a6276574.htm

UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 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, 2010
 
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)
 
 1311 MAMARONECK AVENUE, SUITE 260
WHITE PLAINS, NY
 (Address of principal executive offices)
 
23-2715194
(I.R.S. Employer
Identification No.)
 
 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  o     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  o
Accelerated Filer  x
 
 
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  oNo  x
 
As of May 5, 2010 there were 40,120,006 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
 
     
Item 1.
Financial Statements
 
     
 
1
     
 
2
     
 
3
     
 
5
     
Item 2.
20
     
Item 3.
31
     
Item 4.
32
     
Part II:
Other Information
 
     
Item 1.
32
     
Item 1A.
32
     
Item 2.
32
     
Item 3.
32
     
Item 4.
32
     
Item 5.
32
     
Item 6.
32
     
 
33
     
 
34
 
 
 
 

 

Part I. Financial Information
 
Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
 
CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands)
 
March 31,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(unaudited)
       
Operating real estate
           
Land
  $ 200,865     $ 221,740  
Buildings and improvements
    847,140       845,751  
Construction in progress
    4,985       2,575  
      1,052,990       1,070,066  
Less: accumulated depreciation
    200,943       193,745  
Net operating real estate
    852,047       876,321  
Real estate under development
    164,846       137,340  
Cash and cash equivalents
    66,077       93,808  
Cash in escrow
    6,649       8,582  
Investments in and advances to unconsolidated affiliates
    52,123       51,712  
Rents receivable, net
    18,590       16,782  
Notes receivable and preferred equity investment, net
    126,643       125,221  
Deferred charges, net of amortization
    27,609       28,311  
Acquired lease intangibles, net of amortization
    21,365       22,382  
Prepaid expenses and other assets, net of amortization
    24,223       22,005  
Total assets
  $ 1,360,172     $ 1,382,464  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Mortgage notes payable
  $ 706,536     $ 732,287  
Convertible notes payable, net of unamortized discount of $1,850 and $2,105, respectively
    48,165       47,910  
Acquired lease and other intangibles, net of amortization
    6,506       6,753  
Accounts payable and accrued expenses
    14,418       17,548  
Dividends and distributions payable
    7,423       7,377  
Distributions in excess of income from, and investments in, unconsolidated affiliates
    20,534       20,589  
Other liabilities
    18,679       17,523  
Total liabilities
    822,261       849,987  
                 
Equity
               
Common shares
    40       40  
Additional paid-in capital
    300,799       299,014  
Accumulated other comprehensive loss
    (3,213 )     (2,994 )
Retained earnings
    14,024       16,125  
Total Common Shareholders’ equity
    311,650       312,185  
Noncontrolling interests in subsidiaries
    226,261       220,292  
Total equity
    537,911       532,477  
Total liabilities and equity
  $ 1,360,172     $ 1,382,464  

See accompanying notes
 
 
1

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
(unaudited)
 
   
Three months ended
March 31,
 
(dollars in thousands, except per share amounts)
 
2010
   
2009
 
             
Revenues
           
Minimum rents
  $ 25,732     $ 21,249  
Percentage rents
    135       201  
Expense reimbursements
    6,030       5,462  
Lease termination income
    6       205  
Other property income
    431       302  
Management fee income
    400       756  
Interest income
    5,127       5,143  
Other
    -       1,700  
Total revenues
    37,861       35,018  
                 
Operating Expenses
               
Property operating
    7,848       7,322  
Real estate taxes
    4,527       3,665  
General and administrative
    5,119       6,141  
Depreciation and amortization
    10,341       8,580  
Total operating expenses
    27,835       25,708  
Operating income
    10,026       9,310  
Equity in earnings (losses) of unconsolidated affiliates
    387       (3,307 )
Interest and other finance expense
    (8,467 )     (7,821 )
Gain on debt extinguishment
    -       3,150  
Income from continuing operations before income taxes
    1,946       1,332  
Income tax expense
    (439 )     (526 )
Income from continuing operations
    1,507       806  
                 
Discontinued Operations
               
Operating income from discontinued operations
    -       174  
Gain on sale of property
    -       5,637  
Income from discontinued operations
    -       5,811  
Net income
    1,507       6,617  
                 
Loss (income) attributable to noncontrolling interests in subsidiaries:
               
Continuing operations
    3,623       8,546  
Discontinued operations
    -       (4,864 )
Net loss attributable to noncontrolling interests in subsidiaries
    3,623       3,682  
                 
Net income attributable to Common Shareholders
  $ 5,130     $ 10,299  
                 
Income from continuing operations attributable to Common Shareholders
  $ 5,130     $ 9,352  
Income from discontinued operations attributable to Common Shareholders
    -       947  
Net Income attributable to Common Shareholders
  $ 5,130     $ 10,299  
                 
Basic Earnings per Share
               
Income from continuing operations
  $ 0.13     $ 0.28  
Income from discontinued operations
    -       0.03  
Basic earnings per share
  $ 0.13     $ 0.31  
                 
Diluted Earnings per Share
               
Income from continuing operations
  $ 0.13     $ 0.28  
Income from discontinued operations
    -       0.03  
Diluted earnings per share
  $ 0.13     $ 0.31  
 
See accompanying notes
 
 
2

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
(unaudited)
 

(dollars in thousands)
 
Three months ended
March 31,
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 1,507     $ 6,617  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
    10,341       8,592  
Gain on sale of property
    -       (5,637 )
Gain on debt extinguishment
    -       (3,150 )
Amortization of lease intangibles
    285       2,455  
Amortization of mortgage note premium
    (9 )     (9 )
Amortization of discount on convertible debt
    255       447  
Non-cash accretion of notes receivable
    (1,438 )     (1,258 )
Share compensation expense
    1,057       1,133  
Equity in (earnings) losses of unconsolidated affiliates
    (387 )     3,307  
Distributions of operating income from unconsolidated affiliates
    49       139  
Provision for bad debt
    442       359  
Changes in assets and liabilities
               
