AKR 10-Q 09.30.2011



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

For the quarterly period ended September 30, 2011
 
or
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 1-12002
 
ACADIA REALTY TRUST
 
(Exact name of registrant in its charter)
MARYLAND
 (State or other jurisdiction of
 incorporation or organization)
 
23-2715194
 (I.R.S. Employer
 Identification No.)
 
 
 
1311 MAMARONECK AVENUE, SUITE 260, WHITE PLAINS, NY
 (Address of principal executive offices)
 10605
 (Zip Code)
(914) 288-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x
 
NO o
            
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x
 
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  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 o No x
 As of November 2, 2011 there were 40,334,476 common shares of beneficial interest, par value $.001 per share, outstanding.




ACADIA REALTY TRUST AND SUBSIDIARIES
 
FORM 10-Q
 
INDEX

 
 
Page
 
 
 
Part I:
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II:
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





Part I. Financial Information

Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30,
2011
 
December 31,
2010
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
268,077

 
$
219,981

Building and improvements
958,549

 
867,773

Construction in progress
3,983

 
4,236

 
1,230,609

 
1,091,990

Less: accumulated depreciation
200,840

 
184,014

Net operating real estate
1,029,769

 
907,976

Real estate under development
229,223

 
243,892

Notes receivable, net
41,304

 
89,202

Investments in and advances to unconsolidated affiliates
78,420

 
31,036

Cash and cash equivalents
98,027

 
120,592

Cash in escrow
27,553

 
28,610

Rents receivable, net
23,179

 
17,360

Deferred charges, net
25,696

 
23,714

Acquired lease intangibles, net
22,975

 
18,622

Prepaid expenses and other assets
27,637

 
22,328

Assets of discontinued operations
2,684

 
21,474

Total assets
$
1,606,467

 
$
1,524,806

LIABILITIES
 

 
 

Mortgage notes payable
$
846,399

 
$
806,212

Convertible notes payable, net of unamortized discount of $109 and $1,063, respectively
24,824

 
48,712

Distributions in excess of income from, and investments in, unconsolidated affiliates
21,401

 
20,884

Accounts payable and accrued expenses
31,992

 
27,458

Dividends and distributions payable
7,507

 
7,427

Acquired lease and other intangibles, net
5,592

 
5,737

Other liabilities
18,914

 
20,459

Liabilities of discontinued operations
289

 
395

Total liabilities
956,918

 
937,284

EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 40,333,233 and 40,254,525 shares, respectively
40

 
40

Additional paid-in capital
303,783

 
303,823

Accumulated other comprehensive loss
(4,231
)
 
(2,857
)
Retained earnings
39,098

 
17,206

Total shareholders’ equity
338,690

 
318,212

Noncontrolling interests
310,859

 
269,310

Total equity
649,549

 
587,522

Total liabilities and equity
$
1,606,467

 
$
1,524,806

See accompanying notes

1




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 (unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2011
 
2010
 
2011
 
2010
Revenues
 
 
 
 
 
 
 
Rental income
$
29,483

 
$
26,688

 
$
85,564

 
$
75,733

Interest income
1,585

 
5,206

 
9,493

 
15,437

Expense reimbursements
5,407

 
4,636

 
16,213

 
14,721

Management fee income
252

 
346

 
1,169

 
1,182

Other
666

 
712

 
1,849

 
1,786

Total revenues
37,393

 
37,588

 
114,288

 
108,859

Operating Expenses
 

 
 

 
 

 
 

Property operating
7,347

 
6,887

 
22,565

 
20,324

Real estate taxes
5,003

 
4,523

 
13,792

 
12,902

General and administrative
5,758

 
5,317

 
17,147

 
15,852

Depreciation and amortization
8,398

 
8,687

 
24,626

 
23,651

Total operating expenses
26,506

 
25,414

 
78,130

 
72,729

Operating income
10,887

 
12,174

 
36,158

 
36,130

Equity in earnings of unconsolidated affiliates
3,110

 
143

 
3,025

 
610

Other interest income
105

 
175

 
219

 
462

Gain from bargain purchase

 

 

 
33,805

(Loss) gain on debt extinguishment
(303
)
 

 
1,268

 

Interest and other finance expense
(9,742
)
 
(9,904
)
 
(27,598
)
 
(29,061
)
Income from continuing operations before income taxes
4,057

 
2,588

 
13,072

 
41,946

Income tax (benefit) provision
(488
)
 
785

 
7

 
1,869

Income from continuing operations
4,545

 
1,803

 
13,065

 
40,077

Discontinued Operations
 
 
 
 
 
 
 
Operating income from discontinued operations
102

 
478

 
702

 
1,208

Impairment of asset

 

 
(6,925
)
 

Gain on sale of property

 

 
32,498

 

Income from discontinued operations
102

 
478

 
26,275

 
1,208

Net income
4,647

 
2,281

 
39,340

 
41,285

Noncontrolling interests
 

 
 

 
 

 
 

Continuing operations
(572
)
 
2,908

 
3,597

 
(18,045
)
Discontinued operations
(64
)
 
(72
)
 
731

 
(195
)
Net (income) loss attributable to noncontrolling interests
(636
)
 
