AKR 10-Q 09.30.2012



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, 2012
 
or
 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _______ to _______
 
Commission File Number 1-12002
 
ACADIA REALTY TRUST
 
(Exact name of registrant in its charter)
MARYLAND
 (State or other jurisdiction of
 incorporation or organization)
 
23-2715194
 (I.R.S. Employer
 Identification No.)
 
 
 
1311 MAMARONECK AVENUE, SUITE 260, WHITE PLAINS, NY
 (Address of principal executive offices)
 10605
 (Zip Code)
(914) 288-8100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x
 
NO o
            
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x
 
NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer  x
 
Accelerated Filer  o
 
 
 
Non-accelerated Filer  o
 
Smaller Reporting Company  o

 Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
 As of November 8, 2012 there were 50,669,019 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,
2012
 
December 31,
2011
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
355,586

 
$
270,305

Building and improvements
1,107,680

 
938,652

Construction in progress
10,244

 
7,321

 
1,473,510

 
1,216,278

Less: accumulated depreciation
203,404

 
178,791

Net operating real estate
1,270,106

 
1,037,487

Real estate under development
229,808

 
219,645

Notes receivable, net
78,826

 
59,989

Investments in and advances to unconsolidated affiliates
88,572

 
84,568

Cash and cash equivalents
85,297

 
89,812

Cash in escrow
19,030

 
20,969

Rents receivable, net
30,549

 
25,585

Deferred charges, net
30,326

 
24,371

Acquired lease intangibles, net
29,066

 
26,721

Prepaid expenses and other assets
38,003

 
26,571

Accounts receivable from related party

 
1,375

Assets of discontinued operations

 
36,226

Total assets
$
1,899,583

 
$
1,653,319

LIABILITIES
 

 
 

Mortgage notes payable
$
871,243

 
$
767,150

Convertible notes payable
930

 
930

Distributions in excess of income from, and investments in, unconsolidated affiliates
22,409

 
21,710

Accounts payable and accrued expenses
34,691

 
38,937

Dividends and distributions payable
8,757

 
7,914

Acquired lease and other intangibles, net
9,420

 
5,462

Other liabilities
23,514

 
19,735

Liabilities of discontinued operations

 
22,172

Total liabilities
970,964

 
884,010

EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 47,138,544 and 42,586,376 shares, respectively
47

 
43

Additional paid-in capital
450,163

 
348,667

Accumulated other comprehensive loss
(4,763
)
 
(3,913
)
Retained earnings
33,269

 
39,317

Total shareholders’ equity
478,716

 
384,114

Noncontrolling interests
449,903

 
385,195

Total equity
928,619

 
769,309

Total liabilities and equity
$
1,899,583

 
$
1,653,319

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)
2012
 
2011
 
2012
 
2011
Revenues
 
 
 
 
 
 
 
Rental income
$
35,028

 
$
28,075

 
$
97,237

 
$
81,741

Interest income
1,866

 
1,585

 
5,996

 
9,493

Expense reimbursements
6,007

 
5,291

 
17,973

 
16,049

Other
1,240

 
918

 
3,536

 
3,018

Total revenues
44,141

 
35,869

 
124,742

 
110,301

Operating Expenses
 

 
 

 
 

 
 

Property operating
7,712

 
6,397

 
21,462

 
20,888

Other operating
613

 
568

 
2,929

 
665

Real estate taxes
5,861

 
4,900

 
15,903

 
13,683

General and administrative
7,004

 
5,758

 
18,154

 
17,149

Depreciation and amortization
10,365

 
8,183

 
29,326

 
23,960

Total operating expenses
31,555

 
25,806

 
87,774

 
76,345

Operating income
12,586

 
10,063

 
36,968

 
33,956

Equity in (losses) earnings of unconsolidated affiliates
(2,538
)
 
3,110

 
1,997

 
3,025

Other interest income
55

 
105

 
131

 
219

(Loss) gain on debt extinguishment

 
(303
)
 

 
1,268

Interest and other finance expense
(9,563
)
 
(9,692
)
 
(26,675
)
 
(27,450
)
Income from continuing operations before income taxes
540

 
3,283

 
12,421

 
11,018

Income tax (benefit) provision
(97
)
 
(488
)
 
1,137

 
(4
)
Income from continuing operations
637

 
3,771

 
11,284

 
11,022

Discontinued Operations
 
 
 
 
 
 
 
Operating income from discontinued operations
101

 
876

 
783

 
2,745

Impairment of asset

 

 

 
(6,925
)
Gain on sale of property
5,917

 

 
8,585

 
32,498

Income from discontinued operations
6,018

 
876

 
9,368

 
28,318

Net income
6,655

 
4,647

 
20,652

 
39,340

Noncontrolling interests
 

 
 

 
 

 
 

Continuing operations
5,628

 
(2
)
 
5,381

 
5,035

Discontinued operations
(4,702
)
 
(634
)
 
(7,604
)
 
(707
)
Net loss (income) attributable to noncontrolling interests
926

 
(636
)
 
(2,223
)
 
4,328

Net income attributable to Common Shareholders
$
7,581

 
$
4,011

 
$
18,429

 
$
43,668

Basic Earnings per Share
 

 
 

 
 

 
 

Income from continuing operations
$
0.13

 
$
0.09

 
$
0.37

 
$
0.40

Income from discontinued operations
0.03

 
0.01

 
0.04

 
0.68

Basic earnings per share
$
0.16

 
$
0.10

 
$
0.41

 
$
1.08

Diluted Earnings per Share
 

 
 

 
 

 
 