Cash in escrow
    1,933       684  
Rents receivable
    (2,250 )     (2,080 )
Prepaid expenses and other assets, net
    (2,366 )     8,477  
Accounts payable and accrued expenses
    (939 )     (2,361 )
Other liabilities
    1,002       1,430  
                 
Net cash provided by operating activities
    9,482       19,145  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investment in real estate
    (11,075 )     (96,052 )
Deferred acquisition and leasing costs
    (395 )     (694 )
Investments in and advances to unconsolidated affiliates
    (156 )     (2,242 )
Return of capital from unconsolidated affiliates
    28       301  
Repayments of notes receivable
    -       902  
Advances on notes receivable
    -       (347 )
Proceeds from sale of property
    -       9,481  
                 
Net cash used in investing activities
    (11,598 )     (88,651 )

 
3

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009
 
(unaudited)
 

(dollars in thousands)
 
Three months ended
March 31,
 
   
2010
   
2009
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Principal payments on mortgage notes
    (25,742 )     (24,319 )
Proceeds received on mortgage notes
    -       150,565  
Purchase of convertible notes
    -       (13,925 )
Increase in deferred financing and other costs
    (2,943 )     (1,124 )
Capital contributions from noncontrolling interests in partially-owned affiliates
    11,876       -  
Distributions to noncontrolling interests in partially-owned affiliates
    (487 )     (404 )
Dividends paid to Common Shareholders
    (7,188 )     (8,671 )
Distributions to noncontrolling interests in Operating Partnership
    (184 )     (630 )
Distributions on preferred Operating Partnership Units to noncontrolling interests
    (5 )     (19 )
Repurchase and cancellation of Common Shares
    (966 )     (2,715 )
Common Shares issued under Employee Share Purchase Plan
    24       30  
                 
Net cash (used in) provided by financing activities
    (25,615 )     98,788  
                 
(Decrease) increase in cash and cash equivalents
    (27,731 )     29,282  
Cash and cash equivalents, beginning of period
    93,808       86,691  
                 
Cash and cash equivalents, end of period
  $ 66,077     $ 115,973  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for interest, including capitalized interest of $442 and $969, respectively
  $ 7,724     $ 7,589  
                 
Cash paid for income taxes
  $ 784     $ 30  
                 
Dividends paid through the issuance of Common Shares
  $ -     $ 16,192  
 
See accompanying notes
 
 
4

 

ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.         THE COMPANY
 
Acadia Realty Trust (the “Trust”) and subsidiaries (collectively, the “Company”) is a fully-integrated, self-managed and self-administered equity real estate investment trust (“REIT”) focused primarily on the ownership, acquisition, redevelopment and management of retail properties, including neighborhood and community shopping centers and mixed-use properties with retail components.

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 a controlling interest. As of March 31, 2010, the Trust controlled 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 who contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common or Preferred OP Units”). 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”). This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

During 2001, the Company formed a partnership, Acadia Strategic Opportunity Fund, LP (“Fund I”), and in 2004 formed a limited liability company, Acadia Mervyn Investors I, LLC (“Mervyns I”), with four institutional investors. The Operating Partnership 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 real estate investments. As of March 31, 2010, Fund I was fully invested, with the Operating Partnership having contributed $16.5 million to Fund I and $2.7 million to Mervyns I.

The Operating Partnership is the sole general partner of Fund I and sole managing member of Mervyns I, with a 22.2% equity interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its equity interest percentage based on certain investment return thresholds (“Promote”). Cash flow is distributed pro-rata to the partners and members (including the Operating Partnership) until they receive a 9% cumulative return (“Preferred Return”), and the return of all capital contributions. Thereafter, remaining cash flow (which is net of distributions and fees to the Operating Partnership for property management, asset management, leasing, construction and legal services) is distributed 20% to the Operating Partnership as a Promote and 80% to the partners (including the Operating Partnership). As all contributed capital and accumulated preferred return has been distributed to investors, the Operating Partnership is now entitled to a Promote on all earnings and distributions.

During 2004, the Company, along with the investors from Fund I as well as two additional institutional investors, formed Acadia Strategic Opportunity Fund II, LLC (“Fund II”), and Acadia Mervyn Investors II, LLC (“Mervyns II”) with $300.0 million, in the aggregate, of committed discretionary capital. The Operating Partnership’s share of committed capital is $60.0 million. The Operating Partnership is the managing member with a 20% interest in both Fund II and Mervyns II. The terms and structure of Fund II and Mervyns II are substantially the same as Fund I and Mervyns I, including the Promote structure, with the exception that the Preferred Return is 8%. As of March 31, 2010, the Operating Partnership had contributed $40.0 million to Fund II and $7.6 million to Mervyns II.

During 2007, the Company formed Acadia Strategic Opportunity Fund III LLC (“Fund III”) with 14 institutional investors, including all of the investors from Fund I and a majority of the investors from Fund II with $502.5 million of committed discretionary capital. The Operating Partnership’s share of the committed capital is $100.0 million and it is the managing member with a 19.9% interest in Fund III. The terms and structure of Fund III are substantially the same as the previous Funds, including the Promote structure, with the exception that the Preferred Return is 6%. As of March 31, 2010, the Operating Partnership had contributed $19.2 million to Fund III.

Fund I, Fund II, Fund III, Mervyns I and Mervyns II are collectively referred to herein as the “Opportunity Funds.”
 
 
5

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.         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 Financial Accounting Statements Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (“ASC Topic 810”). Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings (or loss) of these entities are included in consolidated net income under the caption, Equity in Earnings (Losses) of Unconsolidated Affiliates.

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 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. 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.
 
Although the Company accounts for its investment in Albertson’s, which it has made through the Retailer Controlled Property Venture (“RCP Venture”) (Note 7), using the equity method of accounting, the Company adopted the policy of not recording its equity in earnings or losses of the unconsolidated affiliate until the Company receives the audited financial statements of Albertson’s to support the equity in earnings or losses in accordance with ASC Topic 323 “Investments – Equity Method and Joint Ventures.”

