a6386434.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 June 30, 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
23-2715194
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
   
1311 MAMARONECK AVENUE, SUITE 260
10605
WHITE PLAINS, NY
(Zip Code)
(Address of principal executive offices)
 
 
(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 August 5, 2010 there were 40,147,415 common shares of beneficial interest, par value $.001 per share, outstanding.
 
 
 

 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
FORM 10-Q
 
INDEX
 
     
Page
       
Part I:
   
       
Item 1.
   
       
   
1
       
   
2
       
   
3
       
   
4
       
   
6
       
Item 2.
 
18
       
Item 3.
 
30
       
Item 4.
 
31
       
Part II:
   
       
Item 1.
 
31
       
Item 1A.
 
31
       
Item 2.
 
31
       
Item 3.
 
31
       
Item 4.
 
31
       
Item 5.
 
31
       
Item 6.
 
31
       
   
32
       
   
33
 
 
 
 

 
Part I. Financial Information
 
Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands)
 
June 30,
   
December 31,
 
   
2010
   
2009
 
ASSETS
 
(unaudited)
       
             
Operating real estate
           
Land
  $ 200,354     $ 221,740  
Building and improvements
    856,070       845,751  
Construction in progress
    968       2,575  
      1,057,392       1,070,066  
Less: accumulated depreciation
    208,475       193,745  
Net operating real estate
    848,917       876,321  
Real estate under development
    293,476       137,340  
Notes receivable and preferred equity investment, net
    126,048       125,221  
Investments in and advances to unconsolidated affiliates
    16,037       51,712  
Cash and cash equivalents
    78,930       93,808  
Rents receivable, net
    17,213       16,782  
Deferred charges, net of amortization
    27,341       28,311  
Acquired lease intangibles, net of amortization
    20,447       22,382  
Prepaid expenses and other assets
    33,824       30,587  
Total assets
  $ 1,462,233     $ 1,382,464  
                 
LIABILITIES
               
                 
 Mortgages payable
  $ 761,041     $ 732,287  
 Notes payable, net of unamortized discount of $1,594 and $2,105, respectively
    48,421       47,910  
 Distributions in excess of income from, and investments in, unconsolidated affiliates
    20,782       20,589  
 Accounts payable and accrued expenses
    23,601       17,548  
 Dividends and distributions payable
    7,426       7,377  
 Acquired lease and other intangibles, net of amortization
    6,247       6,753  
 Other liabilities
    18,029       17,523  
Total liabilities
    885,547       849,987  
                 
SHAREHOLDERS’ EQUITY
               
                 
Common shares, $.001 par value, authorized 100,000,000 shares; issued
               
and outstanding 40,143,189 and 39,787,018 shares, respectively
    40       40  
Additional paid-in capital
    301,625       299,014  
Accumulated other comprehensive loss
    (3,371 )     (2,994 )
Retained earnings
    19,587       16,125  
Total shareholders’ equity
    317,881       312,185  
Noncontrolling interests
    258,805       220,292  
Total equity
    576,686       532,477  
Total liabilities and equity
  $ 1,462,233     $ 1,382,464  
 
See accompanying notes
 
 
 
1

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 
(unaudited)
 
   
Three months ended
June 30,
   
Six months ended
June 30,
 
(dollars in thousands, except per share amounts)
 
2010
   
2009
   
2010
   
2009
 
                         
Revenues
                       
Rental income
  $ 25,826     $ 23,925     $ 51,693     $ 45,375  
Mortgage interest income
    5,238       4,933       10,231       9,959  
Expense reimbursements
    4,870       4,921       10,900       10,383  
Lease termination income
    59       21       65       226  
Management fee income
    436       444       836       1,200  
Other
    503       887       934       2,889  
Total revenues
    36,932       35,131       74,659       70,032  
                                 
Operating Expenses
                               
Property operating
    6,571       7,240       14,416       14,546  
Real estate taxes
    4,346       4,088       8,873       7,753  
General and administrative
    5,416       5,208       10,538       11,349  
Depreciation and amortization
    7,864       8,456       18,205       17,036  
Other expense
    -       4,149       -       4,165  
Total operating expenses
    24,197       29,141       52,032       54,849  
                                 