Income from continuing operations
$
0.13

 
$
0.09

 
$
0.37

 
$
0.40

Income from discontinued operations
0.03

 
0.01

 
0.04

 
0.68

Diluted earnings per share
$
0.16

 
$
0.10

 
$
0.41

 
$
1.08

 See accompanying notes

2





ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited)
 
 
 
 
 
 
 
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
(dollars in thousands)
 
2012
 
2011
 
2012
 
2011
 
 
 
 
 
 
 
 
 
Net income
 
$
6,655

 
$
4,647

 
$
20,652

 
$
39,340

Other Comprehensive income
 

 

 
 
 
 
Unrealized loss on valuation of swap agreements
 
(1,315
)
 
(3,652
)
 
(3,870
)
 
(5,209
)
Reclassification of realized interest on swap agreements
 
681

 
761

 
1,964

 
2,398

Other comprehensive loss
 
(634
)
 
(2,891
)
 
(1,906
)
 
(2,811
)
Comprehensive income
 
6,021

 
1,756

 
18,746

 
36,529

Comprehensive loss (income) attributable to noncontrolling interests
 
1,282

 
374

 
(1,167
)
 
5,765

Comprehensive income attributable to Common Shareholders
 
$
7,303

 
$
2,130

 
$
17,579

 
$
42,294

 
 
 
 
 
 
 
 
 
 See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

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

 
$
43

 
$
348,667

 
$
(3,913
)
 
$
39,317

 
$
384,114

 
$
385,195

 
$
769,309

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
171

 

 
2,711

 

 

 
2,711

 
(2,711
)
 

Issuance of Common Shares, net of issuance costs
4,332

 
4

 
98,308

 

 

 
98,312

 

 
98,312

Issuance of OP Units to acquire real estate

 

 

 

 

 

 
2,279

 
2,279

Dividends declared ($0.54 per Common Share)

 

 

 

 
(24,477
)
 
(24,477
)
 
(847
)
 
(25,324
)
Vesting of employee Restricted Share and LTIP awards
44

 

 
128

 

 

 
128

 
2,579

 
2,707

Common Shares issued under Employee Share Purchase Plan
3

 

 
59

 

 

 
59

 

 
59

Issuance of LTIP Unit awards to employees

 

 

 

 

 

 
2,577

 
2,577

Issuance of Common Shares to trustees

 

 
280

 

 

 
280

 

 
280

Exercise of Share options
11

 

 
160

 

 

 
160

 

 
160

Employee Restricted Shares cancelled
(8
)
 

 
(150
)
 

 

 
(150
)
 

 
(150
)
Noncontrolling interest distributions

 

 

 

 

 

 
(62,645
)
 
(62,645
)
Noncontrolling interest contributions

 

 

 

 

 

 
122,309

 
122,309

 
47,139

 
47

 
450,163

 
(3,913
)
 
14,840

 
461,137

 
448,736

 
909,873

Comprehensive (loss) income:
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
18,429

 
18,429

 
2,223

 
20,652

Unrealized loss on valuation of swap agreements

 

 

 
(2,212
)
 

 
(2,212
)
 
(1,658
)
 
(3,870
)
Reclassification of realized interest on swap agreements

 

 

 
1,362

 

 
1,362

 
602

 
1,964

Total comprehensive (loss) income

 

 

 
(850
)
 
18,429

 
17,579

 
1,167

 
18,746

Balance at September 30, 2012
47,139

 
$
47

 
$
450,163

 
$
(4,763
)
 
$
33,269

 
$
478,716

 
$
449,903

 
$
928,619

 















4




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011 (continued)

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

 
$
40

 
$
303,823

 
$
(2,857
)
 
$
17,206

 
$
318,212

 
$
269,310

 
$
587,522

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
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 Share 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 (loss) income:
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

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




See accompanying notes
 


5




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Nine Months Ended
(dollars in thousands)
September 30,
 
2012
 
2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
20,652

 
$
39,340

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

 
 
Depreciation and amortization
29,653

 
25,087

Amortization of financing costs
2,395

 
2,897

Gain on sale of property
(8,585
)
 
(32,498
)
Gain on debt extinguishment

 
(1,268
)
Impairment of asset

 
6,925

Share compensation expense
2,986

 
3,390

Equity in (earnings) of unconsolidated affiliates
(1,997
)
 
(3,025
)
Distributions of operating income from unconsolidated affiliates
4,087

 
5,213

Other, net
336

 
1,970

Changes in assets and liabilities
 

 
 
Cash in escrow
1,939

 
735

Rents receivable, net
(5,639
)
 
(6,974
)
Prepaid expenses and other assets
(7,625
)
 
(4,039
)
Accounts payable and accrued expenses
(3,013
)
 
4,133

Other liabilities
739

 
(2,749
)
Net cash provided by operating activities
35,928

 
39,137

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(137,208
)
 
(90,615
)
Redevelopment and property improvement costs
(55,817
)

(45,094
)
Deferred leasing costs
(3,397
)
 
(4,291
)
Investments in and advances to unconsolidated affiliates
(19,356
)
 
(46,544
)
Return of capital from unconsolidated affiliates
13,497

 
3,735

Proceeds from notes receivable
2,005

 
48,182

Issuance of notes receivable
(34,500
)
 
(7,834
)
Proceeds from sale of property
44,703

 
43,791

Net cash used in investing activities
(190,073
)
 
(98,670
)

6




ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
(unaudited)

 
Nine Months Ended
(dollars in thousands)
September 30,
 
2012
 
2011
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage notes
(189,747
)
 
(66,751
)
Proceeds received from mortgage notes
214,276

 
108,802

Purchase of convertible notes payable

 
(21,994
)
Increase in deferred financing and other costs
(6,684
)
 
(2,835
)
Capital contributions from noncontrolling interests
122,309

 
43,646

Distributions to noncontrolling interests
(63,463
)
 