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. Actual results could differ from these estimates. Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2010. 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, 2009.

Recent Accounting Pronouncements

On January 1, 2010, the Company adopted new accounting requirements relating to variable interest entities. These new accounting requirements amend the existing accounting guidance: (i) to require an enterprise to perform an analysis to determine whether the enterprise’s variable interest or interests give it a controlling financial interest in a variable interest entity, identifying the primary beneficiary of a variable interest entity; (ii) to require ongoing reassessment of whether an enterprise is the primary beneficiary of a variable interest entity, rather than only when specific events occur; (iii) to eliminate the quantitative approach previously required for determining the primary beneficiary of a variable interest entity; (iv) to amend certain guidance for determining whether an entity is a variable interest entity; (v) to add an additional reconsideration event when changes in facts and circumstances pertinent to a variable interest entity occur; (vi) to eliminate the exception for troubled debt restructuring regarding variable interest entity reconsideration; and (vii) to require advanced disclosures that will provide users of financial statements with more transparent information about an enterprise’s involvement in a variable interest entity. The adoption of these new accounting requirements did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements” (“ASU No. 2010-06”). The provisions of ASU No. 2010-06 amended Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” by requiring an entity to: (i) disclose separately the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers and (ii) present separate information for Level 3 activity pertaining to gross purchases, sales, issuances, and settlements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009, except for the gross basis reconciliation for the Level 3 fair value measurements, which is effective for fiscal years beginning after December 15, 2010.  The adoption did not have a material impact on the Company’s financial position and results of operations, as it does not have any transfers between Level 1 and Level 2 fair value measurements.

In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic 855) Amendments to Certain Recognition and Disclosure Requirements” (“ASU No. 2010-09”). ASU No. 2010-09 requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date, in both issued and revised financial statements, through which the filer had evaluated subsequent events. The adoption did not have an impact on the Company’s financial position and results of operations.

 
6

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.         EARNINGS PER COMMON SHARE
 
Basic earnings per share was determined by dividing the applicable net income attributable to Common Shareholders for the period by the weighted average number of Common Shares outstanding during each period consistent with ASC Topic 260, “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
March 31,
 
(dollars in thousands, except per share amounts)
 
2010
   
2009
 
Numerator:
           
Income from continuing operations  attributable to Common Shareholders
  $ 5,130     $ 9,352  
Effect of dilutive securities:
               
Preferred OP Unit distributions
 
      5  
Numerator for diluted earnings per Common Share
  $ 5,130     $ 9,357  
                 
Denominator:
               
Weighted average shares for basic earnings per share
    39,981       33,474  
Effect of dilutive securities:
               
Employee share options
    169       122  
Convertible Preferred OP Units
 
      25  
Dilutive potential Common Shares
    169       147  
Denominator for diluted earnings per share
    40,150       33,621  
Basic earnings per Common Share from continuing operations attributable to Common Shareholders
  $ 0.13     $ 0.28  
Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
  $ 0.13     $ 0.28  

The weighted average shares used in the computation of diluted earnings per share include unvested restricted Common Shares (“Restricted Shares”) and restricted OP units (“LTIP Units”) (Note 15) that are entitled to receive dividend equivalent payments. The effect of the conversion of 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 noncontrolling interests in subsidiaries 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 11) is not reflected in the table above as such conversion based on the current market price of the Common Shares would be settled with cash. The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares would be dilutive for the three months ended March 31, 2009 as reflected above. These would be anti-dilutive for the three months ended March 31, 2010 and, accordingly, are not included in computing diluted earnings per Common Share for the period.

 
7

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.         COMPREHENSIVE INCOME

The following table sets forth comprehensive income for the three months ended March 31, 2010 and 2009:

(dollars in thousands) 
 
Three months ended
March 31,
 
   
2010
   
2009
 
Net income attributable to Common Shareholders
  $ 5,130     $ 10,299  
Other comprehensive (loss) income
    (219 )     146  
Comprehensive income attributable to Common Shareholders
  $ 4,911     $ 10,445  

Other comprehensive (loss) income relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges and the reclassification, which is included in interest expense, of a derivative instrument.

The following table sets forth the change in accumulated other comprehensive loss for the three months ended March 31, 2010:

Accumulated other comprehensive loss

(dollars in thousands)
     
Balance at December 31, 2009
  $ (2,994 )
Unrealized loss on valuation of derivative instruments and amortization of derivative instrument
    (219 )
Balance at March 31, 2010
  $ (3,213 )

5.         SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES
 
The following table summarizes the change in the shareholders’ equity and noncontrolling interest since December 31, 2009:

(dollars in thousands)
 
Common Shareholders’
 Equity
   
Noncontrolling Interests
   
Total
 
Balance at December 31, 2009
  $ 312,185     $ 220,292     $ 532,477  
Dividends and distributions declared of $0.18 per Common Share and Common OP Units
    (7,231 )     (192 )     (7,423 )
Net income (loss) for the period January 1 through March 31, 2010
    5,130       (3,623 )     1,507  
Distributions paid
    -       (487 )     (487 )
Other comprehensive (loss) income – Unrealized (loss) gain on valuation of derivative instruments
    (219 )     65       (154 )
Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
    2,114       (2,114 )     -  
Common Shares issued under Employee Share Purchase Plan
    24       -       24  
Issuance of Common Shares to Trustees
    61       -       61  
Employee Restricted Share awards
    552       -       552  
Employee Restricted Shares cancelled
    (966 )     -       (966 )
Employee LTIP Unit awards
    -       444       444  
Noncontrolling interest contributions
    -       11,876       11,876  
                         
Balance at March 31, 2010
  $ 311,650     $ 226,261     $ 537,911  

Noncontrolling interests include interests in the Operating Partnership which represent (i) the limited partners’ 376,306 and 626,606 Common OP Units at March 31, 2010 and December 31, 2009, respectively, (ii) 188 Series A Preferred OP Units at March 31, 2010 and December 31, 2009, with a stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit

 
8

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.         SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES, (continued)

if such unit were converted into a Common OP Unit. Noncontrolling interests also include outside interests in partially owned affiliates and third-party interests in Fund I, II and III, and Mervyns I and II and three other entities.