  Operating income
    12,735       5,990       22,627       15,183  
                                 
Other interest income
    153       95       287       212  
Equity in earnings (losses) of unconsolidated affiliates
    80       49       467       (3,258 )
Interest and other finance expense
    (8,631 )     (7,631 )     (17,098 )     (15,452 )
Gain on bargain purchase
    33,805       -       33,805       -  
Gain on debt extinguishment
    -       3,895       -       7,045  
  Income from continuing operations before income taxes
    38,142       2,398       40,088       3,730  
 Income tax provision
    (645 )     (1,096 )     (1,084 )     (1,622 )
  Income from continuing operations
    37,497       1,302       39,004       2,108  
                                 
Discontinued Operations
                               
Operating income from discontinued operations
    -       19       -       193  
Gain on sale of property
    -       -       -       5,637  
  Income from discontinued operations
    -       19       -       5,830  
                                 
  Net income
    37,497       1,321       39,004       7,938  
                                 
(Income) loss attributable to noncontrolling interests:
                               
Continuing operations
    (24,699 )     5,814       (21,076 )     14,360  
Discontinued operations
    -       -       -       (4,864 )
Net (income) loss attributable to noncontrolling interests
    (24,699 )     5,814       (21,076 )     9,496  
                                 
  Net income attributable to Common Shareholders
  $ 12,798     $ 7,135     $ 17,928     $ 17,434  
                                 
Basic Earnings per Share
                               
Income from continuing operations
  $ 0.32     $ 0.18     $ 0.45     $ 0.45  
Income from discontinued operations
    -       -       -       0.03  
Basic earnings per share
  $ 0.32     $ 0.18     $ 0.45     $ 0.48  
                                 
Diluted Earnings per Share
                               
Income from continuing operations
  $ 0.32     $ 0.18     $ 0.45     $ 0.45  
Income from discontinued operations
    -       -       -       0.03  
Diluted earnings per share
  $ 0.32     $ 0.18     $ 0.45     $ 0.48  
 
 
See accompanying notes
 
 
2

 
ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

 
        Acc-         
       
umulated
       
       
Other
  Total    
     
Additional
Comp-
 
Share-
Non-  
 
Common Shares
Paid-in
rehensive
Retained
holders’
controlling
Total
(dollars in thousands, except per share amounts)
Shares
Amount
Capital
Loss
Earnings
Equity
Interests
Equity

Balance at December 31, 2009
    39,787     $ 40     $ 299,014     $ (2,994 )   $ 16,125     $ 312,185     $ 220,292     $ 532,477  
                                                                 
Conversion of 256,967 OP Units to Common Shares
  by limited partners of the Operating Partnership
    257               2,174       -       -       2,174       (2,174 )     -  
Dividends declared ($0.36 per Common Share)
    -       -       -       -       (14,466 )     (14,466 )     (381 )     (14,847 )
Employee Restricted Share awards
    133       -       1,062       -       -       1,062       888       1,950  
Common Shares issued under Employee Share
                                                               
  Purchase Plan
    3       -       50       -       -       50       -       50  
Issuance of Common Shares to Trustees
    13       -       190       -       -       190       -       190  
Exercise of Trustees options
    7       -       101       -       -       101       -       101  
Employee Restricted Shares cancelled
    (57 )     -       (966 )     -       -       (966 )     -       (966 )
Noncontrolling interest contributions (distributions)
    -       -       -       -       -       -       18,953       18,953  
                                                                 
Net income
    -       -               -       17,928       17,928       21,076       39,004  
Unrealized loss on valuation of swap agreements
    -       -       -       (1,701 )     -       (1,701 )     (26 )     (1,727 )
Reclassification of realized interest on swap agreements
    -       -       -       1,324       -       1,324       177       1,501  
  Total comprehensive income
    -       -       -       -       -       17,551       21,227       38,778  
                                                                 
Balance at June 30, 2010
    40,143     $ 40     $ 301,625     $ (3,371 )   $ 19,587     $ 317,881     $ 258,805     $ 576,686  
 
 

Balance at December 31, 2008
    32,357     $ 32     $ 218,527     $ (4,508 )   $ 13,671     $ 227,722     $ 214,506     $ 442,228  
                                                                 
Dividends declared ($0.39 per Common Share)
    -       -       -       -       (14,321 )     (14,321 )     (415 )     (14,736 )
Issuance of Common Shares
    5,750       6       65,237       -       -       65,243       -       65,243  
Issuance of Common Shares through special dividend
    1,287       2       16,190       -       -       16,192       -       16,192  
Employee Restricted Share awards
    442       -       1,678       -       -       1,678       452       2,130  
Common Shares issued under Employee Share
                                                               