2,836

 
4,328

 
(18,240
)
Net income attributable to Common Shareholders
$
4,011

 
$
5,117

 
$
43,668

 
$
23,045

Basic Earnings per Share
 

 
 

 
 

 
 

Income from continuing operations
$
0.10

 
$
0.12

 
$
0.41

 
$
0.55

Income from discontinued operations

 
0.01

 
0.67

 
0.02

Basic earnings per share
$
0.10

 
$
0.13

 
$
1.08

 
$
0.57

Diluted Earnings per Share
 

 
 

 
 

 
 

Income from continuing operations
$
0.10

 
$
0.12

 
$
0.41

 
$
0.55

Income from discontinued operations

 
0.01

 
0.67

 
0.02

Diluted earnings per share
$
0.10

 
$
0.13

 
$
1.08

 
$
0.57

 See accompanying notes

2




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010

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

 
$
40

 
$
303,823

 
$
(2,857
)
 
$
17,206

 
$
318,212

 
$
269,310

 
$
587,522

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
11

 

 
49

 

 

 
49

 
(49
)
 

Dividends declared ($0.54 per Common Share)

 

 

 

 
(21,776
)
 
(21,776
)
 
(738
)
 
(22,514
)
Vesting of employee Restricted Share and LTIP awards
95

 

 
389

 

 

 
389

 
2,829

 
3,218

Common Shares issued under Employee Share Purchase Plan
4

 

 
68

 

 

 
68

 

 
68

Issuance of LTIP Unit awards to employees

 

 

 

 

 

 
2,441

 
2,441

Issuance of Common Shares to trustees
8

 

 
171

 

 

 
171

 

 
171

Exercise of trustees options
1

 

 
7

 

 

 
7

 

 
7

Employee Restricted Shares cancelled
(40
)
 

 
(724
)
 

 

 
(724
)
 

 
(724
)
Noncontrolling interest distributions

 

 

 

 

 

 
(815
)
 
(815
)
Noncontrolling interest contributions

 

 

 

 

 

 
43,646

 
43,646

 
40,333

 
40

 
303,783

 
(2,857
)
 
(4,570
)
 
296,396

 
316,624

 
613,020

Comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)

 

 

 

 
43,668

 
43,668

 
(4,328
)
 
39,340

Unrealized loss on valuation of swap agreements

 

 

 
(3,265
)
 

 
(3,265
)
 
(1,944
)
 
(5,209
)
Reclassification of realized interest on swap agreements

 

 

 
1,891

 

 
1,891

 
507

 
2,398

Total comprehensive (loss) income

 

 

 
(1,374
)
 
43,668

 
42,294

 
(5,765
)
 
36,529

Balance at September 30, 2011
40,333

 
$
40

 
$
303,783

 
$
(4,231
)
 
$
39,098

 
$
338,690

 
$
310,859

 
$
649,549

 



















3








ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011 AND 2010 (continued)

(unaudited)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Loss
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
(amounts in thousands, except per share amounts)
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2009
39,787

 
$
40

 
$
299,014

 
$
(2,994
)
 
$
16,125

 
$
312,185

 
$
220,292

 
$
532,477

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
359

 

 
3,179

 

 

 
3,179

 
(3,179
)
 

Dividends declared ($0.54 per Common Share)

 

 

 

 
(21,721
)
 
(21,721
)
 
(553
)
 
(22,274
)
Vesting of employee Restricted Share and LTIP awards
133

 

 
1,561

 

 

 
1,561

 
1,333

 
2,894

Common Shares issued under Employee Share Purchase Plan
5

 

 
75

 

 

 
75

 

 
75

Issuance of Common Shares to trustees
13

 

 
228

 

 

 
228

 

 
228

Exercise of trustees options
7

 

 
101

 

 

 
101

 

 
101

Employee Restricted Shares cancelled
(57
)
 

 
(966
)
 

 

 
(966
)
 

 
(966
)
Noncontrolling interest distributions

 

 

 

 

 

 
(856
)
 
(856
)
Noncontrolling interest contributions

 

 

 

 

 

 
21,076

 
21,076

 
40,247

 
40

 
303,192

 
(2,994
)
 
(5,596
)
 
294,642

 
238,113

 
532,755

Comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
23,045

 
23,045

 
18,240

 
41,285

Unrealized loss on valuation of swap agreements

 

 

 
(2,263
)
 

 
(2,263
)
 
(73
)
 
(2,336
)
Reclassification of realized interest on swap agreements

 

 

 
1,891

 

 
1,891

 
245

 
2,136

Total comprehensive (loss) income

 

 

 
(372
)
 
23,045

 
22,673

 
18,412

 
41,085

Balance at September 30, 2010
40,247

 
$
40

 
$
303,192

 
$
(3,366
)
 
$
17,449

 
$
317,315

 
$
256,525

 
$
573,840




See accompanying notes
 


4




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Nine Months Ended
(dollars in thousands)
September 30,
 
2011
 
2010
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
39,340

 
$
41,285

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

 
 
Depreciation and amortization
25,087

 
25,409

Amortization of financing costs
2,897

 
3,137

Gain from bargain purchase

 
(33,805
)
Gain on sale of property
(32,498
)
 

Gain on debt extinguishment
(1,268
)
 

Impairment of asset
6,925

 

