Prepared and filed by St Ives Financial


UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

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 1-12002

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 NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer 

  

Accelerated Filer   

  

Non-accelerated Filer  

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)    Yes        No   

As of August 9, 2006, there were 31,771,544 common shares of beneficial interest, par value $.001 per share, outstanding.


 


ACADIA REALTY TRUST AND SUBSIDIARIES

INDEX

 

 

 

 

Page

Part I:

 

Financial Information


 

 

 

 

Item 1.

 

Financial Statements (unaudited)

 

 

 

 

 

 

 

Consolidated Balance Sheets as of June 30, 2006 and December 31, 2005

3

 

 

 

 

 

 

Consolidated Statements of Income for the three and six months ended June 30, 2006 and 2005

4

 

 

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005

5

 

 

 

 

 

 

Notes to Consolidated Financial Statements

6

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosure of Market Risk

34

 

 

 

 

Part II:

 

Other Information

 

 

 

 

 

Item 6.

 

Exhibits

37

 

 

 

 

 

 

Signatures

40

2


Back to Contents

Part I. Financial Information

Item 1. Financial Statements

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(unaudited)

 

 

 

June 30,
2006

 

December 31,
2005

 

 

 


 


 

   

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

Real estate:

 

 

 

 

 

 

 

Land

 

$

135,720

 

$

146,240

 

Buildings and improvements

 

 

501,998

 

 

584,962

 

Construction in progress

 

 

12,058

 

 

4,016

 

 

 



 



 

 

 

 

649,776

 

 

735,218

 

Less: accumulated depreciation

 

 

(139,578

)

 

(135,891

)

 

 



 



 

Net real estate

 

 

510,198

 

 

599,327

 

Cash and cash equivalents

 

 

55,114

 

 

91,398

 

Cash in escrow

 

 

7,500

 

 

7,799

 

Restricted cash

 

 

549

 

 

548

 

Investments in and advances to unconsolidated affiliates

 

 

37,658

 

 

10,320

 

Investment in management contracts, net of accumulated amortization of $2,431 and $1,938, respectively

 

 

2,745

 

 

3,178

 

Preferred equity investment

 

 

 

 

19,000

 

Rents receivable, net

 

 

8,069

 

 

13,505

 

Notes receivable

 

 

57,801

 

 

15,733

 

Prepaid expenses

 

 

4,376

 

 

5,199

 

Deferred charges, net

 

 

25,556

 

 

24,288

 

Acquired lease intangibles

 

 

6,785

 

 

8,941

 

Other assets

 

 

18,741

 

 

15,786

 

Assets of discontinued operations

 

 

26,099

 

 

26,836

 

 

 



 



 

 

 

$

761,191

 

$

841,858

 

 

 



 



 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Mortgage notes payable

 

$

361,890

 

$

411,000

 

Accounts payable and accrued expenses

 

 

8,901

 

 

19,018

 

Dividends and distributions payable

 

 

6,161

 

 

6,088

 

Share of distributions in excess of share of income and investment in unconsolidated affiliates

 

 

23,131

 

 

10,315

 

Other liabilities

 

 

9,244

 

 

14,375

 

Liabilities of discontinued operations

 

 

13,963

 

 

14,221

 

 

 



 



 

Total liabilities

 

 

423,290

 

 

475,017

 

 

 



 



 

Minority interest in operating partnership

 

 

8,357

 

 

9,204

 

Minority interests in partially-owned affiliates

 

 

106,541

 

 

137,061

 

 

 



 



 

Total minority interests

 

 

114,898

 

 

146,265

 

 

 



 



 

Shareholders’ equity:

 

 

 

 

 

 

 

Common shares

 

 

31

 

 

31

 

Additional paid-in capital

 

 

223,920

 

 

223,199

 

Accumulated other comprehensive income (loss)

 

 

1,861

 

 

(12

)

Deficit

 

 

(2,809

)

 

(2,642

)

 

 



 



 

Total shareholders’ equity

 

 

223,003

 

 

220,576

 

 

 



 



 

 

 

$

761,191

 

$

841,858

 

 

 



 



 

See accompanying notes

3


Back to Contents

Part I. Financial Information

Item 1. Financial Statements

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(unaudited)

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 


 


 


 


 

   

(dollars in thousands, except per share amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

17,448

 

$

19,134

 

$

35,236

 

$

37,635

 

Percentage rents

 

 

126

 

 

150

 

 

311

 

 

351

 

Expense reimbursements

 

 

3,480

 

 

3,555

 

 

7,559

 

 

7,929

 

Other property income

 

 

251

 

 

175

 

 

462

 

 

505

 

Management fee income

 

 

1,281

 

 

982

 

 

2,482

 

 

1,557

 

Interest income

 

 

1,907

 

 

903

 

 

3,653

 

 

1,320

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 



 



 



 



 

Total revenues

 

 

24,493

 

 

24,899

 

 

49,703

 

 

49,297

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating

 

 

3,602

 

 

4,639

 

 

7,652

 

 

9,459

 

Real estate taxes

 

 

2,460

 

 

2,325

 

 

5,259

 

 

4,887

 

General and administrative

 

 

4,779

 

 

3,820

 

 

10,086

 

 

6,935

 

Depreciation and amortization

 

 

6,506

 

 

6,234

 

 

12,904

 

 

12,506

 

 

 



 



 



 



 

Total operating expenses

 

 

17,347

 

 

17,018

 

 

35,901

 

 

33,787

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

7,146

 

 

7,881

 

 

13,802

 

 

15,510

 

Equity in earnings of unconsolidated affiliates

 

 

3,028

 

 

126

 

 

7,140

 

 

387

 

Interest expense

 

 

(5,654

)

 

(4,352

)

 

(10,839

)

 

(8,285

)

Minority interest

 

 

327

 

 

1,050

 

 

(754

)

 

1,251

 

 

 



 



 



 



 

Income from continuing operations before income taxes

 

 

4,847

 

 

4,705

 

 

9,349

 

 

8,863

 

Income taxes

 

 

(363

)

 

 

 

(812

)

 

 

 

 



 



 



 



 

Income from continuing operations

 

 

4,484

 

 

4,705

 

 

8,537

 

 

8,863

 

 

 



 



 



 



 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income from discontinued operations

 

 

371

 

 

400

 

 

677

 

 

692

 

Impairment of real estate

 

 

 

 

(770

)

 

 

 

(770

)

Minority interest

 

 

(7

)

 

10

 

 

(13

)

 

5

 

 

 



 



 



 



 

Income (loss) from discontinued operations

 

 

364

 

 

(360

)

 

664

 

 

(73

)

 

 



 



 



 



 

Net income

 

$

4,848

 

$

4,345

 

$

9,201

 