  Purchase Plan
    5       -       57       -       -       57       -       57  
Issuance of Common Shares to Trustees
    25       -       570       -       -       570       -       570  
Employee Restricted Shares cancelled
    (191 )             (2,715 )     -       -       (2,715 )     -       (2,715 )
Conversion options on Convertible Notes purchased
    -       -       (838 )     -       -       (838 )     -       (838 )
Noncontrolling interest distributions
    -       -       -       -       -       -       (454 )     (454 )
                                                                 
Net income (loss)
    -       -               -       17,434       17,434       (9,496 )     7,938  
Unrealized loss on valuation of swap agreements
    -       -       -       (26 )     -       (26 )     (27 )     (53 )
Reclassification of realized interest on swap agreements
    -       -       -       1,307       -       1,307       140       1,447  
  Total comprehensive income (loss)
    -       -       -       -       -       18,715       (9,383 )     9,332  
                                                                 
Balance at June 30, 2009
    39,675     $ 40     $ 298,706     $ (3,227 )   $ 16,784     $ 312,303     $ 204,706     $ 517,009  


See accompanying notes
 
 
 
3

 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 
(unaudited)
 

(dollars in thousands)
 
Six months ended
June 30
 
   
2010
   
2009
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income
  $ 39,004     $ 7,938  
Adjustments to reconcile net income to net cash provided by operating activities
               
Depreciation and amortization
    18,205       17,060  
Gain on bargain purchase
    (33,805 )     -  
Gain on sale of property
    -       (5,637 )
Gain on debt extinguishment
    -       (7,045 )
Non-cash accretion of notes receivable
    (2,961 )     (2,570 )
Share compensation expense
    2,141       2,187  
Equity in (earnings) losses of unconsolidated affiliates
    (467 )     3,258  
Other, net
    2,107       11,529  
Changes in assets and liabilities
               
Cash in escrow
    484       (550 )
Rents receivable, net
    (1,441 )     (3,083 )
Prepaid expenses and other assets, net
    (1,094 )     4,266  
Accounts payable and accrued expenses
    (2,216 )     1,409  
Other liabilities
    280       (372 )
                 
Net cash provided by operating activities
    20,237       28,390  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Investment in real estate
    (36,934 )     (107,804 )
Deferred acquisition and leasing costs
    (1,802 )     (6,160 )
Investments in and advances to unconsolidated affiliates
    (2,182 )     (2,985 )
Return of capital from unconsolidated affiliates
    617       1,879  
Repayments of notes receivable
    2,011       1,728  
Advances on notes receivable
    -       (696 )
Proceeds from sale of property
    -       9,481  
                 
Net cash used in investing activities
    (38,290 )     (104,557 )
 
 
 
4

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009
 
(unaudited)
 

(dollars in thousands)
 
Six months ended
June 30,
 
   
2010
   
2009
 
             
CASH FLOWS FROM FINANCING ACTIVITIES:
           
Principal payments on mortgage notes
    (26,254 )     (67,843 )
Proceeds received on mortgage notes
    29,035       166,262  
Purchase of convertible notes
    -       (46,611 )
Increase in deferred financing and other costs
    (2,945 )     (27 )
Capital contributions from noncontrolling interests
    19,476       -  
Distributions to noncontrolling interests
    (903 )     (1,326 )
Dividends paid to Common Shareholders
    (14,419 )     (15,824 )
Proceeds from issuance of Common Shares, net of issuance costs
    -       65,243  
Repurchase and cancellation of Common Shares
    (966 )     (2,715 )
Common Shares issued under Employee Share Purchase Plan
    50       56  
Exercise of options to purchase Common Shares
    101       -  
                 
Net cash provided by financing activities
    3,175       97,215  
                 
(Decrease) increase in cash and cash equivalents
    (14,878 )     21,048  
Cash and cash equivalents, beginning of period
    93,808       86,691  
                 
Cash and cash equivalents, end of period
  $ 78,930     $ 107,739  
                 
Supplemental disclosure of cash flow information
               
Cash paid during the period for interest, including capitalized interest of $876 and $2,126, respectively
  $ 16,473     $ 16,746  
                 
Cash paid for income taxes
  $ 1,095     $ 153  
                 
Dividends paid through the issuance of Common Shares
  $ -     $ 16,192  
                 
Acquisition of interest in unconsolidated affiliate:
               
                 
Real estate, net
  $ (108,000 )   $ -  
Assumption of mortgage debt
    25,990       -  
Gain on bargain purchase
    33,805       -  
Other assets and liabilities
    7,532       -  
Investment in unconsolidated affiliates
    37,824       -  
Cash included in investment in real estate
  $ (2,849 )   $ -  


See accompanying notes
 
 
 
5

 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.         ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

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 June 30, 2010, the Trust controlled approximately 99% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common 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”).

