011-10 is not expected to have a material impact on the Company's financial condition or results of operations.

2.
EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed by dividing net income attributable to Common Shareholders by the weighted average Common Shares outstanding. At March 31, 2012, the Company has unvested LTIP Units (Note 13) which provide for non-forfeitable rights to dividend equivalent payments. Accordingly, these unvested LTIP Units are considered participating securities and are included in the computation of basic earnings per Common Share pursuant to the two-class method.

Diluted earnings per Common Share reflects the potential dilution of the conversion of obligations and the assumed exercises of securities including the effects of restricted share unit (“Restricted Share Units”) and share option awards issued under the Company's Share Incentive Plans (Note 13). The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares would be anti-dilutive and are therefore not included in the computation of diluted earnings per share for the three months ended March 31, 2012, but would be dilutive and therefore are included in the computation of diluted earnings per share for the three months ended March 31, 2011.

The effect of the conversion of Common OP Units is not reflected in the computation of basic and diluted earnings per share, as they are exchangeable for Common Shares on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as noncontrolling interests in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share. The conversion of the convertible notes payable (Note 9) is not included in the computation of basic and diluted earnings per share as such conversion, based on the current market price of the Common Shares, would be settled with cash.

The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated:
 
Three Months Ended
 
March 31,
(dollars in thousands, except per share amounts)
2012
 
2011
Numerator
 
 
 
Income from continuing operations
$
4,010

 
$
8,185

Less: net income attributable to participating securities
84

 
256

Income from continuing operations net of income attributable to participating securities
3,926

 
7,929

Effect of dilutive securities:
 
 
 
Preferred OP Unit distributions

 
4

Numerator for diluted earnings per Common Share
$
3,926

 
$
7,933

 
 
 
 
Denominator
 

 
 

Weighted average shares for basic earnings per share
42,736

 
40,318

Effect of dilutive securities:
 

 
 

Employee Restricted Share Units and share options
43

 
21

Convertible Preferred OP Units

 
25

Dilutive potential Common Shares
43

 
46

Denominator for diluted earnings per share
42,779

 
40,364

Basic earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.09

 
$
0.20

Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.09

 
$
0.20


10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During January 2012, the Company established an at-the-market (“ATM”) equity program with an aggregate offering amount of up to $75.0 million in Common Shares. The Company intends to use the future net proceeds of this offering for general corporate purposes, which may include, among other things, repayment of its debt, future acquisitions (directly in the Core Portfolio and through its Opportunity Funds), and redevelopments of and capital improvements to its properties. During the first quarter 2012, the Company issued 0.8 million Common Shares through the ATM program which generated gross proceeds of $18.2 million and net proceeds of $17.9 million. Of the net proceeds of $17.9 million, $8.2 million was received during March 2012 and $9.7 million was received during April 2012. The net proceeds were used for acquisitions and general corporate purposes.

Noncontrolling interests represent the portion of equity in entities consolidated in the accompanying financial statements that the Company does not own. Such noncontrolling interests are reported on the Consolidated Balance Sheets within equity, separately from shareholders' equity.

Noncontrolling interests include third party interests in the Company’s Opportunity Funds and other entities. It also includes interests in the Operating Partnership which represent (i) the limited partners’ 384,991 and 279,748 Common OP Units at March 31, 2012 and December 31, 2011, respectively; (ii) 188 Series A Preferred OP Units at March 31, 2012 and December 31, 2011; and (iii) 237,000 and 217,826 LTIP Units at March 31, 2012 and December 31, 2011, respectively.


4.
ACQUISITION AND DISPOSITION OF REAL ESTATE AND DISCONTINUED OPERATIONS

Acquisitions
Core Portfolio
During March 2012, the Company acquired a four property portfolio located in Chicago, Illinois for $18.8 million, including the assumption of debt of $16.0 million.
During February 2012, the Company acquired a 40,000 square foot single tenant property for $12.2 million, which included the assumption of $7.0 million of in-place mortgage debt. In addition, the Company acquired a 13,300 square foot single tenant property for $6.7 million. Both properties are located in Cambridge, Massachusetts.
During January 2012, the Company acquired 1520 North Milwaukee Avenue, a 3,100 square foot property located in Chicago, Illinois for $3.8 million.
The Company expensed $0.4 million of costs related to these 2012 Core Portfolio acquisitions.