(1,478
)
Dividends paid to Common Shareholders
(23,671
)
 
(21,773
)
Proceeds from stock offering, net of issuance costs of $400
96,540

 

Other employee and trustee stock compensation, net
70

 
(649
)
Net cash provided by financing activities
149,630

 
36,968

(Decrease) in cash and cash equivalents
(4,515
)
 
(22,565
)
Cash and cash equivalents, beginning of period
89,812

 
120,592

Cash and cash equivalents, end of period
$
85,297

 
$
98,027

Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $4,515 and $3,613, respectively
$
24,528

 
$
22,006

 
 
 
 
Cash paid for income taxes
$
941

 
$
3,721

 
 
 
 
Supplemental disclosure of non-cash investing activities:
 
 
 
Acquisition of real estate through assumption of debt
$
59,335

 
$

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

 
$

Acquisition of real estate through conversion of notes receivable
$
14,000

 
$

 
 
 
 

See accompanying notes




7

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

Acadia Realty Trust (the “Trust”) and subsidiaries (collectively, the “Company”), is a fully-integrated equity real estate investment trust (“REIT”) focused on the ownership, acquisition, redevelopment, and management of high-quality retail properties and urban/infill mixed-use properties with a strong retail component located primarily in high-barrier-to-entry, supply constrained, 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, 2012, the Trust controlled approximately 99% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”) and employees who have been awarded restricted OP units (“LTIP Units”) as long-term incentive compensation (Note 13). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Trust (“Common Shares”).

As of September 30, 2012, the Company has ownership interests in 58 properties within its core portfolio, which consist of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through its opportunity funds (“Core Portfolio”). The Company also has ownership interests in 37 properties within three of its 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 Funds I, II and Acadia Strategic Opportunity Fund IV, LLC ("Fund IV"), the “Opportunity Funds”). The 95 Core Portfolio and Opportunity Fund properties consist of commercial properties, which are 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 is the sole general partner or managing member of the Opportunity Funds and RCP Venture and earns fees or priority distributions for asset management, property management, construction, development, leasing and legal services. Cash flows from the Opportunity Funds and RCP Venture are distributed pro-rata to their respective partners and members (including the Operating Partnership) until each receives a certain cumulative return ("Preferred Return"), and the return of all capital contributions. Thereafter, remaining cash flow is distributed 20% to the Operating Partnership ("Promote") and 80% to the partners or members (including the Operating Partnership).

Effective May 16, 2012, the Company formed Fund IV. During the quarter ended September 30, 2012, the Company completed its final closings with a total of $540.6 million of equity commitments with 17 principally institutional investors as well as some high-net worth individuals. The Operating Partnership's share of equity commitments totaled $125.0 million. As of September 30, 2012, there have been no capital contributions made to, nor any investments made by, Fund IV.

Following is the Preferred Return and Operating Partnership's equity interests in the Opportunity Funds and RCP Venture:
Entity
Equity Interest Held By Operating Partnership
Preferred Return
Fund I and Mervyns I
22.2%
9.0%
Fund II and Mervyns II
20.0%
8.0%
Fund III
19.9%
6.0%
Fund IV
23.1%
6.0%

 Basis of Presentation

The consolidated financial statements include the consolidated accounts of the Company and its investments in entities 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

8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

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 (Losses) Earnings 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.

Actual results could differ from these estimates. Operating results for the three and nine months ended September 30, 2012 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2012. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim period. These consolidated financial statements should be read in conjunction with the Company's 2011 Annual Report on Form 10-K, as filed with the SEC on February 28, 2012.
Reclassifications
Certain reclassifications have been made to the 2011 financial statements to conform to the 2012 presentation.

Real Estate

The Company reviews its long-lived assets for impairment when there is an event or change in circumstances that indicates that the carrying amount may not be recoverable. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held-for-sale, the Company reduces its carrying value to the fair value less costs to dispose. Management does not believe that the values of any of the Company's properties are impaired as of September 30, 2012.

Involuntary Conversion of Asset
The Company experienced significant flooding that resulted in extensive damage to one of its properties during September 2011. Costs related to the clean-up and redevelopment are insured to a limit sufficient that the Company believes will allow for full restoration of the property. Loss of rents during the redevelopment are covered by business interruption insurance subject to a $0.1 million deductible. The Company plans to restore the improvements that were damaged by the flooding and expects that the costs of such restoration and rebuilding will be recoverable from insurance proceeds. In accordance with ASC Topic 360 “Property, Plant and Equipment,” and as a result of the above-described property damage, the Company has recorded a write-down of the asset's carrying value in the accompanying consolidated balance sheets of approximately $1.4 million as of September 30, 2012 and December 31, 2011. In addition, the Company has recorded an insurance recovery in the same amount that is included in Prepaid Expenses and Other Assets in the accompanying consolidated balance sheets. The Company has also provided a $0.1 million provision in the 2011 year-end consolidated statement of income of the Company's 2011 Annual Report on Form 10-K, as filed with the SEC for its exposure to the insurance deductible attributable to the loss of rents. As of September 30, 2012, the Company has received initial insurance proceeds of approximately $6.9 million but is still in the process of finalizing all claims related to the flood with the insurance carrier.
Recent Accounting Pronouncements

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


9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

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

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

2.
EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed by dividing net income attributable to Common Shareholders by the weighted average Common Shares outstanding. At September 30, 2012, the Company has unvested LTIP Units (Note 13) which provide for non-forfeitable rights to dividend equivalent payments. Accordingly, these unvested LTIP Units are considered participating securities and are included in the computation of basic earnings per Common Share pursuant to the two-class method.