As of June 30, 2010, the Company has ownership interests in 34 properties within its core portfolio (“Core Portfolio”) and 44 properties within its three opportunity funds, Acadia Strategic Opportunity Fund I, L.P. (“Fund I”), Acadia Strategic Opportunity Fund II, LLC (“Fund II”) and Acadia Strategic Opportunity Fund III, LLC (“Fund III” and together with Fund I and Fund II, the “Opportunity Funds”). The 78 properties consist of commercial properties, primarily neighborhood and community shopping centers, self-storage and mixed-use properties with a retail component. In addition, the Company also invests in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I”) and Acadia Mervyn Investors II, LLC (“Mervyns II”) or Fund II, all on a non-recourse basis. These investments comprise the Company’s Retailer Controlled Property initiative (“RCP Venture”). The Operating Partnership has the following equity interests in the Opportunity Funds, Mervyns I and Mervyns II:

 
Entity
Equity Interest Held By Operating Partnership
 
 
Fund I and Mervyns I
22.2%
 
 
Fund II and Mervyns II
20.0%
 
 
Fund III
19.9%
 

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


Basis of Presentation

The consolidated financial statements include the consolidated accounts of the Company and its investments in partnerships and limited liability companies in which the Company is presumed to have control in accordance with the consolidation guidance of the Financial Accounting Statements Board (“FASB”) Accounting Standards Codification (“ASC”). Investments in entities for which the Company has the ability to exercise significant influence but does not have financial or operating control, are accounted for under the equity method of accounting. Accordingly, the Company’s share of the net earnings (or losses) of 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 rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. 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. These consolidated financial statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K, as filed with the SEC on March 1, 2010.
 

 
6

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.         ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements

In June 2009, the FASB issued a new accounting standard, which provided certain changes to the evaluation of a variable interest entity (“VIE”) including requiring a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, continuous assessments of whether an enterprise is the primary beneficiary of a VIE and enhanced disclosures about an enterprise’s involvement with a VIE. Under the new standard, the primary beneficiary has both the power to direct the activities that most significantly impact economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.  The adoption of the standard on January 1, 2010 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,” which provides for new disclosures, as well as clarification of existing disclosures on fair value measurements.  The adoption of the standard on January 1, 2010 did not have a material impact on the Company’s financial position and results of operations.

In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic 855) Amendments to Certain Recognition and Disclosure Requirements,” which 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 through which subsequent events have been evaluated. The adoption did not have an impact on the Company’s financial position and results of operations.

2.          EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed using net income attributable to common shareholders and the weighted average Common Shares outstanding. Diluted earnings per Common Share reflect the conversion of obligations and the assumed exercises of securities including the effects of awards issuable under the Company’s Share Incentive Plans. The computation of basic and diluted earnings per Common Share from continuing operations for the periods indicated are as follows:

   
Three months ended
June 30,
   
Six months ended
June 30,
 
(dollars in thousands, except per share amounts)
 
2010
   
2009
   
2010
   
2009
 
Numerator:
                       
Income from continuing operations  attributable to Common Shareholders
  $ 12,798     $ 7,116     $ 17,928     $ 16,468  
Effect of dilutive securities:
 
   
   
   
 
Preferred OP Unit distributions
    5       5       9       10  
Numerator for diluted earnings per Common Share
  $ 12,803     $ 7,121     $ 17,937     $ 16,478  
                                 
Denominator:
                               
Weighted average shares for basic earnings per share
    40,135       38,592       40,058       36,261  
Effect of dilutive securities:
                               
   Employee share options
    212       187       191       154  
   Convertible Preferred OP Units
    25       25       25       25  
Dilutive potential Common Shares
    237       212       216       179  
Denominator for diluted earnings per share
    40,372       38,804       40,274       36,440  
Basic earnings per Common Share from continuing operations attributable to Common Shareholders
  $ 0.32     $ 0.18     $ 0.45     $ 0.45  
Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
  $ 0.32     $ 0.18     $ 0.45     $ 0.45  

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 13) 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 9) 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 is dilutive for the three and six months ended June 30, 2010 and June 30, 2009 as reflected above.
 
 
 
7

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.         NONCONTROLLING INTERESTS

Noncontrolling interests represent the portion of equity that the Company does not own in entities that it consolidates. Such noncontrolling interests are reported on the Consolidated Balance Sheets within equity, separately from the Company’s equity.