Non-cash accretion of notes receivable
(601
)
 
(4,513
)
Share compensation expense
3,390

 
3,121

Equity in earnings of unconsolidated affiliates
(3,025
)
 
(610
)
Distributions of operating income from unconsolidated affiliates
5,213

 
805

Other, net
2,571

 
3,190

Changes in assets and liabilities
 

 
 
Cash in escrow
735

 
(20,977
)
Rents receivable, net
(6,974
)
 
(2,891
)
Prepaid expenses and other assets
(4,039
)
 
1,443

Accounts payable and accrued expenses
4,133

 
5,285

Other liabilities
(2,749
)
 
1,713

Net cash provided by operating activities
39,137

 
22,592

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Investments in real estate
(135,709
)
 
(60,552
)
Deferred acquisition and leasing costs
(4,291
)
 
(2,442
)
Investments in and advances to unconsolidated affiliates
(46,544
)
 
(2,915
)
Return of capital from unconsolidated affiliates
3,735

 
753

Repayments of notes receivable
48,182

 
42,011

Increase in notes receivable
(7,834
)
 

Proceeds from sale of property
43,791

 

Net cash used in investing activities
(98,670
)
 
(23,145
)

5




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
(unaudited)

 
Nine Months Ended
(dollars in thousands)
September 30,
 
2011
 
2010
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage notes
(66,751
)
 
(33,698
)
Proceeds received on mortgage notes
108,802

 
58,914

Purchase of convertible notes payable
(21,994
)
 

Increase in deferred financing and other costs
(2,835
)
 
(4,973
)
Capital contributions from noncontrolling interests
43,646

 
21,076

Distributions to noncontrolling interests
(1,478
)
 
(1,426
)
Dividends paid to Common Shareholders
(21,773
)
 
(21,655
)
Repurchase and cancellation of Common Shares
(724
)
 
(966
)
Common Shares issued under Employee Share Purchase Plan
68

 
75

Exercise of options to purchase Common Shares
7

 
101

Net cash provided by financing activities
36,968

 
17,448

(Decrease) increase in cash and cash equivalents
(22,565
)
 
16,895

Cash and cash equivalents, beginning of period
120,592

 
93,808

Cash and cash equivalents, end of period
$
98,027

 
$
110,703

Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $3,613 and $1,592, respectively
$
22,006

 
$
21,592

 
 
 
 
Cash paid for income taxes
$
3,721

 
$
1,184

 
 
 
 
Acquisition of interest in unconsolidated affiliate:
 

 
 

Real estate, net
$

 
$
(108,000
)
Assumption of mortgage debt

 
25,990

Gain from 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




6

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

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

All of the Company's assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and entities in which the Operating Partnership owns an interest. As of September 30, 2011, the Trust controlled approximately 99% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”) and employees who have been awarded restricted OP units (“LTIP Units”) as long-term incentive compensation (Note 13). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Trust (“Common Shares”).

As of September 30, 2011, the Company has ownership interests in 48 properties within its core portfolio, which 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 its opportunity funds (“Core Portfolio”). The Company also has ownership interests in 47 properties within its three opportunity funds, Acadia Strategic Opportunity Fund L.P. (“Fund I”), Acadia Strategic Opportunity Fund II, LLC (“Fund II”) and Acadia Strategic Opportunity Fund III LLC (“Fund III” and together with Fund I and Fund II, the “Opportunity Funds”). The 95 properties consist of commercial properties, primarily neighborhood and community shopping centers, mixed-use properties with a retail component and self-storage properties. In addition, the Company also invests in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I”), Acadia Mervyn Investors II, LLC (“Mervyns II”) and Fund II, all on a non-recourse basis. These investments comprise and are referred to as the Company's Retailer Controlled Property initiative (“RCP Venture”). The Operating Partnership has the following equity interests in the Opportunity Funds, Mervyns I and Mervyns II:
Entity
Equity Interest Held By Operating Partnership
Fund I and Mervyns I
22.2%
Fund II and Mervyns II
20.0%
Fund III
19.9%

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

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

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


7

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Actual results could differ from these estimates. Operating results for the three and nine months ended September 30, 2011 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. 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 2010 Annual Report on Form 10-K, as filed with the SEC on February 28, 2011.
Reclassifications
Certain reclassifications have been made to the 2010 financial statements to conform to the 2011 presentation.

Real Estate

The Company reviews its operating long-lived assets for impairment when there is an event, or change in circumstances that indicates that the carrying amount may not be recoverable. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held-for-sale, the Company reduces its carrying value to the fair value less costs to dispose. During the quarter ended June 30, 2011, the Company determined that the value of the Granville Centre owned by Fund I was impaired. Accordingly, it recorded an impairment loss of $6.9 million. Management does not believe that the values of any of the Company's other properties are impaired as of September 30, 2011.

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

Recent Accounting Pronouncements

During April 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor's Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU 2011-02 requires a creditor to evaluate whether a restructuring constitutes a troubled debt restructuring by concluding that the restructuring constitutes a concession and that the debtor is experiencing financial difficulties and was effective for the first interim or annual period beginning on or after June 15, 2011. The adoption of ASU 2011-02 did not have a material impact on the Company's financial condition or results of operations.