Diluted earnings per Common Share reflects the potential dilution of the conversion of obligations and the assumed exercises of securities including the effects of restricted share unit (“Restricted Share Units”) and share option awards issued under the Company's Share Incentive Plans (Note 13). The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares would be anti-dilutive and are therefore not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2012 and for the three months ended September 30, 2011, but would be dilutive and therefore are included in the computation of diluted earnings per share for the nine months ended September 30, 2011.

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





















10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


2.
EARNINGS PER COMMON SHARE (continued)

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)
2012
 
2011
 
2012
 
2011
Numerator
 
 
 
 
 
 
 
Income from continuing operations
$
6,265

 
$
3,769

 
$
16,665

 
$
16,057

Less: net income attributable to participating securities
127

 
164

 
336

 
122

Income from continuing operations net of income attributable to participating securities
6,138

 
3,605

 
16,329

 
15,935

Effect of dilutive securities:
 
 
 
 
 
 
 
Preferred OP Unit distributions

 

 

 
14

Numerator for diluted earnings per Common Share
$
6,138

 
$
3,605

 
$
16,329

 
$
15,949

 
 
 
 
 
 
 
 
Denominator
 

 
 

 
 

 
 

Weighted average shares for basic earnings per share
46,338

 
40,340

 
44,447

 
40,330

Effect of dilutive securities:
 

 
 

 
 

 
 

Employee Restricted Share Units and share options
435

 
289

 
424

 
267

Convertible Preferred OP Units

 

 

 
25

Dilutive potential Common Shares
435

 
289

 
424

 
292

Denominator for diluted earnings per share
46,773

 
40,629

 
44,871

 
40,622

Basic earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.13

 
$
0.09

 
$
0.37

 
$
0.40

Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.13

 
$
0.09

 
$
0.37

 
$
0.40


3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During the third quarter 2012, the Company completed its at-the-market (“ATM”) equity program with an aggregate offering amount of $75.0 million of gross proceeds from the sale of Common Shares. Under this program, the Company issued 3.3 million Common Shares which generated net proceeds of $73.7 million.

During August 2012, the Company established a new ATM equity program with an additional aggregate offering amount of up to $125.0 million of gross proceeds from the sale of Common Shares. Through September 30, 2012, the Company issued approximately 1.0 million Common Shares under this new ATM which generated gross proceeds of approximately $25.4 million and net proceeds of approximately $25.0 million. The net proceeds from these ATM equity programs will be used by the Company primarily to fund acquisitions directly in the Core Portfolio and through its capital contributions to the Opportunity Funds.

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 and include third party interests in the Company’s Opportunity Funds and other entities. It also includes interests in the Operating Partnership which represent (i) the limited partners’ 384,376 and 279,748 Common OP Units at September 30, 2012 and December 31, 2011, respectively; (ii) 188 Series A Preferred OP Units at both September 30, 2012 and December 31, 2011; and (iii) 230,441 and 217,826 LTIP Units at September 30, 2012 and December 31, 2011, respectively.








11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


4.
ACQUISITION AND DISPOSITION OF REAL ESTATE AND DISCONTINUED OPERATIONS

Acquisitions
2012 Core Portfolio Acquisitions
During July 2012, the Company acquired 83 Spring Street, a 4,800 square foot retail condominium unit in New York, New York for $11.5 million.

During June 2012, the Company acquired the Brentwood Shopping Center, a 57,000 square foot shopping center located in Washington, D.C. for $21.7 million, including the assumption of $16.5 million of debt.

During May 2012, the Company acquired 28 Jericho Turnpike, a 96,000 square foot single-tenant property located in Westbury, New York for $27.3 million.
During April 2012, the Company acquired 930 North Rush Street, a 2,900 square foot single-tenant property located in Chicago, Illinois for $20.7 million.
During March 2012, the Company acquired a four property portfolio located in Chicago, Illinois for $18.8 million, including the assumption of debt of $16.0 million.
During February 2012, the Company acquired 330 River Street, a 53,300 square foot shopping center located in Cambridge, Massachusetts for $18.9 million, which included the assumption of $7.0 million of debt.
During January 2012, the Company acquired 1520 North Milwaukee Avenue, a 3,100 square foot property located in Chicago, Illinois for $3.8 million.
The Company expensed $1.2 million of costs for the nine months ended September 30, 2012 related to these 2012 Core Portfolio acquisitions.
2012 Fund III Acquisitions
During August 2012, Fund III acquired 3104 M Street, a 4,900 square foot single-tenant retail property located in Washington D.C. for $3.0 million.
During August 2012, Fund III acquired an undeveloped parcel of land located in Mohegan Lake, New York, for $11.0 million.
During August 2012, Fund III, in a joint venture with an unaffiliated partner, acquired a 90% interest in Arundel Plaza, a 265,000 square foot shopping center in Glen Burnie, Maryland, for $17.6 million, including the assumption of debt of $9.3 million.
During August 2012, Fund III obtained a deed in lieu of foreclosure on a 19.2 acre undeveloped property in Farmingdale, New York encumbered by the Fund's existing $10.0 million first mortgage loan which was originated in September 2008.
During April 2012, Fund III acquired Lincoln Park Centre, a 62,700 square foot retail property located in Chicago, Illinois for $31.5 million, including the assumption of debt of $19.8 million.
During February 2012, Fund III, in a joint venture with an unaffiliated partner, acquired a 50% interest in 640 Broadway, a 45,700 square foot property located in New York, New York for $16.3 million.
The Company expensed $2.2 million of costs during the nine months ended September 30, 2012 related to these 2012 Fund III acquisitions.