Noncontrolling interests include third party interests in the Company’s Opportunity Funds and other entities. It also include interests in the Operating Partnership which represent (i) the limited partners’ 369,639 and 626,606 Common OP Units at June 30, 2010 and December 31, 2009, respectively, and (ii) 188 Series A Preferred OP Units at June 30, 2010 and December 31, 2009.

4.         ACQUISITIONS AND DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Acquisitions

Prior to June 30, 2010, the Company, through Fund II, and an unaffiliated joint venture partner, California Urban Investment Partners, LLC (“CUIP”) owned a leasehold interest in CityPoint, a mixed-use, redevelopment project located in downtown Brooklyn, New York. Fund II owned a 75% interest in the retail component, a 50% interest in the office component and no interest in the residential component of CityPoint. CUIP owned the remaining interests in the retail and office components and 100% of the residential component of the project.  Accordingly, Fund II’s investment represented 24.75% of the overall original acquisition cost and subsequent carry and pre-development costs and was accounted for using the equity method.

On June 30, 2010, Fund II acquired all of CUIP’s interest in CityPoint for $9.2 million (the “Transaction”), consisting of a current payment of $2.0 million and deferred payments, potentially through 2020, aggregating $7.2 million. Fund II also assumed CUIP’s share of the first mortgage debt, $19.6 million.

The Transaction was a business combination achieved in stages, and as a result, Fund II was required to report its entire investment in CityPoint at fair market value. A June 30, 2010 third-party appraisal valued CityPoint at $108 million which resulted in Fund II recording a non-cash gain of approximately $33.8 million for the three and six months ended June 30, 2010. The Operating Partnership’s share of this gain, net of the noncontrolling interests’ share, totaled $6.3 million.

As a result of the Transaction, the Company changed its method of accounting for CityPoint from the equity method and now consolidates CityPoint in its consolidated financial statements as of June 30, 2010. As CityPoint is currently in the redevelopment stage, there are no revenues or earnings from CityPoint included in the Company’s Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009.

Discontinued Operations

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

There were no properties sold during the six months ended June 30, 2010. During 2009, the Company sold Blackman Plaza and six of the remaining Fund I investments in 24 Kroger and Safeway supermarket locations. The combined results of operations of the properties classified as discontinued operations are summarized as follows:

Statements Of Operations
 
Three
months
ended
June 30,
   
Six
months
ended
June 30,
 
(dollars in thousands) 
 
2009
   
2009
 
             
Total revenues
  $ 93     $ 375  
Total expenses
    74       182  
Operating income
    19       193  
Gain on sale of property
 
      5,637  
Income from discontinued operations
    19       5,830  
Income from discontinued operations attributable to noncontrolling interests in subsidiaries
 
      (4,864 )
Income from discontinued operations attributable to Common Shareholders
  $ 19     $ 966  
 
 
 
8

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.          INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

Brandywine Portfolio

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

Crossroads

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


Opportunity Funds

RCP Venture

During January of 2004, the Company formed 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. The Company has invested in the RCP Venture through Mervyns I and Mervyns II or Fund II, all on a non-recourse basis. Through June 30, 2010, the Company has made investments in Mervyns Department Stores (“Mervyns”) and Albertson’s including additional investments in locations that are separate from these original investments (“Add-On Investments”). Additionally, the Company has invested in Shopko, Marsh and Rex Stores Corporation (collectively “Other RCP Investments”).

The Company accounts for the original investments in Mervyns and Albertson’s under 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 Investments under the cost method due to its minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.

The following table summarized the Company’s RCP Venture investments from inception through June 30, 2010:
 
   
                             
(dollars in thousands)
                       
Operating Partnership Share
 
              Invested           Invested        
             
Capital
         
Capital
       
        Year    
and
         
and
       
Investor
 
Investment
 
Acquired
   
Advances
   
Distributions
   
Advances
   
Distributions
 
Mervyns I and Mervyns II
 
Mervyns
 
2004
    $ 26,058     $ 45,966     $ 4,901     $ 11,251  
   
Mervyns add-on
                                     
Mervyns I and Mervyns II 
 
investments
  2005/2008       6,517       1,703       1,046       283  
Mervyns II
 
Albertson’s
  2006       20,717       65,969       4,239       13,193  
   
Albertson’s add-on
                                     
Mervyns II 
 
investments
  2006/2007       2,412       1,215       387       243  
Fund II
 
Shopko
  2006       1,108       1,100       222       220  
Fund II
 
Marsh/Marsh Add-on investments
  2006/2008       2,667       2,639       533       528  
Mervyns II
 