During May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” ASU No. 2011-04 amended ASC 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in GAAP and International Financial Reporting Standards (“IFRS”). The amendments, which primarily require additional fair value disclosure, are to be applied prospectively. The Company is currently evaluating the impact of adopting ASU 2011-04 which is effective for interim and annual periods beginning after December 15, 2011.

During June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income,” which revises the manner in which companies present comprehensive income. Under ASU No. 2011-05, companies may present comprehensive income, which is net income adjusted for the components of other comprehensive income, either in a single continuous statement of comprehensive income or by using two separate but consecutive statements. Regardless of the alternative chosen, companies must display adjustments for items reclassified from other comprehensive income into net income within the presentation of both net income and other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011,

8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

on a retrospective basis. The Company is currently evaluating the impact of the adoption of ASU 2011-05 on its consolidated financial statements.

2.
EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed by dividing net income attributable to common shareholders by the weighted average Common Shares outstanding. Diluted earnings per Common Share reflect the potential dilution of the conversion of obligations and the assumed exercises of securities including the effects of awards issuable under the Company's Share Incentive Plans. The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated:

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2011
 
2010
 
2011
 
2010
Numerator
 
 
 
 
 
 
 
Income from continuing operations  attributable to Common Shareholders
$
3,973

 
$
4,711

 
$
16,662

 
$
22,032

Effect of dilutive securities:
 
 
 
 
 
 
 
Preferred OP Unit distributions

 

 
14

 
14

Numerator for diluted earnings per Common Share
$
3,973

 
$
4,711

 
$
16,676

 
$
22,046

 
 
 
 
 
 
 
 
Denominator
 

 
 

 
 

 
 

Weighted average shares for basic earnings per share
40,340

 
40,169

 
40,330

 
40,096

Effect of dilutive securities:
 

 
 

 
 

 
 

Employee share options
289

 
262

 
268

 
214

Convertible Preferred OP Units

 

 
25

 
25

Dilutive potential Common Shares
289

 
262

 
293

 
239

Denominator for diluted earnings per share
40,629

 
40,431

 
40,623

 
40,335

Basic earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.10

 
$
0.12

 
$
0.41

 
$
0.55

Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.10

 
$
0.12

 
$
0.41

 
$
0.55


The weighted average shares used in the computation of diluted earnings per share include unvested restricted Common Shares (“Restricted Shares”) and 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 would be dilutive for the nine months ended September 30, 2011 and 2010 and are accordingly included in the table above. They would be anti-dilutive for the three months ended September 30, 2011 and 2010 and, as such, are not included in the table above.


3.
NONCONTROLLING INTERESTS

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


9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3.
NONCONTROLLING INTERESTS (continued)

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’ 280,349 and 281,294 Common OP Units at September 30, 2011 and December 31, 2010, respectively; (ii) 188 Series A Preferred OP Units at both September 30, 2011 and December 31, 2010; and (iii) 1,060,225 and 641,534 LTIP Units at September 30, 2011 and December 31, 2010, respectively.


4.
ACQUISITION AND DISPOSITION OF REAL ESTATE AND DISCONTINUED OPERATIONS

Acquisitions

During September 2011, the Company acquired a 50% equity interest in an entity which owns a six property portfolio (the “Georgetown Portfolio”) located in Washington, D.C. for a purchase price of $13.4 million, which included the assumption of 50% of in-place debt of $9.2 million, inclusive of the Company's existing mezzanine loan to the entity (Note 6).

During August 2011, the Company acquired a six property portfolio located in Chicago, Illinois for $18.0 million.

During August 2011, the Company acquired a newly constructed 13,000 square foot property located in the Bronx, New York for $9.1 million.

During June 2011, the Company acquired a 6,000 square foot single-tenant retail condominium located in New York, New York for $4.8 million.

During May 2011, the Company acquired a 44,000 square foot retail property located in Chicago, Illinois, for $28.4 million.

During April 2011, the Company, through Fund III, acquired a 105,000 square foot property located in the East Loop section of downtown Chicago, Illinois, for $31.6 million

During February 2011, Fund III, in a venture with an unaffiliated partner, acquired three retail properties (“Lincoln Road”), aggregating 61,400 square feet located in the Lincoln Road area of South Miami Beach, Florida for $51.9 million, which included the assumption of $20.6 million of in-place mortgage debt. Fund III has a 95% interest in these properties.

During February 2011, Fund III, in a venture with an unaffiliated partner, acquired a 64,600 square foot single-tenant retail property (“White Oak”) located in Silver Spring, Maryland for $9.8 million. Fund III has a 90% interest in the property.

Discontinued Operations

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

During October 2011, Fund I sold Granville Centre, a 135,000 square foot shopping center, located in Columbus, Ohio, for $2.3 million. During the quarter ended June 30, 2011, the Company determined that the value of the Granville Centre was impaired and recorded an impairment loss of $6.9 million.

During May 2011, the Company sold the Ledgewood Mall, a 517,000 square foot, unencumbered enclosed mall located in Ledgewood, New Jersey, for $37.0 million. The sale resulted in a gain of $28.6 million.