The above 2012 Core Portfolio and Fund III acquisitions, excluding the acquisitions of land, have been accounted for as business combinations. The purchase prices were allocated to the acquired assets and liabilities based on the estimated fair value of the acquired assets at the dates of acquisition. The preliminary measurements at fair value reflected below are subject to change. The Company expects to finalize the valuations and complete the purchase price allocations within one year from the dates of acquisition.

The following table summarizes both the Company's preliminary and finalized allocations of the purchase prices of assets acquired and liabilities assumed during 2012:





12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Acquisitions (continued)
(dollars in thousands)
Purchase Price Allocation as Originally Reported
Adjustments
Finalized Purchase Price Allocation
 
Preliminary Purchase Price Allocation (1)
Land
$
50,870

$
4,951

$
55,821

 
$
27,084

Buildings and improvements
67,303

(7,432
)
59,871

 
85,592

Acquisition-related intangible assets (in Acquired lease intangibles, net)
2,482

3,463

5,945

 

Acquisition-related intangible liabilities (in Acquired lease and other intangibles, net)
(4,387
)
(1,056
)
(5,443
)
 

Above-below market debt assumed (included in Mortgage notes payable)
935

74

1,009

 

Total consideration
$
117,203

$

$
117,203

 
$
112,676


(1) Represents preliminary allocation for 2012 acquisitions where purchase price allocations have not been finalized

During 2011, the Company acquired properties and recorded the preliminary allocation of the purchase price to the assets acquired based on provisional measurements of fair value. During 2012, the Company finalized the allocation of the purchase price and made certain measurement period adjustments.

The following table summarizes the preliminary allocation of the purchase price of these properties as recorded as of December 31, 2011, and the finalized allocation of the purchase price as adjusted as of September 30, 2012:

(dollars in thousands)
Finalized Purchase Price Allocation
Preliminary Purchase Price Allocation
Land
$
12,150

$
5,438

Buildings and improvements
11,009

18,563

Acquisition-related intangible assets (in Acquired lease intangibles, net)
1,027


Acquisition-related intangible liabilities (in Acquired lease and other intangibles, net)
(185
)

Total consideration
$
24,001

$
24,001


Discontinued Operations

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

During August 2012, Fund III sold 125 Main Street, located in Westport, Connecticut, for $33.5 million.

During June 2012, Fund I sold Tarrytown Centre, a 35,000 square foot shopping center, located in Westchester, New York, for $12.8 million.

During the year ended December 2011, the Company sold 18 assets for a combined $65.0 million. For additional detail on these assets, please refer to the Company's 2011 Form 10-K as filed with the SEC.




13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Discontinued Operations (continued)

The combined assets and liabilities as of December 31, 2011, and the results of operations of the properties classified as discontinued operations for the three and nine months ended September 30, 2012 and September 30, 2011, respectively are summarized as follows:

BALANCE SHEET
 
 

ASSETS
 
December 31, 2011
(dollars in thousands)
 
 

Net real estate
 
$
33,817

Rents receivable, net
 
830

Deferred charges, net
 
1,483

Prepaid expenses and other assets
 
96

Total assets of discontinued operations
 
$
36,226

LIABILITIES
 
 

Mortgage notes payable
 
$
20,760

Accounts payable and accrued expenses
 
710

Other liabilities
 
702

Total liabilities of discontinued operations
 
$
22,172


 
 
Three Months Ended
 
Nine Months Ended
STATEMENTS OF OPERATIONS
 
September 30,
 
September 30,
 
September 30,
 
September 30,
(dollars in thousands) 
 
2012
 
2011
 
2012
 
2011
Total revenues
 
$
226

 
$
1,766

 
$
1,917

 
$
6,457

Total expenses
 
125

 
890

 
1,134

 
3,712

Operating income
 
101

 
876

 
783

 
2,745

Impairment of asset
 

 

 

 
(6,925
)
Gain on sale of property
 
5,917

 

 
8,585

 
32,498

Income from discontinued operations
 
6,018

 
876

 
9,368

 
28,318

(Income) from discontinued operations attributable to noncontrolling interests
 
(4,702
)
 
(634
)
 
(7,604
)
 
(707
)
Income from discontinued operations attributable to Common Shareholders
 
$
1,316

 
$
242

 
$
1,764

 
$
27,611


5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

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







14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Opportunity Funds

RCP Venture

The Company along with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) formed an investment group, the RCP Venture, for the purpose of making investments in surplus or underutilized properties owned by retailers. The RCP Venture is neither a single entity nor a specific investment. Any member of this group has the option of participating, or not, in any individual investment and each individual investment has been made on a stand-alone basis through a separate limited liability company (“LLC”). These investments have been made through different investment vehicles with different affiliated and unaffiliated investors and different economics to the Company. Investments under the RCP Venture are structured as separate joint ventures as there may be other investors participating in certain investments in addition to Klaff, Lubert-Adler and Acadia. The Company has made these investments through its subsidiaries, Mervyns I, Mervyns II and Fund II, (together the “Acadia Investors”), all on a non-recourse basis. Through September 30, 2012, the Acadia Investors have made investments in Mervyns Department Stores (“Mervyns”) and Albertsons including additional investments in locations that are separate from these original investments (“Add-On Investments”). Additionally, they have invested in Shopko, Marsh and Rex Stores Corporation (collectively “Other RCP Investments”).

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

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

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

During the nine months ended September 30, 2012, the Company received RCP Venture distributions from Albertsons Add-On investments and Rex Stores totaling $3.9 million of which the Operating Partnership's share totaled $0.8 million.