Rex Stores
  2007       2,701       400       535       80  
Total
            $ 62,180     $ 118,992     $ 11,863     $ 25,798  
 
 
 
9

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

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

Other Opportunity Fund Investments

Fund I Investments

Fund I owned a 50% interest in the Sterling Heights Shopping Center, which was accounted for under the equity method of accounting. On March 25, 2010, the Sterling Heights Shopping Center was sold 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 had a 24.75% interest in CityPoint, a redevelopment project located in downtown Brooklyn, NY, which was accounted for under the equity method. On June 30, 2010, Fund II acquired the remaining interests in the project from its unaffiliated partner, as discussed in Note 4 and, as a result, now consolidates the CityPoint entity.

Fund III Investments

Fund III, together with an unaffiliated partner, has invested in an entity for the purpose of providing management services to owners of self-storage properties, including the 14 locations currently owned through Fund II and Fund III.  This entity was determined to be a variable interest entity of which the Company was determined not to be the primary beneficiary.  As such, the Company accounts for this investment under the equity method.

The following tables summarize the combined/condensed financial information of the Company’s investments in unconsolidated affiliates as of June 30, 2010 and December 31, 2009.
 
 
(dollars in thousands)
 
June 30,
 2010
   
December 31,
2009
 
Combined/Condensed Balance Sheets
           
Assets:
           
Rental property, net
  $ 134,448     $ 142,690  
Real estate under development
 
      100,346  
Investment in unconsolidated affiliates
    210,337       209,407  
Other assets
    15,711       20,951  
                 
Total assets
  $ 360,496     $ 473,394  
                 
Liabilities and partners’ equity
               
Mortgage note payable
  $ 228,032     $ 258,685  
Other liabilities
    8,032       12,085  
Partners’ equity
    124,432       202,624  
                 
Total liabilities and partners’ equity
  $ 360,496     $ 473,394  
Company’s investment in and advances to unconsolidated affiliates
  $ 16,037     $ 51,712  
Share of distributions in excess of share of income and investments in unconsolidated affiliates
  $ (20,782 )   $ (20,589 )
 
 
 
10

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
 
5.          INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES (continued)

Summary of Investments in Unconsolidated Affiliates

   
Three Months Ended
   
Six Months Ended
 
(dollars in thousands)
 
June 30,
2010
   
June 30,
2009
   
June 30,
2010
   
June 30,
2009
 
Combined/Condensed Statements of Operations
                       
Total revenue
  $ 7,401     $ 7,460     $ 14,470     $ 14,945  
Operating and other expenses
    2,074       2,223       4,611       4,864  
Interest expense
    3,359       3,450       6,714       6,852  
Equity in (losses) earnings of unconsolidated affiliates
    (159 )     (2,070 )     2,764       (34,264 )
Depreciation and amortization
    1,589       1,109       2,687       2,232  
Loss on sale of property, net
 
   
      (2,957 )     (390 )
Net income (loss)
  $ 220     $ (1,392 )   $ 265     $ (33,657 )
                                 
Company’s share of net income (loss)
  $ 177     $ 146     $ 661     $ (3,064 )
Amortization of excess investment
    (97 )     (97 )     (194 )     (194 )
Company’s share of net income (loss)
  $ 80     $ 49     $ 467     $ (3,258 )
 
 
6.          NOTES RECEIVABLE AND PREFERRED EQUITY INVESTMENT

At June 30, 2010, the Company’s notes receivable and preferred equity investment, net, consisted of the following:

Description
 
Effective
interest Rate
   
Maturity date
   
First Priority liens
   
Net carrying amount of notes receivable and preferred equity
 
Extension options
(dollars in thousands)
                         
                           
72nd Street
    20.9%       7/2011     $ 185,000     $ 43,727  
1 x 1 year
Georgetown A
    10.2%       11/2010       9,630       8,000  
2 x 1 year
Georgetown B
    13.5%       6/2011       115,981       40,000  
2 x 1 year
Other Loan
    14.5%       12/2010    
      8,585  
1 x 6 months
First Mortgage Loan
    12.8%       9/2010    
      10,000  
1 x 1 year
Individually less
 
  10% to
   
Demand note
                   
  than 3%
    24.0%    
to 1/2017
      272,433       15,736  
Total
                          $ 126,048    

 
 
11

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


7.         DERIVATIVE FINANCIAL INSTRUMENTS

As of June 30, 2010, the Company’s derivative financial instruments consisted of seven interest rate LIBOR swaps with an aggregate notional value of $78.8 million, which fix interest at rates from 0.9% to 5.1% and mature between July 2010 and November 2012. The fair value of the net derivative liability of these instruments, which is included in other liabilities in the Consolidated Balance Sheets, totals $3.5 million at June 30, 2010. The notional value does not represent exposure to credit, interest rate or market risks.