$

8,790

 

 

 



 



 



 



 

Basic earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.14

 

$

0.15

 

$

0.26

 

$

0.28

 

Income (loss) from discontinued operations

 

 

0.01

 

 

(0.01

)

 

0.02

 

 

 

 

 



 



 



 



 

Basic earnings per share

 

$

0.15

 

$

0.14

 

$

0.28

 

$

0.28

 

 

 



 



 



 



 

Diluted earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.14

 

$

0.15

 

$

0.26

 

$

0.27

 

Income (loss) from discontinued operations

 

 

0.01

 

 

(0.01

)

 

0.02

 

 

 

 

 



 



 



 



 

Diluted earnings per common share

 

$

0.15

 

$

0.14

 

$

0.28

 

$

0.27

 

 

 



 



 



 



 

See accompanying notes

4


Back to Contents

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005

(unaudited)

 

   

June 30,
2006

 

June 30,
2005

 

 

 


 


 

   

(dollars in thousands)

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

Net income

 

$

9,201

 

$

8,790

 

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

 

 

 

 

 

 

 

Depreciation and amortization

 

 

13,465

 

 

12,338

 

Minority interests

 

 

767

 

 

(1,256

)

Equity in earnings of unconsolidated affiliates

 

 

(7,140

)

 

(387

)

Amortization of derivative settlement included in interest expense

 

 

218

 

 

219

 

Distributions of operating income from unconsolidated affiliates

 

 

6,079

 

 

310

 

Restricted share compensation

 

 

2,543

 

 

542

 

Trustee share compensation

 

 

75

 

 

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Cash in escrow

 

 

(1,394

)

 

3

 

Restricted cash

 

 

(1

)

 

102

 

Rents receivable

 

 

2,887

 

 

(4,773

)

Prepaid expenses

 

 

30

 

 

28

 

Other assets

 

 

(1,840

)

 

(5,764

)

Accounts payable and accrued expenses

 

 

(3,694

)

 

(208

)

Other liabilities

 

 

2,949

 

 

889

 

 

 



 



 

Net cash provided by operating activities

 

 

24,145

 

 

10,833

 

 

 



 



 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

Expenditures for real estate and improvements

 

 

(49,268

)

 

(31,633

)

Investments in and advances to unconsolidated affiliates

 

 

(23,822

)

 

(1,398

)

Distributions from unconsolidated affiliates

 

 

26,758

 

 

489

 

Expenditures for deferred costs

 

 

(4,144

)

 

(3,984

)

Increase in notes receivable

 

 

(42,068

)

 

(6,489

)

Preferred equity investment

 

 

19,000

 

 

(19,500

)

 

 



 



 

Net cash used in investing activities

 

 

(73,544

)

 

(62,515

)

 

 



 



 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

Principal payments on mortgages

 

 

(87,678

)

 

(6,029

)

Additional borrowings under mortgage notes

 

 

107,291

 

 

52,000

 

Dividends paid

 

 

(11,956

)

 

(10,940

)

Increase in dividend payable

 

 

73

 

 

78

 

Redemption of Operating Partnership Units

 

 

(100

)

 

 

Minority interest share of Operating Partnership Unit redemption

 

 

(146

)

 

 

Distributions to minority interests in Operating Partnership

 

 

(240

)

 

(256

)

Preferred distributions on Operating Partnership units

 

 

(124

)

 

(178

)

Distributions to minority interests in partially-owned affiliates

 

 

(34,225

)

 

 

Contributions from minority interests in Operating Partnership

 

 

40,124

 

 

37,303

 

Exercise of options

 

 

43

 

 

333

 

Common Shares issued under Employee Stock Purchase Plan

 

 

53

 

 

47

 

 

 



 



 

Net cash provided by financing activities

 

 

13,115

 

 

72,358

 

 

 



 



 

(Decrease) increase in cash and cash equivalents

 

 

(36,284

)

 

20,676

 

Cash and cash equivalents, beginning of period

 

 

91,398

 

 

16,043

 

 

 



 



 

Cash and cash equivalents, end of period

 

$

55,114

 

$

36,719

 

 

 



 



 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Cash paid for interest

 

$

10,971

 

$

9,189

 

 

 



 



 

Supplemental disclosure of non-cash investing and financing activities:

 

 

 

 

 

 

 

Acquisition of management contract rights through issuance of Preferred Operating Partnership Units

 

$

 

$

4,000

 

 

 



 



 

Increase in share of distributions in excess of share of income and investment in unconsolidated affiliates as a result of the Brandywine recapitalization (Note 2)

 

$

10,428

 

$

 

 

 



 



 

See accompanying notes

5


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ACADIA REALTY TRUST

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.

THE COMPANY

Acadia Realty Trust (the “Company”) is a fully integrated and self-managed real estate investment trust (“REIT”) focused primarily on the ownership, acquisition, redevelopment and management of neighborhood and community shopping centers.

All of the Company’s assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership” or “OP”) and partnerships in which the OP owns a controlling interest. As of June 30, 2006, the Company controlled 98% of the Operating Partnership as the sole general partner.

In 2001, the Company formed a partnership, Acadia Strategic Opportunity Fund I, LP (“Fund I”), and in 2004 formed a limited liability company, Acadia Mervyn I, LLC (“Mervyns I”), with four institutional investors. The Company committed a total of $20.0 million to Fund I and Mervyns I, and the four institutional shareholders committed $70.0 million, for the purpose of acquiring a total of approximately $300.0 million in investments. As of June 30, 2006, the Company has contributed $16.2 million to Fund I and $2.7 million to Mervyns I.

The Company is the sole general partner or managing member, with a 22% interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds. Decisions made by the general partner, as it relates to purchasing, financing, and disposition of properties, are subject to the unanimous disapproval of the Advisory Committee of Fund I, which is comprised of representatives from each of the four institutional investors. Cash flow is distributed pro-rata to the partners (including the Company) until they have received a 9% cumulative return, and the return of all capital contributions. Thereafter, remaining cash flow is to be distributed 80% to the partners (including the Company) and 20% to the Company as a carried interest (“Promote”). Through December 31, 2005, the Company also earned a fee for asset management services equal to 1.5% of the allocated equity in the remaining Fund I assets, as well as market-rate fees for property management, leasing and construction services. Effective January 1, 2006, the Company converted the asset management fee to a priority distribution of the same amount as the fee, which entitles the Company to a special allocation of income equal to the amount of the priority distribution. Thereafter, cash flow is distributed as previously mentioned and the Company continues to earn the market rate property management, leasing and construction fees. Following the recapitalization of the Brandywine Portfolio in January 2006, all capital contributions and the required 9% cumulative preferred return have been distributed to the institutional investors. Accordingly, the Company is now entitled to a Promote on all future earnings and distributions.