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

The combined assets and liabilities as of December 31, 2010 and results of operations of the properties classified as discontinued operations for the three and nine months ended September 30, 2011 and 2010, respectively are summarized as follows:





10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

BALANCE SHEET
 
September 30,
 
December 31,
(dollars in thousands)
 
2011
 
2010
ASSETS
 
 
 
 
Net real estate
 
$
2,215

 
$
18,557

Rents receivable, net
 
363

 
753

Deferred charges, net of amortization
 
82

 
2,016

Prepaid expenses and other assets, net
 
24

 
148

Total assets of discontinued operations
 
$
2,684

 
$
21,474


 
 
 
 
LIABILITIES
 
 
 
 
Accounts payable and accrued expenses
 
$
275

 
$
233

Other liabilities
 
14

 
162

Total liabilities of discontinued operations
 
$
289

 
$
395

 
 
 
 
 

 
Three Months Ended
 
Nine Months Ended
STATEMENTS OF OPERATIONS
September 30,
 
September 30,
 
September 30,
 
September 30,
(dollars in thousands) 
2011
 
2010
 
2011
 
2010
Total revenues
$
242

 
$
1,673

 
$
2,470

 
$
5,061

Total expenses
140

 
1,195

 
1,768

 
3,853

Operating income
102

 
478

 
702

 
1,208

Impairment of asset

 

 
(6,925
)
 

Gain on sale of property

 

 
32,498

 

Income from discontinued operations
102

 
478

 
26,275

 
1,208

(Income) loss from discontinued operations attributable to noncontrolling interests
(64
)
 
(72
)
 
731

 
(195
)
Income from discontinued operations attributable to Common Shareholders
$
38

 
$
406

 
$
27,006

 
$
1,013


5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

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

During September 2011, the Company acquired a 50% equity interest in the Georgetown Portfolio (Note 4). The unaffiliated venture partner for the Georgetown Portfolio maintains control over this investment and, as such, the Company accounts for this investment under the equity method. Due to this acquisition, the Company reclassified an existing $8.0 million mezzanine loan collateralized by five properties within the Georgetown Portfolio from Notes Receivable to Investments in and Advances to Unconsolidated Affiliates.







11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



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

Opportunity Funds

RCP Venture

During 2004, the Company along with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) formed an investment group, the RCP Venture, for the purpose of making investments in surplus or underutilized properties owned by retailers. The RCP Venture is neither a single entity nor a specific investment. Any member of this group has the option of participating, or not, in any individual investment and each individual investment has been made on a stand-alone basis through a separate limited liability company (“LLC”). These investments have been made through different investment vehicles with different affiliated and unaffiliated investors and different economics to the Company. Investments under the RCP Venture are structured as separate joint ventures as there may be other investors participating in certain investments in addition to Klaff, Lubert-Adler and Acadia. The Company has made these investments through its subsidiaries, Mervyns I, Mervyns II and Fund II, (together the “Acadia Investors”), all on a non-recourse basis. Through September 30, 2011, Acadia Investors have made investments in Mervyns Department Stores (“Mervyns”) and Albertsons including additional investments in locations that are separate from these original investments (“Add-On Investments”). Additionally, Acadia Investors have invested in Shopko, Marsh and Rex Stores Corporation (collectively “Other RCP Investments”).

The Acadia Investors have non-controlling interests in the individual investee LLC’s as follows:
 
 
 
Acadia Investors
Ownership % in:
Investment
Investee LLC
Acadia Investors
Entity
Investee
LLC
Underlying
entity(s)
Mervyns
KLA/Mervyn’s, LLC
Mervyns I and Mervyns II
10.5%
5.8%
Mervyns Add-On investments
KLA/Mervyn’s, LLC
Mervyns I and Mervyns II
10.5%
5.8%
Albertsons
KLA A Markets, LLC
Mervyns II
18.9%
5.7%
Albertsons Add-On investments
KLA A Markets, LLC
Mervyns II
20.0%
6.0%
Shopko
KLA-Shopko, LLC
Fund II
20.0%
2.0%
Marsh and Add-On investments
KLA Marsh, LLC
Fund II
20.0%
3.3%
Rex Stores
KLAC Rex Venture, LLC
Mervyns II
13.3%
13.3%
The Company accounts for the original investments in Mervyns and Albertsons under the equity method of accounting as the Company has the ability to exercise significant influence, but does not have financial or operating control.

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

During the three months ended September 30, 2011, the Company received RCP Venture distributions totaling $4.5 million, and for the nine months ended September 30, 2011 received distributions of $6.9 million. The Operating Partnership's share of these distributions for the three and nine months ended September 30, 2011 totaled $0.9 million and $1.5 million, respectively.








12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

The following table summarizes activity related to the RCP Venture investments from inception through September 30, 2011:

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

$
45,966

$
4,901

$
11,251

Mervyns Add-On investments
2005/2008
6,517

3,558

1,046

819

Albertsons
2006
20,717

81,594

4,239

16,318

Albertsons Add-On investments
2006/2007
2,416

1,679

388

336

Shopko
2006
1,108

1,659

222

332

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

2,639

533

528

Rex Stores
2007
2,701

840

535

168

 
 
$
62,184

$
137,935

$
11,864

$
29,752

Other Opportunity Fund Investments

Fund II Investments

Prior to June 30, 2010, 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 interest in the project from its unaffiliated partner and, as a result, now consolidates the CityPoint investment.