These derivative instruments have been designated as cash flow hedges and hedge the future cash outflows on mortgage debt. Such instruments are reported at the fair value reflected above. As of June 30, 2010 and 2009, unrealized losses totaling $3.5 and $3.7 million, respectively were reflected in accumulated other comprehensive loss.

As of June 30, 2010 and 2009, no derivatives were designated as fair value hedges, hedges of net investments in foreign operations or considered to be ineffective. Additionally, the Company does not use derivatives for trading or speculative purposes.


8.          MORTGAGE LOANS

The Company completed the following transactions related to mortgage loans and credit facilities during the six months ended June 30, 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% which  matures on January 12, 2012. As of June 30, 2010, $10.0 million was drawn on this facility.

ii) Extended the Fund II subscription line of credit, which is collateralized by a pledge of investors’ unfunded capital commitments, that was scheduled 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.  In connection with the extension, the Company made an $8.2 million payment on the outstanding $48.2 million line of credit. The line of credit’s maximum capacity was reduced to $40.0 million and will decrease to $30.0 million in September 2010.

iii) During February of 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.

iv) Also during February of 2010, the Company made a $15.0 million payment on an outstanding $30.0 million credit facility collateralized by six properties.

v) During May of 2010, the Company made a $17.0 million draw on the Fund III subscription line of credit. As of June 30, 2010, the total outstanding amount on this line of credit was $156.5 million.

vi) Also during May of 2010, the Company borrowed an additional $2.0 million on an existing mortgage loan collateralized by a property.
 
 
 
12

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.          MORTGAGE LOANS (continued)

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 and the servicer on behalf of the lender have reached an agreement in principle to amend the two loans. As part of the agreement the servicer on behalf of the lender has agreed to waive all alleged events of default. Consequently 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 lender disputed the Company’s notice of the exercise of its one year extension option and refused to grant the extension request and issued a Notice of Event of Default and Demand for Payment with which the Company disagreed. Subsequent to June 30, 2010, the Company successfully negotiated an amendment and extension of the loan. The agreement required a $1.1 million payment on the outstanding principal balance and extended the maturity date to April 1, 2013. The interest rate has been adjusted retroactively to LIBOR plus 400 basis points for the period April 1, 2010 through March 31, 2011, LIBOR plus 550 basis points for the period April 1, 2011 through March 31, 2012, and LIBOR plus 600 basis points for the period April 1, 2012 through March 31, 2013.


9.          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.

Through June 30, 2010, the Company has purchased $65.0 million in face amount of its convertible debt at an average discount of approximately 19%. The outstanding Convertible Notes face amount as of June 30, 2010 was $50.0 million.


10.        FAIR VALUE MEASUREMENTS

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

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of June 30, 2010:

(dollars in thousands)
 
Level 1
   
Level 2
   
Level 3
 
Liabilities
                 
Derivative financial instruments (Note 7)
  $     $ 3,494     $  
 
 
 
13

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10.        FAIR VALUE MEASUREMENTS (continued)


Financial Instruments

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

The Company has determined the estimated fair values of the following financial instruments by discounting future cash flows utilizing a discount rate equivalent to the rate at which similar financial instruments would be originated at the reporting date:


   
June 30, 2010
   
December 31, 2009
 
         
Estimated
         
Estimated
 
   
Carrying
   
Fair
   
Carrying
   
Fair
 
(dollars in thousands)
 
Amount
   
Value
   
Amount
   
Value
 
                         
Notes Receivable and Preferred Equity Investments
  $ 126,048     $ 124,165     $ 125,221     $ 126,403  
                                 
Mortgage Notes Payable and Convertible Notes Payable
  $ 809,462     $ 808,829     $ 780,197     $ 751,043  


11.        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 $0.1 million for each of the three months ended June 30, 2010 and 2009, respectively, and $0.1 million and $0.3 million for the six months ended June 30, 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 June 30, 2010 and June 30, 2009, and $0.4 million for each the six months ended June 30, 2010 and 2009, respectively.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended June 30, 2010 and 2009, and $50,000 for each of the six months ended June 30, 2010 and 2009.