In June of 2004, the Company formed a limited liability company, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), and in August 2004 formed another limited liability company, Mervyn II, LLC (“Mervyns II”), with the investors from Fund I as well as two additional institutional investors. With $300.0 million of committed discretionary capital, Fund II and Mervyns II expect to be able to acquire up to $900.0 million of investments on a leveraged basis. The Company’s share of committed capital is $60.0 million. The Company is the sole managing member with 20% interest in the limited liability companies and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds. The terms and structure of Fund II are substantially the same as Fund I with the exceptions that the preferred return is 8%. As of June 30, 2006, the Company has contributed $16.2 million to Fund II and $6.7 million to Mervyns II.

2.

BASIS OF PRESENTATION

The consolidated financial statements include the consolidated accounts of the Company and its controlling investments in partnerships and limited liability companies, including the Operating Partnership, and have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Non-controlling investments in partnerships are accounted for under the equity method of accounting as the Company exercises significant influence. 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 periods.

The preparation of the 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. Actual results could differ from these estimates. Operating results for the six months ended June 30, 2006 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2006. For further information refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

6


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

2.

BASIS OF PRESENTATION (continued)

In 2005, the Emerging Issues Task Force (“EITF”) reached a consensus that the general partners in a limited partnership should determine whether they control a limited partnership based on the application of the framework as discussed in EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights”. Under EITF 04-5, the general partners in a limited partnership are presumed to control that limited partnership regardless of the extent of the general partner’s ownership interest in the limited partnership. The assessment of whether the rights of the limited partners should overcome the presumption of control by the general partners is a matter of judgment that depends on facts and circumstances. If the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise remove the general partners without cause or (b) substantive participating rights, the general partners do not control the limited partnership. EITF 04-5 was effective immediately for new partnerships formed and existing limited partnerships for which the partnership agreements were modified on or after June 29, 2005, and for all other partnerships, EITF 04-5 is effective no later than the beginning of the first reporting period in fiscal years beginning after December 15, 2005. The provisions of EITF 04-5 may be initially applied through either one of two methods: (1) similar to a cumulative effect of a change in accounting principle or (2) retrospective application. The Company assessed the impact of EITF 04-5 as it related to the method of accounting utilized for its equity investments and determined that its investments in Fund I, Fund II, Mervyns I and Mervyns II which were accounted for under the equity method of accounting, should be consolidated, effective upon adoption of EITF 04-5 on January 1, 2006. The Company utilized the retrospective approach in the application of EITF 04-5 and has presented all historical periods prior to 2006 on a consistent basis with 2006 and thereafter. There was no impact on net income or shareholders’ equity for any of the reported periods in the accompanying consolidated financial statements due to the consolidation of these investments.

On January 4, 2006, Fund I recapitalized its investment in a one million square foot shopping center portfolio located in Wilmington, Delaware (“Brandywine Portfolio”). The recapitalization was effected through the conversion of the 77.8% interest which was previously held by the institutional investors in Fund I to an affiliate of GDC Properties (“GDC”) through a merger of interests in exchange for cash. The Company has retained its existing 22.2% interest in the Brandywine Portfolio in partnership with GDC and continues to operate the portfolio and earn fees for such services.

Pursuant to EITF 04-5, the Company has presented the 2005 financial statements to reflect the consolidation of Fund I, including the Brandywine Portfolio which, at the time, was a wholly-owned investment of Fund I. Following the January 2006 recapitalization of the Brandywine Portfolio, the Company no longer has a controlling interest in this investment and, accordingly, currently accounts for this investment under the equity method of accounting.

3.

EARNINGS PER COMMON SHARE

Basic earnings per share was determined by dividing net income for the period by the weighted average number of common shares of beneficial interest (“Common Shares”) outstanding during each period consistent with Statement of Financial Accounting Standards (“SFAS”) No. 128 “Earnings Per Share”. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated.

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 


 


 


 


 

   

(dollars in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations – basic and diluted

 

$

4,484

 

$

4,705

 

$

8,537

 

$

8,863

 

 

 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares – basic earnings per share

 

 

32,509

 

 

31,899

 

 

32,489

 

 

31,883

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

Employee stock options

 

 

302

 

 

246

 

 

300

 

 

259

 

 

 



 



 



 



 

Denominator for diluted earnings per share

 

 

32,811

 

 

32,145

 

 

32,789

 

 

32,142

 

 

 



 



 



 



 

Basic earnings per share from continuing operations

 

$

0.14

 

$

0.15

 

$

0.26

 

$

0.28

 

 

 



 



 



 



 

Diluted earnings per share from continuing operations

 

$

0.14

 

$

0.15

 

$

0.26

 

$

0.27

 

 

 



 



 



 



 

7


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

3.

EARNINGS PER COMMON SHARE (continued)

The effect of the conversion of common units in the Operating Partnership (“Common OP Units”) is not reflected in the above table 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 minority interest 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 effect of the conversion of Series A and B Preferred OP Units (“Preferred OP Units”) which would result in 337,079 and 522,679 additional Common Shares for each of the three and six months ended June 30, 2006 and 2005, respectively, is not reflected in the above table as such conversions would be anti-dilutive.

4.

COMPREHENSIVE INCOME

The following table sets forth comprehensive income for the three and six months ended June 30, 2006 and 2005:

 

 

 

Three months ended
June 30,

 

Six months ended
June 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 


 


 


 


 

   

(dollars in thousands)

 

Net income

 

$

4,848

 

$

4,345

 

$

9,201

 

$

8,790

 

Other comprehensive income (loss) 1

 

 

775

 

 

(1,419

)

 

1,873

 

 

623

 

 

 



 



 



 



 

Comprehensive income

 

$

5,623

 

$

2,926

 

$

11,074

 

$

9,413

 

 

 



 



 



 



 

 

Notes:

 

 

1

 

Relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges.

 

 

(dollars in thousands)

Accumulated other comprehensive income (loss)

 

 

 

 

Balance at December 31, 2005

 

$

(12

)

Unrealized gain on valuation of swap and cap agreements

 

 

1,873

 

 

 



 

Balance at June 30, 2006

 

$

1,861

 

 

 



 

As of June 30, 2006 the balance in accumulated other comprehensive income was comprised of unrealized gains on the valuation of current swap and cap agreements.

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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.

SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS

The following table summarizes the change in the shareholders’ equity and minority interests since December 31, 2005:

 

 

 

Shareholders’
Equity

 

Minority
Interest
in Operating
Partnership

 

Minority
Interest
in partially-
owned
Affiliates

 

 

 


 


 


 

   

(dollars in thousands)

 

Balance at December 31, 2005

 

$

220,576

 

$

9,204

 

$

137,061

 

Dividends and distributions declared of $0.37 per Common Share and Common OP Unit

 

 

(11,956

)

 

(240

)

 

 

Net income for the period January 1 through June 30, 2006

 

 

9,201

 

 

198

 

 

569

 

Distributions paid

 

 

 

 

 

 

(71,088

)

Conversion of Series A Preferred OP Units

 

 

696

 

 

(696

)

 

 

Acquisition of partnership interest

 

 

 

 

 

 

2,246

 

Other comprehensive income – Unrealized gain on valuation of swap agreements

 

 

1,655

 

 

37

 

 

 

Other comprehensive income – adjustment of swap value included in net income

 

 

218

 

 

 

 

 

Employee stock-based compensation

 

 

2,595

 

 

 

 

 

Exercise of Options

 

 

43

 

 

 

 

 

Redemption of 11,105 Restricted Common OP Units

 

 

(101

)

 

(146

)

 

 

Issuance of Common Stock to Trustees

 

 

76

 

 

 

 

 

Minority Interest contributions

 

 

 

 

 

 

37,753

 

 

 



 



 



 

Balance at June 30, 2006

 

$

223,003

 

$

8,357

 

$

106,541

 

 

 



 



 



 

Notes:

Minority interest in the Operating Partnership represents (i) the limited partners’ interest of 642,272 and 653,360 Common OP Units at June 30, 2006 and December 31, 2005, respectively, (ii) 188 and 884 Series A Preferred OP Units at June 30, 2006 and December 31, 2005, respectively, with a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 per unit (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit, and (iii) 4,000 Series B Preferred OP Units at June 30, 2006 and December 31, 2005, respectively, with a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $13.00 (5.2% annually) per unit or (b) the quarterly distribution attributable to a Series B Preferred OP Unit if such unit were converted into a Common OP Unit.

During the first quarter of 2006, holders of 696 Series A Preferred OP Units converted these into Common OP Units and ultimately into Common Shares.

During the second quarter of 2006, the Company redeemed 11,105 Restricted Common OP Units issued during July 2005 in connection with the purchase of 4343 Amboy Road.

Minority interests in partially-owned partnerships represent third-party interests. During January 2006, Fund I recapitalized the Brandywine Portfolio, and as a result, $35.5 million was distributed to the institutional investors in Fund I. During the six months ended June 30, 2006, minority interests in Mervyns I and Mervyns II received distributions of $16.5 million and $18.4 million, respectively. In the second quarter of 2006, minority interests in Fund II and Mervyns II made contributions of $20.8 million and $17.0 million, respectively. During January 2006, the Company acquired a 60% interest in the A&P Shopping Plaza located in Boonton, New Jersey, as discussed in Note 6. The remaining 40% interest is owned by a third party and is reflected as minority interest in the accompanying Consolidated Balance Sheet as of June 30, 2006.

9


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.

PROPERTY ACQUISITIONS

On January 12, 2006, the Company closed on a 19,265 square foot retail building in the Lincoln Park district in Chicago. The property was acquired from an affiliate of Klaff for a purchase price of $9.9 million, including the assumption of existing mortgage debt in the principal amount of $3.8 million.

On January 24, 2006, the Company acquired a 60% interest in the A&P Shopping Plaza located in Boonton, New Jersey. The property, which is 100% occupied and located in northeastern New Jersey, is a 63,000 square foot shopping center anchored by a 49,000 square foot A&P Supermarket. A portion of the remaining 40% interest is owned by a principal of P/A Associates, LLC (“P/A”). The interest was acquired for $3.2 million. There is an existing first mortgage debt of $8.7 million encumbering the property.

On June 16, 2006, the Company purchased 8400 and 8625 Germantown Road in Philadelphia, Pennsylvania for $16.0 million. The Company assumed a $10.1 million first mortgage loan which has a maturity date of June 11, 2013. The 40,570 square foot property is 100% occupied.

7.

INVESTMENTS

A. Investments In and Advances to Unconsolidated Affiliates

 

 

 

June 30, 2006

 

December 31, 2005

 

 

 


 


 

 

 

Mervyns (1)

 

Brandywine
Portfolio

 

Other
Investments

 

Total

 

Total

 

 

 


 


 


 


 


 

   

(dollars in thousands)

 

Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rental property, net

 

$

 

$

125,416

 

$

46,777

 

$

172,193

 

$

165,024

 

Investment in unconsolidated affiliates

 

 

393,955

 

 

 

 

 

 

393,955

 

 

9,401

 

Other assets

 

 

 

 

6,165

 

 

12,757

 

 

18,922

 

 

17,181

 

 

 



 



 



 



 



 

Total assets

 

$

393,955

 

$

131,581

 

$

59,534

 

$

585,070

 

$

191,606

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and partners’ equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage note payable

 

$

 

$

166,200

 

$

87,234

 

$

253,434

 

$

150,462

 

Other liabilities

 

 

 

 

13,069

 

 

7,718

 

 

20,787

 

 

54,544

 

Partners equity (deficit)

 

 

393,955

 

 

(47,688

)

 

(35,418

)

 

310,849

 

 

(13,400

)

 

 



 



 



 



 



 

Total liabilities and partners’ equity

 

$

393,955

 

$

131,581

 

$

59,534

 

$

585,070

 

$

191,606

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company’s investment in unconsolidated affiliates

 

$

25,467

 

$

 

$

12,191

 

$

37,658

 

$

10,320

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share of distributions in excess of share of income and investment in unconsolidated affiliates

 

$

 

$

(12,444

)

$

(10,687

)

$

(23,131

)

$

(10,315

)

 

 



 



 



 



 



 

(1)

Represents the Company’s investment in unconsolidated affiliates through its RCP Venture investments.

10


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.