For the three months ended March 31, 2010, 57,476 employee Restricted Shares were cancelled to pay the employees’ income taxes due on the value of the portion of the Restricted Shares that vested during the period. During the three months ended March 31, 2010, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling $1.0 million.

6.         DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Discontinued Operations

In accordance with ASC Subtopic 205-20 “Presentation of Financial Statements, Discontinued Operations,” the Company reclassified the consolidated statements of income and the consolidated balance sheets relating to the properties that were sold or became held for sale, as a discontinued operation, for all periods presented.

The combined results of operations for these properties for the three months ended March 31, 2010 and March 31, 2009 are reported separately as discontinued operations. During February 2009, the Company sold six Kroger locations.

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

STATEMENTS OF OPERATIONS
Three months ended March 31, 2009
(dollars in thousands) 
 
Total revenues
  $ 282  
Total expenses
    108  
Operating income
    174  
Gain on sale of property
    5,637  
Income from discontinued operations
    5,811  
Income from discontinued operations attributable to noncontrolling interests in subsidiaries
    (4,864 )
Income from discontinued operations attributable to
       
Common Shareholders
  $ 947  
 
 
9

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.         INVESTMENTS
 
A.  Investments In and Advances to Unconsolidated Affiliates

Retailer Controlled Property Venture (“RCP Venture”)

During January of 2004, the Company commenced the RCP Venture with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc., through a limited liability company (“KLA”), for the purpose of making investments in surplus or underutilized properties owned by retailers. As of March 31, 2010, the Company had invested $60.8 million through the RCP Venture on a non-recourse basis. Cash flow from any investment in which the RCP Venture participants elect to invest, is to be distributed to the participants until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to Klaff and 80% to the partners (including Klaff).

Mervyns Department Stores

During September 2004, the Company made its first RCP Venture investment. Through Mervyns I and Mervyns II, the Company invested $23.2 million in a consortium to acquire the Mervyns Department Store chain (“Mervyns”) consisting of 262 stores (“REALCO”) and its retail operation (“OPCO”) from Target Corporation. To date, REALCO has disposed of a significant portion of the portfolio. In addition, in November 2007, the Company sold its interest in OPCO and, as a result, has no further investment in OPCO. Subsequent to the initial acquisition, the Company, through Mervyns I and Mervyns II, made additional investments of $2.9 million.

During the quarter ended March 31, 2009, REALCO recorded an impairment charge on its investment in certain locations and leasehold interests of which Mervyns I and II recognized a combined loss of $3.1 million. The Operating Partnership’s share of this loss, net of taxes, was $0.6 million.

Through March 31, 2010, the Company, through Mervyns I and Mervyns II, made additional investments in locations that are separate from the original investment (“Add-On Investments”) in Mervyns totaling $5.1 million.

Albertson’s

During June of 2006, the RCP Venture made its second investment as part of an investment consortium, acquiring Albertson’s and Cub Foods, of which the Mervyns II share was $20.7 million. Through March 31, 2010, Mervyns II has received distributions from this investment totaling $65.8 million.

Through March 31, 2010, the Company, through Mervyns II, made Add-On Investments in Albertson’s totaling $2.4 million and received distributions totaling $1.2 million.

Other RCP Investments

During 2006, Fund II made investments of $1.1 million in Shopko and $0.7 million in Marsh. During 2007, Fund II received a $1.1 million cash distribution from the Shopko investment representing 100% of its invested capital. As of March 31, 2010, Fund II made investments of $2.0 million in additional Add-On Investments in Marsh and has received distributions totaling $2.6 million.

During July of 2007, the RCP Venture acquired a portfolio of 87 retail properties from Rex Stores Corporation, in which the Company invested in through Mervyns II. Mervyns II’s share of this investment was $2.7 million. Through March 31, 2010, Mervyns II has received distributions of $0.4 million.

The Company accounts for the original investments in Mervyns and Albertson’s using the equity method of accounting as the Company has the ability to exercise significant influence over, but does not have financial or operating control. The Company accounts for the Add-On Investments and other RCP Venture investments using the cost method due to its minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.

 
10

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.         INVESTMENTS (continued)
 
A.  Investments In and Advances to Unconsolidated Affiliates (continued)
 
The following table summarizes the Company’s RCP Venture investments from inception through March 31, 2010:
 
(dollars in thousands)
                     
Operating Partnership Share
 
           
Invested
         
Invested
       
      Year    
Capital
         
Capital
       
Investor
Investment
 
Acquired
   
and Advances
   
Distributions
   
and Advances
   
Distributions
 
Mervyns I and Mervyns II
Mervyns
 
2004
    $ 26,058     $ 45,966     $ 4,901     $ 11,251  
Mervyns I and Mervyns II 
Mervyns add-on
                                     
 
investments
  2005/2008       5,126       1,703       753       283  
Mervyns II
Albertson’s
  2006       20,717       65,757       4,239       13,151  
Mervyns II 
Albertson’s add-on
                                     
 
investments
  2006/2007       2,409       1,215       386       243  
Fund II
Shopko
  2006       1,100       1,100       220       220  
Fund II
Marsh
  2006       2,667       2,639       533       528  
Mervyns II
Rex Stores
  2007       2,701       400       535       80  
Total
            $ 60,778     $ 118,780     $ 11,567     $ 25,756  


Brandywine Portfolio

The Company owns a 22.2% interest in a one million square foot retail portfolio located in Wilmington, Delaware (the “Brandywine Portfolio”) that is accounted for using the equity method.

Crossroads

The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II (collectively, “Crossroads”), which collectively own a 311,000 square foot shopping center located in White Plains, New York that is accounted for using the equity method.