12.        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 tables set forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three and six months ended June 30, 2010 and 2009 (does not include unconsolidated affiliates):
 
 
 
14

 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12.        SEGMENT REPORTING (continued)
Three Months Ended June 30, 2010
 
(dollars in thousands)
 
Core
Portfolio
   
Opportunity
Funds
   
Self-
Storage
Portfolio
   
Notes
Receivable
   
Other
   
Amounts
Eliminated in
Consolidation
   
Total
 
Revenues
  $ 14,863     $ 11,622     $ 4,773     $ 5,238     $ 5,204     $ (4,768 )   $ 36,932  
Property operating expenses
and real estate taxes
    3,942       4,098       3,298    
          (421 )     10,917  
Other expenses
    5,347       3,543    
   
   
      (3,474 )     5,416  
Income before depreciation
and amortization
  $ 5,574     $ 3,981     $ 1,475     $ 5,238     $ 5,204     $ (873 )   $ 20,599  
Depreciation and amortization
  $ 3,960     $ 2,775     $ 1,129     $     $
   
    $ 7,864  
Interest and other finance
expense
  $ 4,290     $ 2,242     $ 2,099     $     $
   
    $ 8,631  
Real estate at cost
  $ 478,904     $ 674,383     $ 209,733     $
    $
    $ (12,152 )   $ 1,350,868  
Total assets
  $ 547,065     $ 704,037     $ 196,223     $ 126,048     $
    $ (111,140 )   $ 1,462,233  
Expenditures in real estate
  $ 2,348     $ 23,871     $ 551     $
    $
    $ (918 )   $ 25,852  
 
Reconciliation to net income and net income attributable to Common Shareholders
     
Net property income before depreciation and amortization
  $ 20,599  
Other interest income
    153  
Depreciation and amortization
    (7,864 )
Equity in earnings of unconsolidated affiliates
    80  
Interest and other finance expense
    (8,631 )
Income tax expense
    (645 )
Gain on bargain purchase
    33,805  
Net income
    37,497  
Net (income) attributable to noncontrolling interests in subsidiaries
    (24,699 )
Net income attributable to Common Shareholders
  $ 12,798  
 
Three Months Ended June 30, 2009
(dollars in thousands)
 
Core
Portfolio
   
Opportunity
Funds
   
Self-
Storage
Portfolio
   
Notes
Receivable
   
Other
   
Amounts
Eliminated in
Consolidation
   
Total
 
Revenues
  $ 15,745     $ 11,646     $ 2,362     $ 4,933     $ 6,461     $ (6,016 )   $ 35,131  
Property operating expenses
and real estate taxes
    5,408       3,946       2,357    
   
      (383 )     11,328  
Other expenses
    5,520       6,013    
      1,734    
      (3,910 )     9,357  
Income (loss) before depreciation
and amortization
  $ 4,817     $ 1,687     $ 5     $ 3,199     $ 6,461     $ (1,723 )   $ 14,446  
Depreciation and amortization
  $ 4,074     $ 3,284     $ 1,098     $
    $
    $
    $ 8,456  
Interest and other finance expense
  $ 4,725     $ 1,304     $ 1,602     $
    $
    $
    $ 7,631  
Real estate at cost
  $ 475,196     $ 517,102     $ 206,744     $
    $
    $ (11,190 )   $ 1,187,852  
Total assets
  $ 562,887     $ 607,876     $ 200,785     $ 124,500     $
    $ (102,758 )   $ 1,393,290  
Expenditures in real estate
  $ 745     $ 10,951     $ 1,737    
   
    $ (1,681 )   $ 11,752  

Reconciliation to net income and net income attributable to Common Shareholders
 
Net property income before depreciation and amortization
  $ 14,446  
Other interest income
    95  
Depreciation and amortization
    (8,456 )
Equity in losses of unconsolidated affiliates
    49  
Interest and other finance expense
    (7,631 )
Gain on debt extinguishment
    3,895  
Income tax expense
    (1,096 )
Income from discontinued operations
    19  
Net income
    1,321  
Net loss attributable to noncontrolling interests in subsidiaries
    5,814  
Net income attributable to Common Shareholders
  $ 7,135  
 
 
15

 
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

12.        SEGMENT REPORTING (continued)
Six Months Ended June 30, 2010
(dollars in thousands)
 
Core
Portfolio
   
Opportunity
Funds
   
Self-
Storage
Portfolio
   
Notes
Receivable
   
Other
   
Amounts
Eliminated in
Consolidation