Fund III
During February 2012, Fund III, in a joint venture with an unaffiliated partner, acquired a 50% interest in 640 Broadway, a 45,700 square foot property located in New York, New York for $16.3 million.
The Company expensed $0.6 million of costs related to this 2012 Fund III acquisition.

Discontinued Operations

The Company reports properties held-for-sale and properties sold during the periods as discontinued operations. The results of operations of discontinued operations are reflected as a separate component within the accompanying Consolidated Statements of Income for all periods presented.

During December 2011, the Company completed the sale of 15 Fund I leasehold interests in its Kroger/Safeway portfolio for $17.5 million.

During October 2011, Fund I sold Granville Centre, a 135,000 square foot shopping center, located in Columbus, Ohio, for $2.3 million.



11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



4.
ACQUISITION AND DISPOSITION OF REAL ESTATE AND DISCONTINUED OPERATIONS (continued)

Discontinued Operations (continued)

During May 2011, the Company sold the Ledgewood Mall, a 517,000 square foot, unencumbered enclosed mall located in Ledgewood, New Jersey, for $37.0 million.

During January 2011, the Company completed the sale of a Fund II leasehold interest in a location at the Oakbrook Center, located in Oak Brook, Illinois, for $8.2 million. The sale resulted in a gain of $3.9 million.

The combined results of operations of the properties classified as discontinued operations for the three months ended March 31, 2011 are summarized as follows:

 
 
Three Months Ended
STATEMENT OF OPERATIONS
 
March 31,
(dollars in thousands) 
 
2011
Total revenues
 
$
2,404

Total expenses
 
1,582

Operating income
 
822

Gain on sale of property
 
3,922

Income from discontinued operations
 
4,744

(Income) from discontinued operations attributable to noncontrolling interests
 
(3,506
)
Income from discontinued operations attributable to Common Shareholders
 
$
1,238


5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

The Company owns a 22.2% interest in an approximately one million square foot retail portfolio (the “Brandywine Portfolio”) located in Wilmington, Delaware, a 49% interest in a 311,000 square foot shopping center located in White Plains, New York (“Crossroads”), and a 50% interest in an approximately 28,000 square foot retail portfolio located in Georgetown, Washington D.C. (the "Georgetown Portfolio"). These investments are accounted for under the equity method.

Opportunity Funds

RCP Venture

The Company along with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) formed an investment group, the RCP Venture, for the purpose of making investments in surplus or underutilized properties owned by retailers. The RCP Venture is neither a single entity nor a specific investment. Any member of this group has the option of participating, or not, in any individual investment and each individual investment has been made on a stand-alone basis through a separate limited liability company (“LLC”). These investments have been made through different investment vehicles with different affiliated and unaffiliated investors and different economics to the Company. Investments under the RCP Venture are structured as separate joint ventures as there may be other investors participating in certain investments in addition to Klaff, Lubert-Adler and Acadia. The Company has made these investments through its subsidiaries, Mervyns I, Mervyns II and Fund II, (together the “Acadia Investors”), all on a non-recourse basis. Through March 31, 2012, the Acadia Investors have made investments in Mervyns Department Stores (“Mervyns”) and Albertsons including additional investments in locations that are separate from these original investments (“Add-






12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES (continued)

On Investments”). Additionally, they have invested in Shopko, Marsh and Rex Stores Corporation (collectively “Other RCP Investments”).