Other Investments

Fund I Investments

Fund I owned a 50% interest in the Sterling Heights Shopping Center, which was accounted for using the equity method of accounting.
 
On March 25, 2010, Fund I sold the Sterling Heights Shopping Center for $2.3 million.  The proceeds from this sale together with the balance of Fund I’s recourse obligation of $0.6 million were used to fully liquidate the outstanding mortgage loan obligation.

Fund II Investments

Fund II has a 25% interest in CityPoint, a redevelopment project located in downtown Brooklyn, NY, which is accounted for using the equity method. The Company has determined that CityPoint is a variable interest entity, and the Company is not the primary beneficiary. The Company’s maximum exposure is its current investment balance of $37.5 million.

The redevelopment plans include the development of a 1.3 million square foot project consisting of commercial and residential components. The Company will participate in the development of the commercial component and does not plan on participating in the development of, nor does it have any ownership interest in, the residential component of the project. As of December 31, 2009, it was determined that the residential component of the project was  impaired. Consequently, CityPoint wrote down the residential portion of the project to its fair value and recorded a $66.0 million impairment charge. The impairment charge was allocated 100% to the unaffiliated joint venture partner. The Company has not recognized any share of this impairment charge as it has no ownership interest in the residential component.

 
11

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
7.         INVESTMENTS (continued)
 
A.  Investments In and Advances to Unconsolidated Affiliates (continued)

Summary of Investments in Unconsolidated Affiliates

The following tables summarize the Company’s investments in unconsolidated affiliates as of March 31, 2010 and December 31, 2009. CityPoint is not reflected in the below Statements of Operations as there are no current operations at this redevelopment project.
 
   
March 31, 2010
 
(dollars in thousands)
 
RCP
Venture
   
CityPoint
   
Brandywine
Portfolio
   
Crossroads
   
Other
Investments
   
Total
 
Balance Sheets
                                   
Assets:
                                   
Rental property, net
  $ -     $ -     $ 127,250     $ 4,905     $ 3,489     $ 135,644  
Real estate under development
    -       101,437       -       -       -       101,437  
Investment in unconsolidated affiliates
    197,221       -       -       -       -       197,221  
Other assets
    -       3,261       10,177       4,846       724       19,008  
                                                 
Total assets
  $ 197,221     $ 104,698     $ 137,427     $ 9,751     $ 4,213     $ 453,310  
                                                 
Liabilities and partners’ equity
                                               
Mortgage note payable
  $ -     $ 25,990     $ 166,200     $ 62,056     $ -     $ 254,246  
Other liabilities
    -       2,704       7,089       1,192       8       10,993  
Partners’ equity (deficit)
    197,221       76,004       (35,862 )     (53,497 )     4,205       188,071  
                                                 
Total liabilities and partners’ equity
  $ 197,221     $ 104,698     $ 137,427     $ 9,751     $ 4,213     $ 453,310  
Company’s investment in and advances to                                                
unconsolidated affiliates
  $ 13,108     $ 37,513     $ -     $ -     $ 1,502     $ 52,123  
Share of distributions in excess of share of                                                
income and investment in unconsolidated                                                
affiliates
  $ -     $ -     $ (8,297 )   $ (12,237 )   $ -     $ (20,534 )
 
 
   
December 31, 2009
       
   
RCP
Venture
   
CityPoint
   
Brandywine
Portfolio
   
Crossroads
   
Other
Investments
   
Total
 
(dollars in thousands)
                                   
Balance Sheets
                                   
Assets
                                   
Rental property, net
  $ -     $ -     $ 127,091     $ 4,968     $ 10,631     $ 142,690  
Real Estate under development
    -       100,346       -       -       -       100,346  
Investment in unconsolidated affiliates
    209,407       -       -       -       -       209,407  
Other assets
    -       3,265       11,388       4,322       1,976       20,951  
                                                 
Total assets
  $ 209,407     $ 103,611     $ 138,479     $ 9,290     $ 12,607     $ 473,394  
                                                 
Liabilities and partners’ equity
                                               
Mortgage note payable
  $ -     $ 25,990     $ 166,200     $ 62,295     $ 4,200     $ 258,685  
Other liabilities
    -       2,096       7,762       977       1,250       12,085  
Partners equity (deficit)
    209,407       75,525       (35,483 )     (53,982 )     7,157       202,624  
                                                 
Total liabilities and partners’ equity
  $ 209,407     $ 103,611     $ 138,479     $ 9,290     $ 12,607     $ 473,394  
                                                 
Company’s investment in and advances to                                                
unconsolidated affiliates
  $ 12,832     $ 37,357     $ -     $ -     $ 1,523     $ 51,712  
                                                 
Share of distributions in excess of share                                                
of income and investment in unconsolidated                                                
affiliates
  $ -     $ -     $ (8,212 )   $ (12,377 )   $ -     $ (20,589 )
   
 
 
12

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.         INVESTMENTS (continued)
 
A.  Investments In and Advances to Unconsolidated Affiliates (continued)

Summary of Investments in Unconsolidated Affiliates (continued)
 
   
Three Months Ended March 31, 2010
 
(dollars in thousands)
 
RCP
Venture
   
Brandywine
Portfolio
   
Crossroads
   
Other
Investments
   
Total
 
Statements of Operations
                             
Total revenue
  $ -     $ 4,544     $ 2,167     $ 358     $ 7,069  
Operating and other expenses
    -       1,579       701       257       2,537  
Interest expense
    -       2,481       834       40       3,355  
Equity in earnings of unconsolidated affiliates
    2,923       -       -       -       2,923  
Depreciation and amortization
    -       863       146       89       1,098  
Loss on sale of property, net
    -       -       -       (2,957 )     (2,957 )
Net income (loss)
  $ 2,923     $ (379 )   $ 486     $ (2,985 )   $ 45  
                                         