Fund III Investments

The unaffiliated venture partners for the Lincoln Road (Note 4), White Oak (Note 4) and the White City Shopping Center investments maintain control over these entities and, as such, the Company accounts for these investments under the equity method.

During June 2010, Fund III, together with an unaffiliated partner, invested in an entity for the purpose of providing management services to owners of self-storage properties, including the 14 locations currently owned through Fund II and Fund III. The entity was determined to be a variable interest entity for which the Company was determined not to be the primary beneficiary. As such, the Company accounts for this investment under the equity method.
























13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Summary of Investments in Unconsolidated Affiliates

The following combined/condensed Balance Sheets and Statements of Operations, in each period, summarize the financial information of the Company’s investments in unconsolidated affiliates.

(dollars in thousands)
September 30,
2011
 
December 31,
2010
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
260,436

 
$
186,802

Investment in unconsolidated affiliates
162,240

 
192,002

Other assets
29,321

 
27,841

Total assets
$
451,997

 
$
406,645

Liabilities and partners’ equity
 

 
 

Mortgage note payable
$
298,065

 
$
267,565

Other liabilities
16,787

 
13,815

Partners’ equity
137,145

 
125,265

Total liabilities and partners’ equity
$
451,997

 
$
406,645

Company’s investment in and advances to unconsolidated affiliates
$
78,420

 
$
31,036

Company's share of distributions in excess of share of income and investments in unconsolidated affiliates
$
(21,401
)
 
$
(20,884
)
 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
September 30,
2011
 
September 30,
2010
 
September 30,
2011
 
September 30,
2010
Combined and Condensed Statements of Operations
 
 
 
 
 
 
 
Total revenues
$
10,290

 
$
7,317

 
$
30,789

 
$
21,787

Operating and other expenses
3,699

 
2,550

 
10,993

 
7,158

Interest expense
4,274

 
3,392

 
12,532

 
10,107

Equity in earnings (losses) of unconsolidated affiliates
13,472

 
(681
)
 
13,060

 
2,083

Depreciation and amortization
2,222

 
1,057

 
6,467

 
3,745

Loss on sale of property, net

 

 

 
(2,957
)
Net income (loss)
$
13,567

 
$
(363
)
 
$
13,857

 
$
(97
)
 
 
 
 
 
 
 
 
Company’s share of net income
$
3,208

 
$
241

 
$
3,318

 
$
904

Amortization of excess investment
(98
)
 
(98
)
 
(293
)
 
(294
)
Company’s share of net income
$
3,110

 
$
143

 
$
3,025

 
$
610

 














14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
NOTES RECEIVABLE

At September 30, 2011, the Company’s notes receivable, net, aggregated $41.3 million, and were collateralized either by the underlying properties or the borrowers' ownership interest in the entities that own the properties and/or by the borrowers' personal guarantee as follows:
Description
Effective
Interest
Rate
Maturity Date
First
Priority
Liens
Net Carrying
amount
of Notes
Receivable
Extension
Options
(dollars in thousands)
 
 
 
 
 
Mezzanine Loan
10.0%
Demand
$

$
2,280

Mezzanine Loan
13.0%
Demand
29,295

2,980

Mezzanine Loan
13.0%
Demand
6,000

1,964

First Mortgage Loan
10.8%
Demand

10,000

Other Loan
14.5%
12/2011

8,585

Other Loan
7.0%
2/2012

4,000

Other Loan
24.0%
1/2016
166,200

3,478

Mezzanine Loan
17.5%
1/2017
37,700

2,173

Mezzanine Loan
15.0%
Upon Capital Event
11,925

3,834

Individually less than 3%
10% to 13.0%
Demand to 12/2011
16,853

2,010

Total
 
 
 

$
41,304

 

During September 2011, the Company reclassified an $8.0 million mezzanine loan from Notes Receivable to Investments in and Advances to Unconsolidated Affiliates related to the acquisition of the Georgetown Portfolio (Note 5).

During September 2011, the Company made a $4.0 million loan to two members of an entity which owns a shopping center in Washington D.C. The note accrues interest at 7% and matures in February 2012. In addition to the loan, the Company entered into and subsequently exercised an option to purchase the shopping center at a future date, pending the servicer's approval of the assignment of a first mortgage loan of $17.0 million. The loan will be offset against the ultimate purchase price when the Company acquires the property.

During May 2011, the Company received a payment of $54.7 million on a mezzanine loan, representing $33.8 million of principal, $13.4 million of accrued interest, and a $7.5 million exit fee.

During February 2011, the Company made a mezzanine loan for $3.8 million which accrues interest at 15% and is payable upon a capital event. The Company also received a payment of $1.9 million on a mezzanine loan.

Allowances for real estate notes receivable are established based upon management's quarterly review of the investments. In performing this review, management considers the estimated net recoverable value of the loan as well as other factors, including the fair value of any collateral, the amount and status of any senior debt, and the prospects for the borrower. Because this determination is based upon projections of future economic events, which are inherently subjective, the amounts ultimately realized from the loans may differ materially from the carrying value at the balance sheet date.