INVESTMENTS (continued)

 

 

 

Three Months Ended

 

 

 


 

 

 

June 30, 2006

 

June 30, 2005 (2)

 

   
 
 

 

 

Mervyns (1)

 

Brandywine
Portfolio

 

Other
Investments

 

Total

 

Total

 

 

 


 


 


 


 


 

   

(dollars in thousands)

 

Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

 

$

4,591

 

$

3,726

 

$

8,317

 

$

2,643

 

Operating and other expenses

 

 

 

 

1,145

 

 

1,227

 

 

2,372

 

 

809

 

Interest expense

 

 

 

 

1,965

 

 

1,347

 

 

3,312

 

 

999

 

Equity in earnings of affiliates

 

 

23,852

 

 

 

 

 

 

23,852

 

 

 

Depreciation and amortization

 

 

 

 

784

 

 

417

 

 

1,201

 

 

158

 

 

 



 



 



 



 



 

Net income

 

$

23,852

 

$

697

 

$

735

 

$

25,284

 

$

677

 

 

 



 



 



 



 



 

Company’s share of net income

 

$

2,414

 

$

269

 

$

345

 

$

3,028

 

$

126

 

 

 



 



 



 



 



 

 

 

 

Six Months Ended

 

 

 


 

 

 

June 30, 2006

 

June 30, 2005 (2)

 

   
 
 

 

 

Mervyns (1)

 

Brandywine
Portfolio

 

Other
Investments

 

Total

 

Total

 

 

 


 


 


 


 


 

   

(dollars in thousands)

 

Statements of Operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue

 

$

 

$

9,105

 

$

6,814

 

$

15,919

 

$

5,351

 

Operating and other expenses

 

 

 

 

2,359

 

 

2,555

 

 

4,914

 

 

1,484

 

Interest expense

 

 

 

 

6,974

 

 

2,451

 

 

9,425

 

 

2,184

 

Equity in earnings of affiliates

 

 

55,414

 

 

 

 

 

 

55,414

 

 

 

Depreciation and amortization

 

 

 

 

1,508

 

 

840

 

 

2,348

 

 

320

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

55,414

 

$

(1,736

)

$

968

 

$

54,646

 

$

1,363

 

 

 



 



 



 



 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company’s share of net income

 

$

5,730

 

$

991

 

$

419

 

$

7,140

 

$

387

 

 

 



 



 



 



 



 

(1)

Represents the Company’s investment in unconsolidated affiliates through its RCP Venture investments.

(2)

The Brandywine Portfolio was consolidated with Fund I for the three and six months ended June 30, 2005. There were no Mervyns or Albertsons activity for the three and six months ended June 30, 2005.

11


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.

INVESTMENTS (continued)

Retailer Controlled Property Venture

On January 27, 2004, the Company entered into the Retailer Controlled Property Venture (“RCP Venture”) with Klaff Realty, L.P. (“Klaff”) and Klaff’s long-time capital partner Lubert-Adler Management, Inc. (“Lubert-Adler”) for the purpose of making investments in surplus or underutilized properties owned by retailers. On September 2, 2004, affiliates of Fund I and Fund II, through separately organized, newly formed limited liability companies on a non-recourse basis, invested in the acquisition of Mervyns through the RCP Venture, which, as part of an investment consortium of Sun Capital and Cerebus, acquired Mervyns from Target Corporation. The total acquisition price was $1.2 billion, with such affiliates’ combined $23.5 million share of the investment divided equally between them. The Company’s share of the Mervyns investment totaled $5.0 million. For the six months ended June 30, 2006, the Company’s share of net income from the investments made through the RCP Venture amounted to $5.7 million.

During June of 2006, the RCP Venture made its second investment with its participation in the acquisition of Albertson’s. Affiliates of Fund II, through the same limited liability companies which were formed for the investment in Mervyns, invested $21.2 million in the acquisition of Albertson’s through the RCP Venture, along with others as part of an investment consortium. The Company’s share of the invested capital was $4.2 million.

Brandywine Portfolio

On January 4, 2006, the institutional investors of Fund I merged their 77.8% interest in the Brandywine Portfolio into affiliates of GDC in exchange for cash. The Company merged its 22.2% share of the Brandywine Portfolio into affiliates of GDC in exchange for a 22.2% interest in such affiliates. Prior to the closing of this transaction, the Company provided $17.6 million of mortgage financing secured by certain properties within the Brandywine Portfolio. This financing was repaid in June 2006. For the six months ended June 30, 2006, the Company’s share of net income of $1.0 million included $1.1 million for reimbursement of the Company’s share of certain fees incurred by the Brandywine Portfolio by the institutional investors of Fund I. As of June 30, 2006, the Company’s share of distributions in excess of its share of income and investment in Brandywine amounted to $12.4 million.

Fund I Investments

Fund I has joint ventures with third party investors in the ownership and operation of Hitchcock Plaza, Pine Log Plaza, Sterling Heights Shopping Center, Haygood Shopping Center, and Tarrytown Centre. The Hitchcock Plaza is a 235,000 square foot shopping center located in Aiken, South Carolina. Adjacent to the Hitchcock Plaza is the 35,000 square foot Pine Log Plaza. Sterling Heights Shopping Center, is a 155,000 square foot community shopping center located in Detroit, Michigan. Haygood Shopping Center is a 162,000 square foot center located in Virginia Beach, Virginia. Lastly, the 35,000 square foot Tarrytown Centre is located in Westchester, New York. These properties are accounted for using the equity method of accounting.

Crossroads

The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II Joint Venture (collectively “Crossroads”), which collectively own a 311,000 square foot shopping center in White Plains, New York. The Company accounts for Crossroads using the equity method of accounting. As of June 30, 2006, the Company’s share of distributions in excess of its share of income and investment in Crossroads amounted to $10.7 million.

12


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.

INVESTMENTS (continued)

B. Preferred Equity Investment

In March of 2005, the Company invested $20.0 million in a preferred equity position (“Preferred Equity Investment”) with Levitz SL, L.L.C. (“Levitz SL”), the owner of fee and leasehold interests in 30 locations (the “Properties”) totaling 2.5 million square feet, of which the majority are currently leased to Levitz Furniture Stores. Klaff Realty L.P. (“Klaff”) is a managing member of Levitz SL. The Preferred Equity Investment received a return of 10%, plus a minimum return of capital of $2.0 million per annum. During March 2006, the rate of return was reset to the six-month LIBOR plus 644 basis points or approximately 11.5%. In October 2005, Levitz Furniture filed for bankruptcy under Chapter 11.

On June 1, 2006, the Company converted the Preferred Equity Investment to a mortgage loan in the amount of $31.3 million. The loan has a maturity date of May 31, 2008 and has an interest rate of 10.5%. The loan is secured by fee and leasehold mortgages as well as a pledge of the entities owning 19 of the above remaining locations totaling 1.8 million square feet. Management believes that the underlying value of the real estate is sufficient to recover the mortgage and accordingly, no reserve is required at June 30, 2006.

8.

DERIVATIVE FINANCIAL INSTRUMENTS

The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of June 30, 2006. The notional value does not represent exposure to credit, interest rate or market risks.