In September 2008, the Company, certain of its subsidiaries, and other unrelated entities (the "Investor Consortium") were named as defendants in an adversary proceeding brought by Mervyn's LLC ("Mervyns") in the United States Bankruptcy Court for the District of Delaware. The action involved five claims alleging fraudulent transfers in which Mervyns was nominally seeking approximately $1.175 billion in damages from the Investor Consortium, although the actual claims made by the administrator and the unsecured creditors were substantially less. The first claim contended that, at the time of the sale of Mervyns by Target Corporation ("Target") to the Investor Consortium, a transfer of assets was made in an effort to defraud creditors. The Company

15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


5.    INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES (continued)
believed that this aspect of the case was without merit. The remaining four claims relate to transfers of assets of Mervyns at various times after the sale by Target. The Company believed that there were substantial defenses to these claims.

During the third quarter of 2012, the parties to this litigation arrived at an agreement to settle the claim. The settlement, was approved by the bankruptcy court and provides for a payment of $163.7 million. Based on the defendants' agreement, the net cost of the settlement to the Investor Consortium would amount to approximately $143.6 million. After applying cash on hand at the investee level, Mervyns I and Mervyns II's combined contribution to this settlement will be approximately $0.9 million. In addition, the Company reduced its carrying value of these investments from $6.3 million to its fair value of $5.5 million. In total, this resulted in a charge of $1.7 million during the quarter ended September 30, 2012, of which the Operating Partnership's share, net of income taxes was $0.2 million.

The following table summarizes activity related to the RCP Venture investments from inception through September 30, 2012:
(dollars in thousands)
 
 
 
Operating Partnership Share
Investment
Year Acquired
Invested
Capital
and Advances
 
Distributions
Invested
Capital
and Advances
 
Distributions
Mervyns
2004
$
26,058

$
45,966

$
4,901

$
11,251

Mervyns Add-On investments
2005/2008
6,517

3,558

1,046

819

Albertsons
2006
20,717

81,594

4,239

16,318

Albertsons Add-On investments
2006/2007
2,416

4,778

388

955

Shopko
2006
1,108

1,659

222

332

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

2,639

533

528

Rex Stores
2007
2,701

1,623

535

325

 
 
$
62,184

$
141,817

$
11,864

$
30,528


Other Opportunity Fund Investments
The unaffiliated venture partners for Fund III's investments in Lincoln Road, Parkway Crossing, Arundel Plaza, Self-Storage Management and the White City Shopping Center maintain control over these entities and, as such, the Company accounts for these investments under the equity method.
Fund III owned an 84% interest in the Shop Rite at Orchard Center, which was accounted for using the equity method. During the second quarter of 2012, this property was sold for $13.8 million.
During the third quarter of 2012, Fund III acquired a 90% interest in Arundel Plaza (Note 4).
During the second quarter of 2012, Fund III made a 49% equity investment in an entity that holds a $2.2 million note receivable that is collateralized by a property. The note bears interest at 6% and matures February 2, 2017. As the unaffiliated venture partner maintains control over this entity, the Company accounts for this investment under the equity method.
During June 2010, Fund III, in a joint venture with an unaffiliated partner, invested in an entity for the purpose of providing management services to owners of self-storage properties, including the 14 locations currently owned through Fund II and Fund III. Fund III has a 50% interest in the entity. This entity was determined to be a variable interest entity for which the Company was determined not to be the primary beneficiary. As such, the Company accounts for this investment under the equity method.
Summary of Investments in Unconsolidated Affiliates

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


16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES (continued)
(dollars in thousands)
September 30,
2012
 
December 31,
2011
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
296,390

 
$
280,470

Investment in unconsolidated affiliates
89,099

 
156,421

Other assets
40,554

 
29,587

Total assets
$
426,043

 
$
466,478

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
318,568

 
$
319,425

Other liabilities
28,323

 
16,902

Partners’ equity
79,152

 
130,151

Total liabilities and partners’ equity
$
426,043

 
$
466,478

Company’s investment in and advances to unconsolidated affiliates
$
88,572

 
$
84,568

Company's share of distributions in excess of income and investments in unconsolidated affiliates
$
(22,409
)
 
$
(21,710
)

 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
September 30,
2012
 
September 30,
2011
 
September 30,
2012
 
September 30,
2011
Combined and Condensed Statements of Operations
 
 
 
 
 
 
 
Total revenues
$
11,903

 
$
10,290

 
$
36,121

 
$
30,789

Operating and other expenses
4,977

 
3,699

 
13,793

 
10,993

Interest and other finance expense
4,603

 
4,274

 
13,854

 
12,532

Equity in earnings of unconsolidated affiliates
1,398

 
13,472

 
6,244

 
13,060

Depreciation and amortization
2,573

 
2,222

 
7,216

 
6,467

Gain on sale of property

 

 
3,402

 

Net income
$
1,148

 
$
13,567

 
$
10,904

 
$
13,857

 
 
 
 
 
 
 
 
Company’s share of net income
$
(2,440
)
 
$
3,208

 
$
2,291

 
$
3,318

Amortization of excess investment
(98
)
 
(98
)
 
(294
)
 
(293
)
Company’s equity in (losses) earnings of unconsolidated affiliates
$
(2,538
)
 
$
3,110

 
$
1,997

 
$
3,025

 


17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
NOTES RECEIVABLE

As of September 30, 2012, the Company’s notes receivable, net, aggregated $78.8 million, and were collateralized either by the underlying properties or the borrowers' ownership interests in the entities that own the properties and/or by the borrowers' personal guarantee subject, as applicable, to senior liens, as follows:
Description
Effective
Interest
Rate
Maturity Date
First
Priority
Liens
Net Carrying
amount
of Notes
Receivable
Extension
Options
(dollars in thousands)
 
 
 
 
 