Company’s share of net income (loss)
  $ 276     $ (43 )   $ 237     $ 14     $ 484  
Amortization of excess investment
    -       -       (97 )     -       (97 )
Company’s share of net income (loss)
  $ 276     $ (43 )   $ 140     $ 14     $ 387  


   
Three Months Ended March 31, 2009
 
(dollars in thousands)
 
RCP
Venture
   
Brandywine
Portfolio
   
Crossroads
   
Other
Investments
   
Total
 
Statements of Operations
                             
Total revenue
  $ -     $ 4,917     $ 2,109     $ 459     $ 7,485  
Operating and other expenses
    -       1,564       773       304       2,641  
Interest expense
    -       2,519       846       37       3,402  
Equity in losses of unconsolidated affiliates
    (32,194 )     -       -       -       (32,194 )
Depreciation and amortization
    -       848       148       127       1,123  
Loss on sale of property, net
    -       -       -       (390 )     (390 )
Net (loss) income
  $ (32,194 )   $ (14 )   $ 342     $ (399 )   $ (32,265 )
                                         
Company’s share of net (loss) income
  $ (3,381 )   $ 43     $ 166     $ (38 )   $ (3,210 )
Amortization of excess investment
    -       -       (97 )     -       (97 )
Company’s share of net (loss) income
  $ (3,381 )   $ 43     $ 69     $ (38 )   $ (3,307 )
 
 
13

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
8.         NOTES RECEIVABLE AND PREFERRED EQUITY INVESTMENT

At March 31, 2010, the Company’s notes receivable and preferred equity investment, net aggregated $126.6 million and were collateralized by the underlying properties, the borrower’s ownership interest in the entities that own the properties and/or by the borrower’s personal guarantee. Effective interest rates on the Company’s notes receivable and preferred equity investment ranged from 10.0% to 21.9% with maturities that range from demand notes to January 2017. As of March 31, 2010, notes receivable and preferred equity investments are as follows:

Description
 
Effective
interest
Rate
 
Maturity
date
 
Periodic
payment
terms
 
Prior
liens
   
Carrying
amount of
notes
receivable and
preferred
equity
 
Extension options
 
(dollars in thousands)
                           
                             
72nd Street
  19.28%  
7/18/2011
    (1)   $ 185,000   (4) $ 42,322  
1 x 1 year
 
Georgetown A
  10.14%  
11/12/2010
    (3)     8,516       8,000  
2 x 1 year
 
Georgetown B
  13.43%  
6/27/2010
    (2)     115,713       40,000  
2 x 1 year
 
Other Loan
  14.50%  
12/30/2010
    (2)  
-
      8,585  
1 x 6 month
 
First Mortgage Loan
  12.50%  
9/11/2010
    (3)  
-
      10,000  
1 x 1 year
 
Individually less
 
10% to
 
Demand note
                       
than 3%
  21.90%  
to 1/1/2017
          272,433       17,736  
-
 
Total
                          $ 126,643      

Notes:
(1)  Principal and interest, including a $7.5 million exit fee, are due upon maturity.
(2)  Payable upon maturity.
(3)  Interest only payable monthly, principal due on maturity.
(4)  The balance represents the maximum amount to be drawn under a construction loan.

During March 2010, the Company assigned its interest in a redevelopment project to an unaffiliated entity in exchange for a $2.0 million note as consideration for its interest. This note is contingent upon the unaffiliated entity obtaining financing for the redevelopment project and bears interest at 10%. The Company had previously recorded a $2.0 million reserve against the costs of this redevelopment project. Consequently, all principal and accrued interest for this contingent note receivable is currently reserved as of March 31, 2010.

9.         DERIVATIVE FINANCIAL INSTRUMENTS

The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of March 31, 2010. The notional value does not represent exposure to credit, interest rate or market risks.

Hedge Type
 
Notional Value
 
Rate
 
Maturity
 
Fair Value
 
(dollars in thousands)
                 
 
 
Interest rate LIBOR swaps
  $ 78,933  
0.90%
to
5.14%
 
7/19/10
to
11/30/12
  $ (3,422 )
                       
Interest rate LIBOR Cap
  $ 30,000   6.0%  
4/01/10
 
-
 
Net Derivative instrument liability (1)
                  $ (3,422 )

(1) The fair value of the derivative instruments is included in other liabilities in the Consolidated Balance Sheets.

 
14

 

ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10.        MORTGAGE LOANS

The Company completed the following transactions related to mortgage loans and credit facilities during the three months ended March 31, 2010:

i) closed on a $48.0 million construction loan that bears interest at the greater of (a) LIBOR plus 400 basis points or (b) an interest rate floor of 6.50% and a maturity date of January 12, 2012. As of March 31, 2010, no amount was drawn on this construction loan.

ii) extended the Fund II line of credit that was to mature on March 1, 2010 to March 1, 2011 and adjusted the interest rate from LIBOR plus 250 basis points to LIBOR plus 325 basis points.  The line of credit’s maximum capacity was reduced to $40.0 million and will decrease to $30.0 million in September 2010.

iii) on February 9, 2010, the Company paid off the outstanding Ledgewood line of credit balance of $2.0 million, which was scheduled to mature on March 29, 2010 and terminated the line of credit.

The following table sets forth certain information pertaining to the Company’s secured credit facilities:

(dollars in thousands)
Borrower
 
Total
amount of
credit
facility
   
Amount
borrowed
as of
December 31,
2009
   
Net borrowings (repayments)
during the
three months
ended
March 31, 2010
   
Amount
borrowed
as of
March 31,
2010
   
Letters
of credit
outstanding
as of
March 31,
2010
   
Amount
available
under
credit
facilities
as of
March 31,
2010
 
Acadia Realty, LP
  $ 64,498     $ 30,000     $ (15,000 )   $ 15,000     $ 9,210     $ 40,288  
Acadia Realty, LP
    -       2,000       (2,000 )     -       -       -  
Fund II
    40,000       48,245       (8,245 )     40,000       -       -  
Fund III
    221,000       139,450       -       139,450       500       81,050  
   Total
  $ 325,498     $ 219,695     $ (25,245 )   $ 194,450     $ 9,710     $ 121,338  

In June 2009, the servicer of two of the Company’s loans alleged that non-monetary defaults had occurred on construction loans for $31.7 million and $11.5 million collateralized by the Pelham Manor Shopping Center and Atlantic Avenue, respectively. The servicer contends that the Company did not substantially complete the improvements in accordance with the required completion dates as defined in the loan agreements and, accordingly, did not meet the requirements for the final draws. The Company does not believe the loans are in default and will vigorously defend its position and is currently in discussions with the servicer to resolve these issues. The Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company’s financial condition or results of operations.