The Acadia Investors have non-controlling interests in the individual investee LLC’s as follows:
 
 
 
Acadia Investors
Ownership % in:
Investment
Investee LLC
Acadia Investors
Entity
Investee
LLC
Underlying
entity(ies)
Mervyns
KLA/Mervyn’s, LLC
Mervyns I and Mervyns II
10.5%
5.8%
Mervyns Add-On investments
KLA/Mervyn’s, LLC
Mervyns I and Mervyns II
10.5%
5.8%
Albertsons
KLA A Markets, LLC
Mervyns II
18.9%
5.7%
Albertsons Add-On investments
KLA A Markets, LLC
Mervyns II
20.0%
6.0%
Shopko
KLA-Shopko, LLC
Fund II
20.0%
2.0%
Marsh and Add-On investments
KLA Marsh, LLC
Fund II
20.0%
3.3%
Rex Stores
KLAC Rex Venture, LLC
Mervyns II
13.3%
13.3%

The Company accounts for the original investments in Mervyns and Albertsons under the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operating control.

The Company accounts for the Add-On Investments and Other RCP Investments under the cost method. Due to its minor ownership interest, based on the size of the investments as well as the terms of the underlying operating agreements, the Company has no influence over such entities' operating and financial policies. Other than the minority investor rights to which the Company is entitled pursuant to statute, it has no rights other than to receive its pro-rata share of cash distributions as declared by the managers of the Add-On Investments and Other RCP Investments. The Company has no rights with respect to the control and operation of these investment vehicles, nor with the formulation and execution of business and investment policies.

During the three months ended March 31, 2012, the Company received RCP Venture distributions from Albertsons Add-On investments and Rex Stores totaling $1.0 million of which the Operating Partnership's share totaled $0.2 million.

The following table summarizes activity related to the RCP Venture investments from inception through March 31, 2012:

(dollars in thousands)
 
 
 
Operating Partnership Share
Investment
Year Acquired
Invested
Capital
and Advances
 
Distributions
Invested
Capital
and Advances
 
Distributions
Mervyns
2004
$
26,058

$
45,966

$
4,901

$
11,251

Mervyns Add-On investments
2005/2008
6,517

3,558

1,046

819

Albertsons
2006
20,717

81,594

4,239

16,318

Albertsons Add-On investments
2006/2007
2,416

2,461

388

492

Shopko
2006
1,108

1,659

222

332

Marsh and Add-On investments
2006/2008
2,667

2,639

533

528

Rex Stores
2007
2,701

1,063

535

213

 
 
$
62,184

$
138,940

$
11,864

$
29,953






13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES (continued)

Other Opportunity Fund Investments
The unaffiliated venture partners for Fund III's investments in Lincoln Road, White Oak, Parkway Crossing and the White City Shopping Center maintain control over these entities and, as such, the Company accounts for these investments under the equity method.
During June 2010, Fund III, in a joint venture with an unaffiliated partner, invested in an entity for the purpose of providing management services to owners of self-storage properties, including the 14 locations currently owned through Fund II and Fund III. Fund III has a 50% interest in the entity. This entity was determined to be a variable interest entity for which the Company was determined not to be the primary beneficiary. As such, the Company accounts for this investment under the equity method.
Summary of Investments in Unconsolidated Affiliates

The following Combined and Condensed Balance Sheets and Statements of Operations, in each period, summarize the financial information of the Company’s investments in unconsolidated affiliates.
(dollars in thousands)
March 31,
2012
 
December 31,
2011
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
280,227

 
$
280,470

Investment in unconsolidated affiliates
133,514

 
156,421

Other assets
30,932

 
29,587

Total assets
$
444,673

 
$
466,478

Liabilities and partners’ equity
 

 
 

Mortgage note payable
$
318,757

 
$
319,425

Other liabilities
17,133

 
16,902

Partners’ equity
108,783

 
130,151

Total liabilities and partners’ equity
$
444,673

 
$
466,478

Company’s investment in and advances to unconsolidated affiliates
$
85,099

 
$
84,568

Company's share of distributions in excess of share of income and investments in unconsolidated affiliates
$
(21,863
)
 
$
(21,710
)
 
Three Months Ended
 
(dollars in thousands)
March 31,
2012
 
March 31,
2011
 
Combined and Condensed Statements of Operations
 
 
 
 
Total revenues
$
12,296

 
$
9,582

 
Operating and other expenses
4,454

 
3,766

 
Interest expense
4,638

 
4,016

 
Equity in (losses) earnings of unconsolidated affiliates
(1,623
)
 