Zero Coupon Loan
24.0%
1/3/2016
$
166,200

$
3,861

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

9,089

Mezzanine Loan
15.0%
Upon Capital Event
11,925

3,834

First Mortgage Loan
12.0%
12/5/2012

19,500

First Mortgage Loan
9.2%
3/30/2013

3,000

First Mortgage Loan
5.3%
Demand

18,500

First Mortgage Loan
6.0%
12/1/2012

12,609

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

5,400

Individually less than 3.0%
10.0% to 12.0%
12/31/13 to 1/1/17
37,623

3,033

Total
 
 
 

$
78,826

 
During August 2012, the Company obtained a deed in lieu of foreclosure on a property located in Farmingdale, New York encumbered by its $10.0 million first mortgage loan (Note 4).
During April 2012, the Company acquired a first mortgage loan, collateralized by a property located in Brooklyn, New York, for $18.5 million. The loan, with an initial maturity date of May 2012, has been in default since November 2011 and has been accruing interest at a 16.0% annual default interest rate. As of September 30, 2012, the loan had an outstanding balance of $23.5 million, including default interest, and was in maturity default. The Company has commenced foreclosure proceedings and a receiver has been appointed.
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 Company charges additions to the allowance for loan losses to current period earnings through a provision for loan losses.

The activity in the allowance for notes receivable for the nine months ended September 30, 2012 is as follows:

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

Provision for losses on notes receivable
5,147

Balance at September 30, 2012
$
8,423




18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of September 30, 2012, the Company's derivative financial instruments consisted of nine interest rate swaps with an aggregate notional value of $161.0 million, which effectively fix LIBOR at rates ranging from 0.52% to 3.79% and mature between November 2012 and September 2022. The Company is also a party to one forward interest rate swap transaction with respect to $12.5 million of LIBOR-based variable-rate debt. The Company also has five derivative financial instruments with a notional value of $181.0 million which cap variable-rate interest at rates ranging from 3.0% to 6.0% and mature between October 2012 and September 2015. The fair value of these derivative instruments, which is included in other liabilities in the Consolidated Balance Sheets, was a liability totaling $4.9 million and $3.5 million at September 30, 2012 and December 31, 2011, respectively. The notional value does not represent exposure to credit, interest rate, or market risks.

These derivative instruments have been designated as cash flow hedges and hedge the future cash outflows of variable-rate interest payments on mortgage debt. Such instruments are reported at the fair value reflected above. As of September 30, 2012 and December 31, 2011, unrealized losses totaling $4.8 million and $3.9 million, respectively, were reflected in accumulated other comprehensive loss on the consolidated balance sheets.

As of September 30, 2012 and December 31, 2011, no derivatives were designated as fair value hedges, hedges of net investments in foreign operations or considered to be ineffective. Additionally, the Company does not use derivatives for trading or speculative purposes.
In conjunction with its implementation of updates to the fair value measurements guidance, the Company made an accounting policy election to measure derivative financial instruments subject to master netting agreements on a net basis.

8.
MORTGAGE NOTES PAYABLE

The Company completed the following transactions related to mortgage notes payable and credit facilities during the nine months ended September 30, 2012:

During the nine months ended September 30, 2012, the Company repaid $53.1 million under the Fund III subscription line of credit. As of September 30, 2012, the total outstanding amount under this facility was $82.9 million.

During the nine months ended September 30, 2012, the Company repaid $7.6 million under the Fund II term loan. As of September 30, 2012, the total outstanding amount under this facility was $32.4 million.

During September 2012, the Company refinanced a $7.8 million loan bearing interest at 6.40% with a new $8.0 million loan collateralized by a property. The new loan bears interest at a fixed rate of 4.20% and matures on September 6, 2022.

During September 2012, the Company closed on a $6.4 million loan collateralized by a property. The loan bears interest at LIBOR plus 190 basis points and matures on September 1, 2022.

During September 2012, the Company refinanced an $83.3 million loan collateralized by a property. The new loan bears interest at LIBOR plus 300 basis points and matures on September 25, 2015, and has 2 one-year extension options.

During August 2012, the Company closed on a $21.0 million loan collateralized by a property. The loan bears interest at LIBOR plus 225 basis points and matures on August 10, 2015, and has 2 one-year extension options.

During August 2012, the Company entered into a $20.0 million loan under New Markets Tax Credit program to finance the construction of a property. Of the total principal, $14.8 million is due to an affiliate included in the consolidated group which has been netted on the accompanying balance sheet and the resulting $5.2 million is included in Mortgage Notes Payable in the accompanying consolidated balance sheet at September 30, 2012. The loan bears interest at 1.00% and matures on August 23, 2019.

During August 2012, the Company closed on a $50.0 million construction line of credit collateralized by a property. This facility bears interest at LIBOR plus 330 basis points and matures on August 23, 2015. As of September 30, 2012 no funds have been drawn down on this facility.

During August 2012, in conjunction with the disposition of a property (Note 4), the Company repaid a $12.5 million loan.


19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.
MORTGAGE NOTES PAYABLE (continued)

During July 2012, the Company refinanced an $11.5 million loan bearing interest at 7.34% with a new $10.6 million loan collateralized by a property. The new loan bears interest at LIBOR plus 335 basis points and matures on July 1, 2015.

During June 2012, the Company closed on a $22.8 million loan collateralized by a property. The loan bears interest at LIBOR plus 295 basis points and matures on July 1, 2015, and has a one-year extension option.

During June 2012, in conjunction with the acquisition of the Brentwood Shopping Center (Note 4), the Company assumed a loan of $16.5 million. The loan bears interest at 6.35% and matures on December 1, 2016.

During June 2012, in conjunction with the disposition of a property (Note 4), the Company repaid an $8.3 million loan.

During May 2012, the Company closed on a $4.3 million loan collateralized by a property. This loan bears interest at 3.68% and matures on May 1, 2016, and has a five-year extension option. The proceeds were used to pay off bridge financing in connection with the acquisition of a property.