On April 1, 2010, a $30.0 million loan, collateralized by a Fund II property located on 161st Street in the Bronx, NY, matured. The Company gave notice of the exercise of its one year extension option and agreed to pay down $0.4 million in order to comply with its debt service coverage requirement to extend.  The lender disputed and refused to grant the extension request and has issued a Notice of Event of Default and Demand for Payment with which the Company disagrees. As a result, the lender is contending that interest at the default rate, which at March 31, 2010, amounts to 6.65%, is payable with which the Company also disagrees. The Company is in negotiations with the special servicer of the loan to amend the loan terms and extend the maturity. The Company believes that it will be able to successfully negotiate the extension and the ultimate resolution of this matter will not have a material adverse effect on its financial condition or the results of operations.

11.        CONVERTIBLE NOTES PAYABLE

In December 2006 and January 2007, the Company issued $115.0 million of convertible notes 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.

During 2009 and 2008, the Company purchased $57.0 million and $8.0 million in face amount, respectively, of its convertible debt at an average discount of approximately 19%. The transactions resulted in a gain on debt extinguishment of $7.1 million and $1.5 million for the years ended December 31, 2009 and 2008, respectively. The outstanding Convertible Notes face amount as of March 31, 2010 was $50.0 million.

 
15

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.        FAIR VALUE MEASUREMENTS

ASC Topic 820, “Fair Value Measurements and Disclosures,” defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants.

ASC Topic 820’s valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

·    
Level 1 - Quoted prices for identical instruments in active markets

·    
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable

·    
Level 3 - Valuations derived from valuation techniques in which significant value drivers are unobservable

The following describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value:

Derivative Instruments — The Company’s derivative financial liabilities consist of interest rate swaps and are predominately valued using Level 2 inputs. The fair value of these instruments is based upon the estimated amounts the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date and is determined using interest rate market pricing models.

The following table presents the Company’s liabilities measured at fair value based on level of inputs at March 31, 2010:

(dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
 
Liabilities
                 
Derivatives
  $ -     $ 3,422     $ -  
Total liabilities measured at fair value
  $ -     $ 3,422     $ -  

Financial Instruments

ASC Topic 825 “Financial Instruments” requires disclosure on the fair value of financial instruments.

Certain of the Company’s assets and liabilities are considered financial instruments. Fair value estimates, methods and assumptions are set forth below.

Cash and Cash Equivalents, Restricted Cash, Cash in Escrow, Rents Receivable, Prepaid Expenses, Other Assets, Accounts Payable and Accrued Expenses, Dividends and Distributions Payable and Other Liabilities—The carrying amount of these assets and liabilities approximates fair value as of March 31, 2010 and December 31, 2009 due to the short-term nature of such accounts.

Notes Receivable and Preferred Equity Investments — As of March 31, 2010 and December 31, 2009, the Company has determined the estimated fair values of its preferred equity investments and notes receivable were $133.3 million and $126.4 million, respectively, by discounting future cash receipts utilizing a discount rate equivalent to the rate at which similar investments would be originated at the reporting date.

Derivative Instruments — The fair value of these instruments is based upon the estimated amounts the Company would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the reporting date and is determined using interest rate market pricing models.

Mortgage Notes Payable and Convertible Notes Payable — As of March 31, 2010 and December 31, 2009, the Company has determined the estimated fair values of its mortgage notes payable were $741.3 million and $751.0 million, respectively, by discounting future cash payments utilizing a discount rate equivalent to the rate at which similar mortgage notes payable would be originated at the reporting date.
 
 
16

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.        RELATED PARTY TRANSACTIONS

During February 2010, Klaff converted all 250,000 of its Restricted Common OP Units into 250,000 Common Shares.

The Company earns asset management, leasing, disposition, development and construction fees for providing services to an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Fees earned by the Company in connection with this portfolio were $0.03 million and $0.2 million for the three months ended March 31, 2010 and 2009, respectively.

The Company earned property management fees, legal and leasing fees from the Brandywine portfolio totaling $0.2 million for each of the three months ended March 31, 2010 and March 31, 2009.

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, 2010 and 2009.

14.        SEGMENT REPORTING

The Company has five reportable segments: Core Portfolio, Opportunity Funds, Self-Storage Portfolio, Notes Receivable and Other.  “Notes Receivable” consists of the Company’s notes receivable and preferred equity investment and related interest income.  “Other” consists primarily of management fees and 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/member of the Opportunity Funds are eliminated in the Company’s consolidated financial statements. The following table sets forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three months ended March 31, 2010 and 2009 (does not include unconsolidated affiliates):

Three Months Ended March 31, 2010
(dollars in thousands)
 
Core
Portfolio
   
Opportunity
Funds
   
Self-
Storage
Portfolio
   
 
 