958

 
Depreciation and amortization
2,272

 
1,869

 
Net (loss) income
$
(691
)
 
$
889

 
 
 
 
 
 
Company’s share of net income (loss)
$
42

 
$
(50
)
 
Amortization of excess investment
(98
)
 
(98
)
 
Company’s equity in (losses) of unconsolidated affiliates
$
(56
)
 
$
(148
)
 
 




14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



6.
NOTES RECEIVABLE

As of March 31, 2012, the Company’s notes receivable, net, aggregated $77.2 million, and were collateralized either by the underlying properties or the borrowers' ownership interests in the entities that own the properties and/or by the borrowers' personal guarantee subject, as applicable, to senior liens, as follows:
Description
Effective
Interest
Rate
Maturity Date
First
Priority
Liens
Net Carrying
amount
of Notes
Receivable
Extension
Options
(dollars in thousands)
 
 
 
 
 
Zero Coupon Loan
24.0%
1/3/2016
$
166,200

$
3,662

Mezzanine Loan
10.0%
12/31/2013
85,835

9,089

Mezzanine Loan
15.0%
Upon Capital Event
11,925

3,834

First Mortgage Loan
12.0%
12/5/2012

21,500

First Mortgage Loan
9.2%
3/30/2013

3,000

First Mortgage Loan
10.8%
Demand

10,000

First Mortgage Loan
7.0%
Demand

4,000

First Mortgage Loan
6.0%
12/1/2012

12,609

2 x 6 months
Construction Loan
20.5%
10/1/2012

5,400

Individually less than 3.0%
6.0% to 12.0%
12/31/13 to 2/3/17
37,623

4,086

Total
 
 
 

$
77,180

 
During March 2012, the Company acquired a 49% interest in a $2.2 million note. The loan matures in February 2017 and is collateralized by a property located in Miami, Florida. The loan bears interest at 6% for years one and two, 7.5% for years three and four, and 8% for year five.
During March 2012, the Company made a $3.0 million loan, which is collateralized by a property located in Chicago, Illinois. The loan matures in March 2013 and bears interest at 9.2%.
During December 2011, the Company made an $8.5 million loan, which is collateralized by five properties located in Chicago, Illinois. The loan matures in December 2012 and bears interest at 12%. During March 2012, this loan was increased to $21.5 million.
Allowances for real estate notes receivable are established based upon management's quarterly review of the investments. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair value of any collateral, the amount and status of any senior debt, and the prospects for the borrower. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loans may differ materially from the carrying value at the balance sheet date.

The activity in the allowance for notes receivable for the three months ended March 31, 2012 is as follows:

(dollars in thousands)
Allowance for Notes Receivable
Balance at December 31, 2011
$
3,276

Provision for losses on notes receivable
29

Balance at March 31, 2012
$
3,305



7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of March 31, 2012, the Company's derivative financial instruments consisted of five interest rate swaps with an aggregate notional value of $49.3 million, which effectively fix LIBOR at rates ranging from 2.65% to 3.79% and mature between November 2012 and December 2022. The Company also has three derivative financial instruments with a notional value of $75.0 million

15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7.
DERIVATIVE FINANCIAL INSTRUMENTS (continued)

which cap variable-rate interest at 3.0%, 6.0% and 3.5% and mature in October 2012, April 2013 and August 2013, respectively. The fair value of these derivative instruments, which is included in other liabilities in the Consolidated Balance Sheets, was a liability totaling $3.0 million and $3.5 million at March 31, 2012 and December 31, 2011, respectively. The notional value does not represent exposure to credit, interest rate, or market risks.

These derivative instruments have been designated as cash flow hedges and hedge the future cash outflows of variable-rate interest payments on mortgage debt. Such instruments are reported at the fair value reflected above. As of March 31, 2012 and December 31, 2011, unrealized losses totaling $3.3 million and $3.9 million, respectively, were reflected in accumulated other comprehensive loss.

As of March 31, 2012 and December 31, 2011, no derivatives were designated as fair value hedges, hedges of net investments in foreign operations or considered to be ineffective. Additionally, the Company does not use derivatives for trading or speculative purposes.
In conjunction with its implementation of updates to the fair value measurements guidance, the Company made an accounting policy election to measure derivative financial instruments subject to master netting agreements on a net basis.