 

Hedge Type

 

Notional Value

 

Interest
Rate

 

Forward Start
Date

 

Interest
Maturity

 

Fair Value

 


 


 


 


 


 


 

   

(dollars in thousands)

 

Current Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

36,111

 

4.35

%

n/a

 

1/1/11

 

$

1,516

 

LIBOR Swap

 

 

20,000

 

4.53

%

n/a

 

10/1/06

 

 

45

 

LIBOR Swap

 

 

15,023

 

4.32

%

n/a

 

1/1/07

 

 

89

 

LIBOR Swap

 

 

11,621

 

4.11

%

n/a

 

1/1/07

 

 

81

 

LIBOR Swap

 

 

8,657

 

4.47

%

n/a

 

6/1/07

 

 

80

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

$

91,412

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Forward-starting Interest Rate Swaps:

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Swap

 

$

4,640

 

4.71

%

1/1/10

 

1/10/11

 

 

101

 

LIBOR Swap

 

 

11,410

 

4.90

%

10/2/06

 

10/1/11

 

 

285

 

LIBOR Swap

 

 

8,434

 

5.14

%

6/1/07

 

3/1/12

 

 

114

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

$

24,484

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

Interest Rate Caps:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIBOR Cap

 

$

30,000

 

6.00

%

n/a

 

4/1/08

 

 

10

 

 

 



 

 

 

 

 

 

 



 

Derivatives receivable (1)

 

 

 

 

 

 

 

 

 

 

$

2,321

 

 

 

 

 

 

 

 

 

 

 

 



 

(1) The derivatives receivable is included in Other Assets in the Consolidated Balance Sheets.

13


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

9.

MORTGAGE LOANS

Due to the adoption of EITF 04-5 (Note 2), all of the Fund I and Fund II loans are now included as part of the Company’s consolidated mortgage indebtedness.

On January 12, 2006, in conjunction with the purchase of a property, the Company assumed a loan of $3.8 million which bears interest at a fixed rate of 8.5%.

On January 18, 2006, the Company drew an additional $1.8 million on an existing credit facility. On April 21, 2006, the Company paid down $15.0 million on this facility. On June 1, 2006, the Company drew an additional $19.2 million on this facility. On June 22, 2006 the entire existing balance of $30.4 million was paid off by the Company.

On January 24, 2006, in conjunction with the purchase of a partnership interest, the Company assumed a loan of $8.7 million which bears interest at a fixed rate of 6.4%.

On February 22, 2006, the Company financed a property within its existing portfolio for $20.5 million. This loan bears interest at a fixed rate of 5.4%. A portion of the proceeds were used to pay down $10.9 million on an existing credit facility.

On March 27, 2006, the Company refinanced a property for $30.0 million. This loan bears interest at LIBOR plus 140 basis points. A portion of the proceeds were used to pay down the existing $12.1 million of debt on this property.

On May 31, 2006, the Company borrowed an additional $13.0 million on an existing $65.0 million revolving credit facility. This additional draw was repaid on June 30, 2006. The existing balance as of June 30, 2006 is $22.0 million.

On June 16, 2006, in conjunction with the purchase of a property, the Company assumed a loan of $10.1 million which bears interest at a fixed rate of 5.45%.

10.

RELATED PARTY TRANSACTIONS

In February 2005, the Company issued $4.0 million of Restricted Common OP Units to Klaff for the balance of certain management contract rights as well as the rights to certain potential future revenue streams.

In June 2006, the Company converted its Preferred Equity Investment with Levitz SL, in which Klaff has an interest, into a mortgage loan (Note 7).

The Company also earns fees in connection with its rights to provide asset management, leasing, disposition, development and construction services for an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Net fees earned by the Company in connection with this portfolio were $1.0 million for the three months ended June 30, 2006 and 2005, respectively, and $2.1 million and $1.6 million for the six months ended June 30, 2006 and 2005, respectively. The amount is net of the payment of sub-management fees to Klaff of $0.3 million for the six months ended June 30, 2005.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for the three months ended June 30, 2006 and 2005, respectively, and $50,000 for the six months ended June 30, 2006 and 2005, respectively.

14


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

SEGMENT REPORTING

The Company has two reportable segments: retail properties and multi-family properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. The reportable segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. The following tables set forth certain segment information for the Company for continuing operations for the three and six months ended June 30, 2006 and 2005 and does not include activity related to unconsolidated partnerships:

 

 

 

Six months ended June 30, 2006

 

 


 

 

Retail
Properties

 

Multi-Family
Properties

 

All
Other

 

Total

 

 


 


 


 


   

(dollars in thousands)

Revenues

 

$

39,568

 

$

4,000

 

$

6,135

 

$

49,703

Property operating expenses and real estate taxes

 

 

10,824

 

 

2,087

 

 

 

 

12,911

Other expenses

 

 

7,830

 

 

1,014

 

 

1,242

 

 

10,086

 

 



 



 



 



Net property income before depreciation, amortization and certain nonrecurring items

 

$

20,914

 

$

899

 

$

4,893

 

$

26,706

 

 



 



 



 



Depreciation and amortization

 

$

11,917

 

$

753

 

$

234

 

$

12,904

 

 



 



 



 



Interest expense

 

$

10,110

 

$

729

 

$

 

$

10,839

 

 



 



 



 



Real estate at cost

 

$

607,771

 

$

42,005

 

$

 

$

649,776

 

 



 



 



 



Total assets

 

$

722,186

 

$

39,005

 

$

 

$

761,191

 

 



 



 



 



Expenditures for real estate and improvements

 

$

48,897

 

$

371

 

$

 

$

49,268

 

 



 



 



 



Reconciliation to net income

 

 

 

 

 

 

 

 

 

 

 

 

Net property income before depreciation and amortization

 

$

26,706

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(12,904

)

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

664

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

7,140

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(10,839

)

 

 

 

 

 

 

 

 

Income taxes

 

 

(812

)

 

 

 

 

 

 

 

 

Minority interest

 

 

(754

)

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Net income

 

$

9,201

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

15


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

SEGMENT REPORTING (continued)

 

 

 

Three months ended June 30, 2006

 

 


 

 

Retail
Properties

 

Multi-Family
Properties

 

All
Other

 

Total

 

 


 


 


 


   

(dollars in thousands)

Revenues

 

$

19,341

 

$

1,964

 

$

3,188

 

$

24,493

Property operating expenses and real estate taxes

 

 

5,030

 

 

1,032

 

 

 

 

6,062

Other expenses

 

 

3,572

 

 

585

 

 

622

 

 

4,779

 

 



 



 



 



Net property income before depreciation, amortization and certain nonrecurring items

 

$

10,739

 

$

347

 

$

2,566

 

$

13,652

 

 



 



 



 



Depreciation and amortization

 

$

6,012

 

$

377

 

$

117

 

$

6,506

 

 



 



 



 



Interest expense

 

$

5,279

 

$

375

 

$

 

$

5,654

 

 



 



 



 



Real estate at cost

 

$

607,771

 

$

42,005

 

$

 

$

649,776

 

 



 



 



 



Total assets

 

$

722,186

 

$

39,005

 

$

 

$

761,191

 

 



 



 



 



Expenditures for real estate and improvements

 

$

48,129

 