The activity in the allowance for notes receivable for the nine months ended September 30, 2011 is as follows:

(dollars in thousands)
Allowance for Notes Receivable
Balance at December 31, 2010
$
4,964

Provision for losses on notes receivable
210

Balance at September 30, 2011
$
5,174





15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of September 30, 2011, the Company's derivative financial instruments consisted of six interest rate swaps with an aggregate notional value of $62.3 million, which effectively fix LIBOR at rates ranging from 0.4% to 5.1% and mature between October 2011 and November 2012. The Company also has two derivative financial instruments with a notional value of $28.9 million and $42.0 million which cap LIBOR at 6.0% and 3.5%, respectively, and mature in April 2013 and August 2013, respectively. The Company is also a party to two forward interest rate swap transactions with respect to $21.2 million of LIBOR-based variable-rate debt which will effectively fix LIBOR at rates ranging between 2.9% and 3.8%. The fair value of the derivative liability of these instruments, which is included in other liabilities in the Consolidated Balance Sheets, totaled $3.9 million and $2.8 million at September 30, 2011 and December 31, 2010, respectively. The notional value does not represent exposure to credit, interest rate, or market risks.

These derivative instruments have been designated as cash flow hedges and hedge the future cash outflows on variable-rate mortgage debt. Such instruments are reported at the fair value reflected above. As of September 30, 2011 and December 31, 2010, unrealized losses totaling $4.2 million and $2.8 million, respectively, were reflected in accumulated other comprehensive loss.

As of September 30, 2011 and December 31, 2010, 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 NOTES PAYABLE

The Company completed the following transactions related to mortgage notes payable and credit facilities during the nine months ended September 30, 2011:

During September 2011, the Company modified and extended the Fund III subscription line of credit. The modification provided a one year extension of the maturity date to October 10, 2012 and adjusted the interest rate to LIBOR plus 225 basis points. During 2011, the Company borrowed $39.0 million and repaid $15.1 million under this line of credit. As of September 30, 2011, the total outstanding amount on this line of credit was $195.4 million.

During September 2011, the Company extended the maturity date of a $9.9 million loan that was scheduled to mature in September 2011, to November 1, 2011.

During September 2011, the Company closed on a $12.5 million loan collateralized by a property. The loan bears interest at LIBOR plus 235 basis points and matures on September 30, 2014, with two one-year extension options.

During August 2011, the Company amended an existing $58.0 million loan collateralized by a property. The amendment provides for an additional $4.0 million of proceeds. The amended loan continues to bear interest at LIBOR plus 400 points, subject to a LIBOR floor of 250 basis points and matures on January 12, 2012. Previously, during January 2011, the Company had amended this loan to provide for an additional $3.0 million supplemental loan and a $7.0 million subordinate loan. During the first nine months of 2011, the Company drew down an additional $12.7 million on this construction loan. As of September 30, 2011, the total outstanding amount on this loan was $53.0 million.

During August 2011, the Company closed on a $42.0 million loan collateralized by six properties. The loan bears interest at LIBOR plus 415 basis points, with a LIBOR floor of 50 basis points and matures on August 31, 2013. The proceeds of this loan were used to repay a $41.5 million loan that matured July 31, 2011.

During June 2011, the Company modified an existing $85.3 million loan collateralized by a property. The modification extended the maturity date from October 4, 2011 to September 30, 2012. The loan continues to bear interest at LIBOR plus 350 basis points subject to a LIBOR floor of 150 basis points.

During June 2011, the Company modified an existing $9.4 million loan collateralized by a property. The modification extended the maturity date from June 29, 2012 to June 30, 2018. The loan continues to bear interest at LIBOR plus 140 basis points.

During January 2011, the Company purchased a $9.3 million mortgage loan collateralized by one of its properties for $7.6 million, resulting in a $1.7 million gain on extinguishment of debt.

During January 2011, the Company borrowed the remaining $2.4 million of a $34.0 million loan collateralized by a property.

16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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. The Convertible Notes have an effective interest rate of 6.03% after giving effect to the accounting treatment required by ASC Topic 470-20 “Debt with Conversion and Other Options.” Holders of the Convertible Notes may require the Company to repurchase the Convertible Notes at par on December 20, 2011, December 15, 2016 and December 15, 2021. The Company determined that the Convertible Notes will mature on December 20, 2011.

The carrying amount of the equity component included in additional paid-in capital totaled $0.1 million at September 30, 2011 and $1.1 million at December 31, 2010. The additional non-cash interest expense recognized in the Consolidated Statements of Income was $0.2 million and $0.3 million for the three months ended September 30, 2011 and 2010, respectively, and $0.7 million and $0.8 million for the nine months ended September 30, 2011 and 2010, respectively. The if-converted value of the Convertible Notes does not exceed their aggregate principal amount as of September 30, 2011 and there are no derivative transactions that were entered into in connection with the issuance of the Convertible Notes.

During 2011, the Company purchased $24.8 million in face amount of its Convertible Notes for $25.0 million and recognized
a loss on debt extinguishment of $0.3 million.

Through September 30, 2011, the Company has purchased $90.1 million in face amount of its Convertible Notes at an average discount of approximately 14%. The outstanding Convertible Notes face amount as of September 30, 2011 was $24.9 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 value assumptions obtained from sources independent of the Company are observable inputs that are classified within Levels 1 and 2 of the hierarchy, and the Company's own assumptions about market value assumptions are unobservable inputs classified within Level 3 of the hierarchy.