8.
MORTGAGE NOTES PAYABLE

The Company completed the following transactions related to mortgage notes payable and credit facilities during the three months ended March 31, 2012:

During the first quarter 2012, the Company repaid $2.5 million under the Fund III subscription line of credit. As of March 31, 2012, the total outstanding amount on this facility was $133.6 million.

During March 2012, in conjunction with the acquisition of four properties in Chicago, Illinois (Note 2), the Company assumed loans of $14.5 million and $1.5 million, which bear interest at 5.62% and 5.55%, respectively, and mature on February 1, 2016.

During February 2012, in conjunction with the acquisition of a property in Cambridge, Massachusetts (Note 2), the Company assumed a $7.0 million loan which bears interest at 6.26% and matures on May 1, 2016, and has one five-year extension option.

During February 2012, the Company closed on a $4.3 million loan collateralized by a property. The loan bears interest at LIBOR plus 200 basis points and matures on February 28, 2013.


9.
CONVERTIBLE NOTES PAYABLE

In December 2006 and January 2007, the Company issued convertible notes totaling $115.0 million with a fixed interest rate of 3.75% due 2026 (the “Convertible Notes”). The Convertible Notes were issued at par and require interest payments semi-annually in arrears on June 15th and December 15th of each year. The Convertible Notes are unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness. The Convertible Notes have an effective interest rate of 6.03% after giving effect to the accounting treatment required by ASC Topic 470-20, “Debt with Conversion and Other Options.” Holders of the Convertible Notes may require the Company to repurchase the Convertible Notes at par on December 15, 2016 and December 15, 2021.

As the Company determined that the Convertible Notes matured on December 20, 2011, as of December 31, 2011, all loan costs associated with the issuance have been expensed and there is no remaining net carrying amount of the equity component. The additional non-cash interest expense recognized in the Consolidated Statements of Income was $0.3 million for the three months ended March 31, 2011. The if-converted value of the Convertible Notes does not exceed their aggregate principal amount as of March 31, 2012 and there are no derivative transactions that were entered into in connection with the issuance of the Convertible Notes.

Through December 31, 2011, the Company had purchased $114.1 million in principal amount of its Convertible Notes at an average discount of approximately 11% of which $24.0 million was repurchased by the Company at par on December 20, 2011 pursuant to the holder's exercise of their repurchase option. The Company did not purchase any of its Convertible Notes during the three months ended March 31, 2012. The outstanding Convertible Notes as of March 31, 2012 was $0.9 million.

16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


10.         FAIR VALUE MEASUREMENTS

The FASB's fair value measurements and disclosure guidance requires the valuation of certain of the Company's financial assets and liabilities, based on a three-level fair value hierarchy. Market value assumptions obtained from sources independent of the Company are observable inputs that are classified within Levels 1 and 2 of the hierarchy, and the Company's own assumptions about market value assumptions are unobservable inputs classified within Level 3 of the hierarchy.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
2,951

 
$


Financial Instruments

Certain of the Company’s assets and liabilities meet the definition of financial instruments. Except as disclosed below, the carrying amounts of these financial instruments approximate their fair values.

The Company has determined the estimated fair values of the following financial instruments by discounting future cash flows utilizing a discount rate equivalent to the rate at which similar financial instruments would be originated at the reporting date:
 
March 31, 2012
 
December 31, 2011
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
 
 
 
 
 
 
Notes Receivable
$
77,180

 
$
77,180

 
$
59,989

 
$
59,989

Mortgage Notes Payable and Convertible Notes Payable
$
812,630

 
$
824,386

 
$
788,840

 
$
792,737


11.
RELATED PARTY TRANSACTIONS

The Company earned property management fees, legal and leasing fees from the Brandywine Portfolio totaling $0.2 million and $0.5 million for the three months ended March 31, 2012 and 2011, respectively.

Related party receivables due from an unconsolidated affiliate totaled $1.8 million at March 31, 2012 and $1.4 million at December 31, 2011.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended March 31, 2012 and 2011.