Notes
Receivable
   
Other
   
Amounts
Eliminated in Consolidation
   
Total
 
Revenues
  $ 15,934     $ 11,862     $ 4,539     $ 4,857     $ 5,055     $ (4,386 )   $ 37,861  
Property operating expenses
and real estate taxes
    5,330       4,455       2,882       -       -       (292 )     12,375  
Other expenses
    5,714       3,382       -       -       -       (3,977 )     5,119  
Income before depreciation
and amortization
  $ 4,890     $ 4,025     $ 1,657     $ 4,857     $ 5,055     $ (117 )   $ 20,367  
Depreciation and amortization
  $ 3,917     $ 5,349     $ 1,183     $ -     $ -     $ (108 )   $ 10,341  
Interest and other finance
expense
  $ 4,302     $ 3,063     $ 1,102     $ -     $ -     $ -     $ 8,467  
Real estate at cost
  $ 476,751     $ 542,961     $ 209,268     $ -     $ -     $ (11,144 )   $ 1,217,836  
Total assets
  $ 538,059     $ 612,245     $ 196,206     $ 126,643     $ -     $ (112,981 )   $ 1,360,172  
                                                         
Expenditures for real estate
and improvements
  $ 1,960     $ 8,611     $ 555     $ -     $ -     $ (51 )   $ 11,075  
                                                         
Reconciliation to net income and net income attributable to Common Shareholders
       
Net property income before depreciation and amortization   $ 20,367  
Depreciation and amortization
    (10,341 )
Equity in earnings of unconsolidated affiliates
    387  
Interest and other finance expense
    (8,467 )
Income tax expense
    (439 )
Net income
    1,507  
Net loss attributable to noncontrolling interests in subsidiaries     3,623  
Net income attributable to Common Shareholders   $ 5,130  
 
 
17

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
14.        SEGMENT REPORTING (continued)

 
 
Three Months Ended March 31, 2009

(dollars in thousands)
 
Core
Portfolio
   
Opportunity
Funds
   
Self-
Storage
Portfolio
   
Notes
Receivable
   
Other
   
Amounts
Eliminated in Consolidation
   
Total
 
Revenues
  $ 18,723     $ 8,643     $ 1,752     $ 4,890     $ 7,170     $ (6,160 )   $ 35,018  
Property operating
expenses
and real estate taxes
    5,541       3,134       2,417        -       -       (105 )     10,987  
Other expenses
    6,921       4,040       -       -       -       (4,820 )     6,141  
Income (loss) before
depreciation
and amortization
  $ 6,261     $ 1,469     $ (665 )   $ 4,890     $ 7,170     $ (1,235 )   $ 17,890  
Depreciation and
amortization
  $ 4,143     $ 3,388     $ 1,049     $ -     $ -     $ -     $ 8,580  
Interest and other finance
expense
  $ 5,156     $ 1,472     $ 1,193     $ -     $ -     $ -     $ 7,821  
Real estate at cost
  $ 474,177     $ 512,319     $ 200,035     $ -     $ -     $ (8,213 )   $ 1,178,318  
                                                         
Total assets
  $ 565,619     $ 603,210     $ 195,857     $ 126,290     $ -     $ (94,877 )   $ 1,396,099  
                                                         
Expenditures for real
estate and improvements
  $ 38     $ 94,575     $ 2,323     $ -     $ -     $ (884 )   $ 96,052  
                                                         
Reconciliation to net income and net income attributable to Common Shareholders          
Net property income before depreciation and amortization     $ 17,890  
Depreciation and amortization       (8,580 )
Equity in losses of unconsolidated affiliates       (3,307 )
Interest and other finance expense       (7,821 )
Gain on debt extinguishment       3,150  
Income tax expense       (526 )
Income from discontinued operations       5,811  
Net income       6,617  
Net loss attributable to noncontrolling interests in subsidiaries       3,682  
Net income attributable to Common Shareholders     $ 10,299  
 
 
18

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
15.        LONG-TERM INCENTIVE COMPENSATION

On March 1, 2010, the Company issued 257,116 LTIP Units to officers of the Company.  Vesting with respect to these awards is recognized ratably over the next five annual anniversaries of the issuance date.  The vesting on 46% of these awards is also generally subject to achieving certain total shareholder returns on the Company’s Common Shares or certain Company performance measures.

Also on March 1, 2010 and March 10, 2010, the Company issued a total of 16,473 Restricted Shares and 9,812 LTIP Units, respectively, to employees of the Company. Vesting with respect to these awards is recognized ratably over the next five annual anniversaries of the issuance date.  The vesting on 31% of these awards is also generally subject to achieving certain total shareholder returns on the Company’s Common Shares or certain Company performance measures.

The total value of the above Restricted Shares and LTIP Units as of the grant date was $4.7 million.  Compensation expense of $0.3 million has been recognized in the accompanying financial statements related to these awards for the three months ended March 31, 2010.

In 2009, the Company adopted the Long Term Investment Alignment Program (the “Program”) pursuant to which the Company may award units to primarily 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. As of March 31, 2010, the Company has awarded units representing 61% of the Program, which were determined to have no value at issuance.  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.

Total long-term incentive compensation expense, including the expense related to the Program, was $1.0 million and $1.1 million for the three months ended March 31, 2010 and 2009, respectively.


16.        DIVIDENDS AND DISTRIBUTIONS PAYABLE

On February 26, 2010, the Board of Trustees of the Company approved and declared a cash dividend for the quarter ended March 31, 2010 of $0.18 per Common Share and Common OP Unit. The dividend was paid on April 15, 2010 to shareholders of record as of March 31, 2010.
 
 
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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 March 31, 2010 and 2009 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, 2009 (our “2009 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
 
As of March 31, 2010, we operated 78 properties, which we own or have an ownership interest in, within our Core Portfolio or within our three Opportunity Funds. These 78 properties consist of commercial properties, primarily neighborhood and community shopping centers, self-storage and mixed-use properties with a retail component. The properties we operate are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States. 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 our Opportunity Funds. Excluding two properties under redevelopment, there are 32 properties in our Core Portfolio totaling approximately 4.8 million square feet. Fund I has 20 properties comprising approximately 0.9 million square feet. Fund II has 10 properties, seven of which (representing 1.2 million square feet) are currently operating, one is under construction, and two are in 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 14 properties totaling approximately 1.8 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 these 78 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 traditional investments in operating rental real estate but investments in operating businesses, the Operating Partnership invests in these through a taxable REIT subsidiary (“TRS”).

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:

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