During April 2012, the Company amended an existing $56.5 million construction loan collateralized by a property with a $69.6 million loan. This loan bears interest at LIBOR plus 225 basis points and matures on May 1, 2015, and has 2 one-year extension options.

During April 2012, the Company received an additional $23.6 million of proceeds on a loan collateralized by a property. As of September 30, 2012, the total outstanding amount for this loan was $73.9 million.

During April 2012, the Company closed on a $15.5 million loan collateralized by a property. The loan bears interest at LIBOR plus 190 basis points and matures on April 27, 2019.

During April 2012, in conjunction with the acquisition of Lincoln Park Centre (Note 4), the Company assumed a loan of $19.8 million. The loan bears interest at 5.85% and matures on December 31, 2013.

During March 2012, in conjunction with the acquisition of four properties in Chicago, Illinois (Note 4), the Company assumed loans of $14.5 million and $1.5 million, which bear interest at 5.62% and 5.55%, respectively, and both mature on February 1, 2016.

During February 2012, in conjunction with the acquisition of 330 River St. (Note 4), the Company assumed a $7.0 million loan which bears interest at 6.26% and matures on May 1, 2016, and has a five-year extension option.

9.
CONVERTIBLE NOTES PAYABLE

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

As of December 31, 2011, all loan costs associated with the issuance have been expensed and there is no remaining net carrying amount of the equity component. The additional non-cash interest expense recognized in the Consolidated Statements of Income was $0.2 million for the three months ended September 30, 2011 and $0.7 million for the nine months ended September 30, 2011. The if-converted value of the Convertible Notes does not exceed their aggregate principal amount as of September 30, 2012 and there are no derivative transactions that were entered into in connection with the issuance of the Convertible Notes.

Through December 31, 2011, the Company had purchased $114.1 million in principal amount of its Convertible Notes at an average discount of approximately 11% of which $24.0 million was repurchased by the Company at par on December 20, 2011 pursuant to the holder's exercise of their repurchase option. The Company did not purchase any of its Convertible Notes during the nine months ended September 30, 2012. The outstanding principal amount of the Convertible Notes as of September 30, 2012 was $0.9 million.

20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10.         FAIR VALUE MEASUREMENTS

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

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of September 30, 2012:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
4,928

 
$


In addition to items that are measured at fair value on a recurring basis, the Company also has assets and liabilities on its balance sheet that are measured at fair value on a nonrecurring basis. As these assets and liabilities are not measured at fair value on a recurring basis, they are not included in the table above. Assets and liabilities that are measured at fair value on a nonrecurring basis include assets acquired and liabilities assumed in business combinations (Note 4).

Financial Instruments

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

The Company has determined the estimated fair values of the following financial instruments by discounting future cash flows utilizing a discount rate equivalent to the rate at which similar financial instruments would be originated at the reporting date:
 
September 30, 2012
 
December 31, 2011
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
 
 
 
 
 
 
 
 
Notes Receivable
$
78,826

 
$
78,826

 
$
59,989

 
$
59,989

Mortgage Notes Payable and Convertible Notes Payable
$
872,173

 
$
888,099

 
$
768,080

 
$
771,991


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, 2012 and 2011, and $0.6 million and $0.8 million for the nine months ended September 30, 2012 and 2011, respectively.

Related party payables, included in Other Liabilities on the consolidated balance sheet due to unconsolidated affiliates totaled $0.9 million at September 30, 2012 and receivables due from unconsolidated affiliates totaled $1.4 million at December 31, 2011.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended September 30, 2012 and 2011 and $75,000 for each of the nine months ended September 30, 2012 and 2011.



21

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING

The Company has five reportable segments: Core Portfolio, Opportunity Funds, Self-Storage Investments, Notes Receivable and Other. “Notes Receivable” consists of the Company's notes receivable and related interest income. “Other” consists primarily of management fees and other interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. Investments in the Core Portfolio are typically held long-term. Given the contemplated finite life of the Opportunity Funds, these investments are typically held for shorter terms. Fees earned by the Company as the general partner/managing member of the Opportunity Funds are eliminated in the Company's consolidated financial statements. The following tables set forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three and nine months ended September 30, 2012 and 2011 and does not include unconsolidated affiliates:

Three Months Ended September 30, 2012
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Self-
Storage
Investments
 
Notes
Receivable
 
Other
 
Amounts
Eliminated in
Consolidation
 
Total
Revenues
$
17,917

 
$
17,340

 
$
6,729

 
$
1,866

 
$
5,815

 
$
(5,526
)
 
$
44,141

Property operating expenses, other operating and real estate taxes
5,571

 
5,851

 
3,444

 

 

 
(680
)
 
14,186

General and administrative
5,436

 
4,948

 
(3
)
 

 

 
(3,377
)
 
7,004

Income before depreciation and amortization and interest and other finance expense
$
6,910

 
$
6,541

 
$
3,288

 
$
1,866

 
$
5,815

 
$
(1,469
)
 
$
22,951

Depreciation and amortization
$
4,712

 
$
4,732

 
$
1,188

 
$

 
$

 
$
(267
)
 
$
10,365

Interest and other finance expense
$
4,085

 
$
4,449

 
$
827

 
$

 
$

 
$
202

 
$
9,563

Real estate at cost
$
634,851

 
$
868,206

 
$
217,296

 
$

 
$

 
$
(17,035
)
 
$
1,703,318

Total assets
$
786,041

 
$
993,046

 
$
193,225

 
$
78,826

 
$

 
$
(151,555
)
 
$
1,899,583

Expenditures for redevelopment and improvements
$
(915
)
 
$
14,108

 
$
1,643

 
$