12.
SEGMENT REPORTING

The Company has five reportable segments: Core Portfolio, Opportunity Funds, Self-Storage Investments, Notes Receivable and Other. “Notes Receivable” consists of the Company's notes receivable and related interest income. “Other” consists primarily of management fees and other interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. Investments in the Core Portfolio are typically held long-term. Given the contemplated finite life of the Opportunity Funds, these investments are typically held for shorter terms. Fees earned by the Company as the general partner/managing member of the Opportunity Funds are eliminated in the Company's consolidated financial statements. The following tables set forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three months ended March 31, 2012 and 2011 and does not include unconsolidated affiliates:

17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


12.
SEGMENT REPORTING (continued)
Three Months Ended March 31, 2012
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Consolidation
 
Total
Revenues
$
15,276

 
$
15,767

 
$
6,096

 
$
2,055

 
$
5,659

 
$
(5,227
)
 
$
39,626

Property operating expenses
and real estate taxes
4,532

 
5,775

 
3,375

 

 

 
(784
)
 
12,898

General and administrative
6,361

 
3,246

 

 

 

 
(3,674
)
 
5,933

Income before depreciation and amortization and interest and other finance expense
$
4,383

 
$
6,746

 
$
2,721

 
$
2,055

 
$
5,659

 
$
(769
)
 
$
20,795

Depreciation and amortization
$
3,747

 
$
4,504

 
$
1,114

 
$

 
$

 
$
(224
)
 
$
9,141

Interest and other finance expense
$
3,354

 
$
4,199

 
$
872

 
$

 
$

 
$
209

 
$
8,634

Real estate at cost
$
548,075

 
$
818,981

 
$
214,567

 
$

 
$

 
$
(15,977
)
 
$
1,565,646

Total assets
$
661,545

 
$
936,787

 
$
191,882

 
$
77,180

 
$

 
$
(140,658
)
 
$
1,726,736

Expenditures for redevelopment and improvements
$
7,204

 
$
12,742

 
$
839

 
$

 
$

 
$
(704
)
 
$
20,081

Acquisition of real estate
$
16,189

 
$
32,500

 
$

 
$

 
$

 
$

 
$
48,689

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
 

Net property income before depreciation and amortization
 
$
20,795

Other interest income
 
54

Depreciation and amortization
 
(9,141
)
Equity in losses of unconsolidated affiliates
 
(56
)
Interest and other finance expense
 
(8,634
)
Income tax provision
 
195

Net income
 
2,823

Net loss attributable to noncontrolling interests
 
1,187

Net income attributable to Common Shareholders
 
$
4,010


18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


12.
SEGMENT REPORTING (continued)
Three Months Ended March 31, 2011
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Consolidation
 
Total
Revenues
$
14,432

 
$
12,526

 
$
5,335

 
$
4,538

 
$
6,474

 
$
(5,858
)
 
$
37,447

Property operating expenses
and real estate taxes
4,293

 
4,507

 
3,204

 

 

 
(445
)
 
11,559

General and administrative
5,898

 
3,480

 

 

 

 
(3,688
)
 
5,690

Income before depreciation and amortization and interest and other finance expense
$
4,241

 
$
4,539

 
$
2,131

 
$
4,538

 
$
6,474

 
$
(1,725
)
 
$
20,198

Depreciation and amortization
$
3,258

 
$
3,536

 
$
948

 
$

 
$

 
$
(108
)
 
$
7,634

Interest and other finance expense
$
4,204

 
$
3,813

 
$
967

 
$

 
$

 
$
(31
)
 
$
8,953

Real estate at cost
$
441,203

 
$
680,880

 
$
210,447

 
$

 
$

 
$
(13,623
)
 
$
1,318,907

Total assets
$
561,728

 
$
790,439

 
$
193,505

 
$
92,417

 
$

 
$
(106,348
)
 
$
1,531,741

Expenditures for redevelopment and improvements
$
1,385

 
$
11,670

 
$
445

 
$

 
$

 
$
(275
)
 