$

232

 

$

 

$

48,361

 

 



 



 



 



Reconciliation to net income

 

 

 

 

 

 

 

 

 

 

 

 

Net property income before depreciation and amortization

 

$

13,652

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(6,506

)

 

 

 

 

 

 

 

 

Income from discontinued operations

 

 

364

 

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

3,028

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(5,654

)

 

 

 

 

 

 

 

 

Income taxes

 

 

(363

)

 

 

 

 

 

 

 

 

Minority interest

 

 

327

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Net income

 

$

4,848

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

16


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

SEGMENT REPORTING (continued)

 

 

 

 

Six months ended June 30, 2005

 

 

 


 

 

 

Retail
Properties

 

Multi-Family
Properties

 

All
Other

 

Total

 

 


 


 


 


     

(dollars in thousands)

Revenues

 

$

42,648

 

$

3,772

 

$

2,877

 

$

49,297

Property operating expenses and real estate taxes

 

 

12,444

 

 

1,902

 

 

 

 

14,346

Other expenses

 

 

5,846

 

 

673

 

 

416

 

 

6,935

   

 

 

 

Net property income before depreciation, amortization and certain nonrecurring items

 

$

24,358

 

$

1,197

 

$

2,461

 

$

28,016

   

 

 

 

Depreciation and amortization

 

$

11,566

 

$

723

 

$

217

 

$

12,506

   

 

 

 

Interest expense

 

$

7,666

 

$

619

 

$

 

$

8,285

   

 

 

 

Real estate at cost

 

$

613,045

 

$

41,060

 

$

 

$

654,105

   

 

 

 

Total assets

 

$

681,136

 

$

40,314

 

$

 

$

721,450

   

 

 

 

Expenditures for real estate and improvements

 

$

31,188

 

$

445

 

$

 

$

31,633

Reconciliation to net income

 



 



 



 



Net property income before depreciation and amortization

 

$

28,016

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(12,506

)

 

 

 

 

 

 

 

 

(Loss) from discontinued operations

 

 

(73

)

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

387

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8,285

)

 

 

 

 

 

 

 

 

Minority interest

 

 

1,251

 

 

 

 

 

 

 

 

 

   

                 

Net income

 

$

8,790

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

17


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11.

SEGMENT REPORTING (continued)

 

 

 

Three months ended June 30, 2005

 

 


 

 

Retail
Properties

 

Multi-Family
Properties

 

All
Other

 

Total

 

 


 


 


 


   

(dollars in thousands)

Revenues

 

$

21,118

 

$

1,896

 

$

1,885

 

$

24,899

Property operating expenses and real estate taxes

 

 

6,036

 

 

928

 

 

 

 

6,964

Other expenses

 

 

3,098

 

 

433

 

 

289

 

 

3,820

 

 



 



 



 



Net property income before depreciation, amortization and certain nonrecurring items

 

$

11,984

 

$

535

 

$

1,596

 

$

14,115

 

 



 



 



 



Depreciation and amortization

 

$

5,759

 

$

363

 

$

112

 

$

6,234

 

 



 



 



 



Interest expense

 

$

4,036

 

$

316

 

$

 

$

4,352

 

 



 



 



 



Real estate at cost

 

$

613,045

 

$

41,060

 

$

 

$

654,105

 

 



 



 



 



Total assets

 

$

681,136

 

$

40,314

 

$

 

$

721,450

 

 



 



 



 



Expenditures for real estate and improvements

 

$

27,995

 

$

224

 

$

 

$

28,219

 

 



 



 



 



Reconciliation to net income

 

 

 

 

 

 

 

 

 

 

 

 

Net property income before depreciation and amortization

 

$

14,115

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

(6,234

)

 

 

 

 

 

 

 

 

(Loss) from discontinued operations

 

 

(360

)

 

 

 

 

 

 

 

 

Equity in earnings of unconsolidated affiliates

 

 

126

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(4,352

)

 

 

 

 

 

 

 

 

Minority interest

 

 

1,050

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

Net income

 

$

4,345

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

18


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.

DISCONTINUED OPERATIONS

SFAS No. 144 “Accounting for the Impairment or Disposal of Long Lived Assets” (“SFAS 144”) requires discontinued operations presentation for disposals of a “component” of an entity. In accordance with SFAS No. 144, the Company reflects the income and expenses and assets and liabilities for properties which became held for sale, as discontinued operations.

The combined results of operations of either sold properties or properties held for sale are reported separately as discontinued operations for the three and six months ended June 30, 2006 and 2005. These are related to the Soundview Marketplace and Bradford Towne Centre which the Company was marketing for sale as of June 30, 2006. The three and six months ended June 30, 2005 also included the Berlin Shopping Center, which was sold on July 7, 2005.

The combined results of operations and assets and liabilities of the properties classified as discontinued operations are summarized as follows:

 

 

 

June 30,
2006

 

December 31,
2005

 

 

 


 


 

   

(dollars in thousands)

 

ASSETS

 

 

 

 

 

 

 

Net real estate

 

$

23,659

 

$

24,002

 

Cash and cash equivalents

 

 

 

 

9

 

Cash in escrow

 

 

144

 

 

292

 

Rents receivable, net

 

 

1,647

 

 

1,801

 

Prepaid expenses

 

 

176

 

 

165

 

Deferred charges, net

 

 

467

 

 

561

 

Other assets

 

 

6

 

 

6

 

 

 



 



 

Total assets of discontinued operations

 

$

26,099

 

$

26,836

 

 

 



 



 

LIABILITIES

 

 

 

 

 

 

 

Mortgage notes payable

 

$

13,666

 

$

13,800

 

Accounts payable and accrued expenses

 

 

55

 

 

177

 

Other liabilities

 

 

242

 

 

244

 

 

 



 



 

Total liabilities of discontinued operations

 

$

13,963

 

$

14,221

 

 

 



 



 

 

 

 

For the three months ended
June 30,

 

For the six months ended
June 30,

 

 

 


 


 

 

 

2006

 

2005

 

2006

 

2005

 

 

 


 


 


 


 

   

(dollars in thousands)

 

Total revenues

 

$

1,759

 

$

1,796

 

$

3,427

 

$

3,795

 

Total expenses

 

 

1,388

 

 

1,396

 

 

2,750

 

 

3,103

 

 

 



 



 



 



 

 

 

 

371

 

 

400

 

 

677

 

 

692

 

Impairment of real estate

 

 

 

 

(770

)

 

 

 

(770

)

Minority interest

 

 

(7

)

 

10

 

 

(13

)

 

5

 

 

 



 



 



 



 

Income (loss) from discontinued operations

 

$

364

 

$

(360

)

$

664

 

$

(73

)

 

 



 



 



 



 

19


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ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.