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2011:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
3,853

 
$



Financial Instruments

Certain of the Company’s assets and liabilities meet the definition of financial instruments. Except as disclosed below, the carrying amounts of these financial instruments approximate their fair 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:
 
September 30, 2011
 
December 31, 2010
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
 
 
 
 
 
 
Notes Receivable
$
41,304

 
$
41,304

 
$
89,202

 
$
90,612

Mortgage Notes Payable and Convertible Notes Payable
$
871,223

 
$
863,996

 
$
854,924

 
$
863,639





17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)




11.
RELATED PARTY TRANSACTIONS

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 September 30, 2011 and 2010 and $0.8 million and $0.6 million for the nine months ended September 30, 2011 and September 30, 2010, respectively.

Related party receivables due from an unconsolidated affiliate totaled $2.3 million at September 30, 2011 and $2.5 million at December 31, 2010.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended September 30, 2011 and 2010 and $75,000 for each of the nine months ended September 30, 2011 and 2010.




12.
SEGMENT REPORTING

The Company has five reportable segments: Core Portfolio, Opportunity Funds, Self-Storage Investments, Notes Receivable and Other. “Notes Receivable” consists of the Company's notes receivable and 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 nine months ended September 30, 2011 and 2010 (does not include unconsolidated affiliates):





























18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)
Three Months Ended September 30, 2011
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Consolidation
 
Total
Revenues
$
14,278

 
$
15,151

 
$
6,127

 
$
1,585

 
$
5,537

 
$
(5,285
)
 
$
37,393

Property operating expenses
and real estate taxes
4,182

 
5,037

 
3,744

 

 

 
(613
)
 
12,350

General and administrative
6,361

 
3,439

 

 

 

 
(4,042
)
 
5,758

Income before depreciation, amortization and impairment
$
3,735

 
$
6,675

 
$
2,383

 
$
1,585

 
$
5,537

 
$
(630
)
 
$
19,285

Depreciation and amortization
$
3,547

 
$
3,960

 
$
1,070

 
$

 
$

 
$
(179
)
 
$
8,398

Interest and other finance expense
$
3,944

 
$
4,619

 
$
882

 
$

 
$

 
$
297

 
$
9,742

Real estate at cost
$
499,349

 
$
763,565

 
$
211,912

 
$

 
$

 
$
(14,994
)
 
$
1,459,832

Total assets
$
614,100

 
$
875,623

 
$
191,840

 
$
41,304

 
$

 
$
(116,400
)
 
$
1,606,467

Expenditures for real estate and improvements
$
33,995

 
$
9,338

 
$
1,196

 
$

 
$

 
$
(738
)
 
$
43,791

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
 

Net property income before depreciation and amortization
 
$
19,285

Other interest income
 
105

Depreciation and amortization
 
(8,398
)
Equity in earnings of unconsolidated affiliates
 
3,110

Interest and other finance expense
 
(9,742
)
Income tax (benefit)
 
(488
)
Loss on debt extinguishment
 
(303
)
Income from discontinued operations
 
102

Net income
 
4,647

Net (income) attributable to noncontrolling interests
 
(636
)
Net income attributable to Common Shareholders
 
$
4,011



























19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)
Three Months Ended September 30, 2010
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Consolidation
 
Total
Revenues
$
13,996

 
$
11,355

 
$
6,703

 
$
5,206

 
$
5,442

 
$
(5,114
)
 
$
37,588

Property operating expenses
and real estate taxes
4,140

 
3,681

 
3,963

 

 

 
(374
)
 
11,410

General and administrative
5,911

 
3,284

 

 

 

 
(3,878
)
 
5,317

Income before depreciation
and amortization
$
3,945

 
$
4,390

 
$
2,740

 
$
5,206

 
$
5,442

 
$
(862
)
 
$
20,861

Depreciation and amortization
$
3,743

 
$
3,792

 
$
1,264

 
$

 
$

 
$
(112
)
 
$
8,687

Interest and other finance expense
$
4,529

 
$
4,097

 
$
1,305

 
$

 
$

 
$
(27
)
 
$
9,904

Real estate at cost
$
440,721

 
$
677,946

 
$
209,956

 
$

 
$

 
$
(12,869
)
 
$
1,315,754

Total assets
$
595,870

 
$
721,911

 
$
194,461

 
$
87,600

 
$

 
$
(121,571
)
 
$
1,478,271

Expenditures for real estate and improvements
$
1,194

 
$
23,090

 
$
187

 
$

 
$

 
$
(853
)
 
$
23,618

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
 
Net property income before depreciation and amortization
 
$
20,861

Other interest income
 
175

Depreciation and amortization
 
(8,687
)
Equity in earnings of unconsolidated affiliates
 
143

Interest and other finance expense
 
(9,904
)
Income tax provision
 
785

Income from discontinued operations
 
478

Net income
 
2,281

Net loss attributable to noncontrolling interests
 
2,836

Net income attributable to Common Shareholders
 
$
5,117





























20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)
Nine Months Ended September 30, 2011
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Co