$
13,225

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
 
Net property income before depreciation and amortization
 
$
20,198

Other interest income
 
34

Depreciation and amortization
 
(7,634
)
Equity in losses of unconsolidated affiliates
 
(148
)
Interest and other finance expense
 
(8,953
)
Income tax provision
 
262

Gain on debt extinguishment
 
1,673

Income from discontinued operations
 
822

Gain on sale of property
 
3,922

Net income
 
9,652

Net (income) attributable to noncontrolling interests
 
(229
)
Net income attributable to Common Shareholders
 
$
9,423

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
13.
LONG-TERM INCENTIVE COMPENSATION

LONG-TERM INCENTIVE COMPENSATION

The Company maintains two share incentive plans, the 2003 Share Incentive Plan and the 2006 Share Incentive Plan (collectively the “Share Incentive Plans”).

On March 15, 2012, the Company issued a total of 279,611 LTIP Units and 1,358 Restricted Share Units to officers of the Company and 9,435 Restricted Share Units to other employees of the Company. Vesting with respect to these awards is generally recognized ratably over the five annual anniversaries following the issuance date. Vesting with respect to 17% of the awards issued to officers is also generally subject to achieving certain Company performance measures.

These awards were measured at their fair value as if they were vested on the grant date. Fair value was established as the market price of the Company's Common Shares as of the close of trading on the day preceding the grant date.

The total value of the above Restricted Share Units and LTIP Units as of the grant date was $6.4 million, of which $2.6 million was recognized in compensation expense during 2011 and $3.8 million will be recognized in compensation expense over the vesting period. Compensation expense of $0.2 million has been recognized in the accompanying financial statements related to these awards for the three months ended March 31, 2012.

19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


13.
LONG-TERM INCENTIVE COMPENSATION (continued)

Total long-term incentive compensation expense, including the expense related to the above-mentioned plans, was $0.9 million and $0.8 million for the three months ended March 31, 2012 and 2011, respectively .

In 2009, the Company adopted the Long Term Investment Alignment Program (the “Program”) pursuant to which the Company may award units primarily to senior executives which would entitle them to receive up to 25% of any future Fund III Promote when and if such Promote is ultimately realized. The Company has awarded units representing 83% of the Program, which were determined to have no value at issuance or as of March 31, 2012. In accordance with ASC Topic 718, “Compensation - Stock Compensation,” compensation relating to these awards will be recorded based on the change in the estimated fair value at each reporting period.

14.    SUBSEQUENT EVENTS
During April 2012, the Company acquired 930 Rush Street, a 2,930 square foot single tenant property located in Chicago, IL for $20.7 million.
During April 2012, Fund III acquired Lincoln Park Centre, a 62,700 square foot retail property located in Chicago, IL for $31.5 million, including the assumption of debt of $19.8 million.
During April 2012, the Company amended an existing $56.5 million construction loan collateralized by a property with a $69.6 million mini-permanent loan. The loan bears interest at LIBOR plus 2.25% and matures on May 1, 2015 with two one-year extension options. Concurrent with this transaction, the Company entered into two interest rate swap agreements with a combined notional value of $69.6 million which fixes LIBOR at 0.70% through May 1, 2015.




20




Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
The following discussion is based on our consolidated financial statements as of March 31, 2012 and 2011 and for the three months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.


FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors are set forth under the heading “Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2011 (our “2011 Form 10-K”) and include, among others, the following: general economic and business conditions, including the current post-recessionary period, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in our real estate markets, including, among other things, competition with other companies; risks of real estate development, acquisition and investment; risks related to our use of leverage; demands placed on our resources due to the growth of our business; risks related to operating through a partnership structure; our limited control over joint venture investments; the risk of loss of key members of management; uninsured losses; REIT distribution requirements and ownership limitations; concentration of ownership by certain institutional investors; governmental actions and initiatives; and environmental/safety requirements. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.


OVERVIEW
Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective:
Own and operate a Core Portfolio of high-quality retail properties located primarily in high-barrier-to-entry, densely-populated metropolitan areas and create value through accretive redevelopment and re-anchoring activities coupled with the acquisition of high-quality assets that have the long-term potential to outperform the asset class as part of our Core asset recycling and acquisition initiative.