STOCK-BASED COMPENSATION

The Company adopted the fair value method of recording stock-based compensation contained in SFAS No. 123R, “Accounting for Stock-Based Compensation” as of January 1, 2002. As such, stock based compensation awards granted after December 31, 2001 have been expensed over the vesting period based on the fair value at the date the stock-based compensation was granted.

On January 6, 2006 (the “Grant Date”), the Company issued 62,630 options to officers (“Officers”) and employees (“Employees”) of the Company. The options, which have an exercise price of $20.65, are for ten-year terms and vest one third as of the Grant Date and one third on each of the next two anniversaries thereof. The Company has determined a value of $3.03 per option using the binomial method for valuing such options. In prior periods, the Company utilized the Black-Scholes method for valuing options granted and believes that the binomial method more accurately reflects the value of the options. This change had no material effect on the value of the unvested options or the Company’s consolidated financial statements. Accordingly, compensation expense of $12,000 and $91,000 has been recognized in the accompanying consolidated financial statements related to the options for the three and six months ended June 30, 2006.

On the Grant Date, the Company also issued a total of 121,233 Restricted Common Shares (“Restricted Shares”) to Officers and 13,136 Restricted Shares (net of subsequent forfeitures) to Employees of the Company. In general, the Restricted Shares carry all the rights of Common Shares including voting and dividend rights, but may not be transferred, assigned or pledged until the recipients have a vested non-forfeitable right to such shares. Vesting with respect to the Restricted Shares issued to Officers, which is subject to the recipients’ continued employment with the Company through the applicable vesting dates, is over five years with 30% vesting on the Grant Date and 17.5% vesting on each of the next four anniversaries thereafter. In addition, vesting on 50% of the unvested Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares. Vesting with respect to the Restricted Shares issued to Employees, which is subject to the recipients’ continued employment with the Company through the applicable vesting dates, is over five years with 30% vesting on the Grant Date and 17.5% vesting on each of the next four anniversaries thereafter. In addition, vesting on 25% of the unvested Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares.

The total value of the above Restricted Share awards on the date of grant was $2.7 million, of which $2.0 million will be recognized in compensation expense over the vesting period. Compensation expense of $0.1 million and $0.8 million has been recognized in the accompanying consolidated financial statements related to these Restricted Shares for the three and six months ended June 30, 2006.

On the Grant Date, the Company also issued a total of 224,901 Restricted Shares to Officers and 28,706 Restricted Shares to Employees in connection with a special, one-time performance bonus recognizing management’s outstanding achievements in enhancing shareholder values over the past five years, including, but not limited to, total shareholder return and the recent recapitalization of the Brandywine Portfolio. The Restricted Shares will vest over a period of five years with 50% vesting on the third anniversary and 25% vesting on the following two anniversaries of the Grant Date. The total value of this special bonus was $5.1 million and is being recognized in compensation expense over the vesting period. Compensation expense of $0.3 million and $0.5 million has been recognized in the accompanying consolidated financial statements related to this special bonus for the three and six months ended June 30, 2006.

On May 15, 2006, the Company issued 18,000 options and 4,801 unrestricted shares to Trustees of the Company in connection with Trustee fees. The options vest immediately. Trustee fee expense of $159,000 has been recognized in the accompanying consolidated financial statements related to these options and unrestricted shares.

14.

DIVIDENDS AND DISTRIBUTIONS PAYABLE

On May 15, 2006, the Board of Trustees of the Company approved and declared a cash dividend for the quarter ended June 30, 2006 of $0.185 per Common Share and Common OP Unit. The dividend was paid on July 14, 2006 to shareholders of record as of June 30, 2006.

20


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion is based on the consolidated financial statements of the Company as of June 30, 2006 and 2005 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 which 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 in our Form 10-K for the year ended December 31, 2005 and include, among others, the following: general economic and business conditions, 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 and acquisition; governmental actions and initiatives; and environmental/safety requirements.

OVERVIEW

We currently operate 76 properties, which we own or have an ownership interest in, consisting of 74 neighborhood and community shopping centers and two multi-family properties, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States. We receive income primarily from the rental revenue received from tenants at our properties, including recoveries, offset by operating and overhead expenses.

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 portfolio of community and neighborhood shopping centers and mixed-use properties with a retail component located in markets with strong demographics.

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

Generate internal growth within the portfolio through aggressive redevelopment, re-anchoring and leasing activities.

Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelopment and leasing and/or transactions requiring creative capital structuring to facilitate the transactions.

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 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 the following critical accounting policies affect the significant judgments and estimates used by us in the preparation of our consolidated financial statements.

Valuation of Property Held for Use and Sale

On a quarterly basis, we review both properties held for use and for sale for indicators of impairment. We record impairment losses and reduce 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 we do not expect to recover our carrying costs on properties held for use, we reduce our carrying cost to fair value, and for properties held for sale, we reduce our carrying value to the fair value less costs to sell. Management does not believe that the value of any properties in our portfolio was impaired as of June 30, 2006.

21


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Bad Debts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likelihood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of June 30, 2006, we have recorded an allowance for doubtful accounts of $2.4 million. If the financial condition of our tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

RESULTS OF OPERATIONS

Comparison of the three months ended June 30, 2006 (“2006”) to the three months ended June 30, 2005 (“2005”)

Effective January 1, 2006, we account for our Funds I and II and Mervyns I and II investments on a consolidated basis pursuant to EITF 04-5. Historic results for the three and six months ended June 30, 2005 have also been presented on a consolidated basis for purposes of comparability with 2006.

In addition, the Brandywine Portfolio operations were consolidated as part of Fund I for the three and six months ended June 30, 2005. Subsequent to the recapitalization and conversion of interests from Fund I to GDC in January 2006, the Brandywine Portfolio is accounted for under the equity method of accounting for the three and six months ended June 30, 2006. In the following tables, we have excluded the Brandywine Portfolio operations for the three and six months ended June 30, 2005 for purposes of comparability with the three and six months ended June 30, 2006.

 

 

 

 

 

 

 

 

 

 

 

Change

 

 

 

 

 

 

 

 

 

 

 


 

(dollars in millions)

 

2006

 

2005 As
Reported

 

Brandywine
Portfolio

 

2005
Adjusted

 

$

 

%

 


 


 


 


 


 


 


 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Minimum rents

 

$

17.4

 

$

19.1

 

$

(3.3

)

$

15.8

 

$

1.6

 

10

%

Percentage rents

 

 

0.1

 

 

0.1

 

 

 

 

0.1

 

 

 

 

Expense reimbursements

 

 

3.5

 

 

3.6

 

 

(0.6

)

 

3.0

 

 

0.5

 

17

%

Other property income

 

 

0.3

 

 

0.2