Generate additional external growth through an opportunistic yet disciplined acquisition program through our Opportunity Funds. We target transactions with high inherent opportunity for the creation of additional value through:

value-add investments in high-quality urban and/or street retail properties with re-tenanting or repositioning opportunities,
opportunistic acquisitions of well-located real-estate anchored by distressed retailers or by motivated sellers and
opportunistic purchases of debt which may include restructuring.

These may also include joint ventures with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.

Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth.

As of March 31, 2012, we operated 89 properties, which we own or have an ownership interest in, within our Core Portfolio or within our Opportunity Funds. These properties consist of commercial properties, primarily neighborhood and community shopping centers, mixed-use properties with a retail component and self-storage properties. The properties we operate are located primarily along the East Coast and in Chicago.

Core Portfolio

Our Core Portfolio consists of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through

21




our Opportunity Funds. There are 54 properties in our Core Portfolio totaling approximately 5.0 million square feet. As of March 31, 2012, the Core Portfolio physical occupancy was 90.3%; leased occupancy was 94.2% including executed leases.

Opportunity Funds

Fund I has four remaining properties comprising approximately 0.1 million square feet.

Fund II has nine properties, seven of which (representing 1.2 million square feet) are currently operating, one of which is under construction, and one of which is in the design phase. Three of the properties also include self-storage facilities. We expect the Fund II portfolio will have approximately 2.0 million square feet upon completion of all current construction and anticipated redevelopment activities.

Fund III has 22 properties totaling approximately 2.6 million square feet, of which 11 locations representing 0.9 million net rentable square feet are self-storage facilities.

The majority of our operating income is derived from rental revenues from properties, including recoveries from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating companies, we consider these investments to be private-equity style, as opposed to real estate, investments. Since these are not generally traditional investments in operating rental real estate but investments in operating businesses, the Operating Partnership principally invests in these through a taxable REIT subsidiary (“TRS”).

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, “Management's Discussion and Analysis of Financial Condition and Results of Operations,” in our 2011 Form 10-K.

RESULTS OF OPERATIONS
A discussion of the significant variances and primary factors contributing thereto within the results of operations are addressed below (where there were no significant variances in the tables, the information is presented without further discussion):

Comparison of the three months ended March 31, 2012 (“2012”) to the three months ended March 31, 2011 (“2011”)

Revenues
2012
 
2011
(dollars in millions)
Core
Portfolio
 
Opportunity Funds
 
Self- Storage Investments
 
Notes
Receivable
and Other
 
Core
Portfolio
 
Opportunity Funds
 
Self- Storage Investments
 
Notes
Receivable
and Other
Rental income
$
12.6

 
$
12.4

 
$
5.6

 
$

 
$
11.2

 
$
10.2

 
$
5.0

 
$

Interest income

 

 

 
2.1

 

 

 

 
4.5

Expense reimbursements
2.7

 
3.3

 

 

 
2.9

 
2.3

 

 

Management fee income (1)

 

 

 
0.4

 

 

 

 
0.6

Other

 

 
0.5

 

 
0.3

 

 
0.4

 

Total revenues
$
15.3

 
$
15.7

 
$
6.1

 
$
2.5

 
$
14.4

 
$
12.5

 
$
5.4

 
$
5.1


(1)
Includes fees earned by us as general partner/managing member of the Opportunity Funds that are eliminated in consolidation and adjusts the loss (income) attributable to noncontrolling interests. The balance reflected in the table represents third party fees that are not eliminated in consolidation. Reference is made to Note 12 to the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for an overview of our five reportable segments.

Rental income in the Core Portfolio increased primarily as a result of additional rents of $1.1 million following the acquisitions

22




of West Diversey, Mercer Street, 4401 White Plains Road and six Chicago street retail properties ("2011 Core Acquisitions") and additional rents of $0.3 million following the acquisitions of Cambridge Rite Aid, Cambridge Whole Foods and five additional Chicago street retail properties ("2012 Core Acquisitions"). Rental income in