AKR 10-Q 03.31.2013



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 March 31, 2013

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 May 9, 2013 there were 55,075,420 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)
March 31,
2013
 
December 31,
2012
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
344,178

 
$
293,691

Building and improvements
1,157,960

 
953,020

Construction in progress
2,747

 
2,429

 
1,504,885

 
1,249,140

Less: accumulated depreciation
223,834

 
187,029

Net operating real estate
1,281,051

 
1,062,111

Real estate under development
262,291

 
246,602

Notes receivable, net
105,367

 
129,278

Investments in and advances to unconsolidated affiliates
222,462

 
221,694

Cash and cash equivalents
81,831

 
91,813

Cash in escrow
20,317

 
18,934

Restricted cash
151,596

 

Rents receivable, net
32,147

 
27,744

Deferred charges, net
39,053

 
26,777

Acquired lease intangibles, net
31,839

 
31,975

Prepaid expenses and other assets
45,775

 
29,241

Accounts receivable from related parties
1,126

 
210

Assets of discontinued operations
21,014

 
22,061

Total assets
$
2,295,869

 
$
1,908,440

 
 
 
 
LIABILITIES
 

 
 

Mortgage and other notes payable
$
1,101,391

 
$
727,048

Convertible notes payable
930

 
930

Distributions in excess of income from, and investments in, unconsolidated affiliates
12,488

 
22,707

Accounts payable and accrued expenses
31,074

 
29,309

Dividends and distributions payable
11,764

 
9,674

Acquired lease and other intangibles, net
16,962

 
14,115

Other liabilities
22,657

 
21,303

Liabilities of discontinued operations
11,911

 
13,098

Total liabilities
1,209,177

 
838,184

EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 54,514,365 and 52,482,598 shares, respectively
54

 
52

Additional paid-in capital
635,414

 
581,925

Accumulated other comprehensive loss
(4,932
)
 
(4,307
)
Retained earnings
43,341

 
45,127

Total shareholders’ equity
673,877

 
622,797

Noncontrolling interests
412,815

 
447,459

Total equity
1,086,692

 
1,070,256

Total liabilities and equity
$
2,295,869

 
$
1,908,440

See accompanying notes

1




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(unaudited)
 
Three Months Ended
 
March 31,
(dollars in thousands, except per share amounts)
2013
 
2012
Revenues
 
 
 
Rental income
$
33,055

 
$
21,951

Interest income
2,869

 
2,055

Expense reimbursements
7,971

 
5,402

Other
3,376

 
505

Total revenues
47,271

 
29,913

Operating Expenses
 

 
 

Property operating
5,637

 
4,422

Other operating
1,512

 
1,035

Real estate taxes
5,196

 
4,139

General and administrative
5,626

 
5,925

Depreciation and amortization
10,628

 
7,146

Total operating expenses
28,599

 
22,667

Operating income
18,672

 
7,246

Equity in earnings (losses) of unconsolidated affiliates
2,250

 
(56
)
Other interest income
29

 
54

Interest and other finance expense
(10,309
)
 
(6,560
)
Income from continuing operations before income taxes
10,642

 
684

Income tax benefit (provision)
140

 
(188
)
Income from continuing operations
10,782

 
496

Discontinued Operations
 
 
 
Operating income from discontinued operations
397

 
2,327

Net income
11,179

 
2,823

Noncontrolling interests
 

 
 

Continuing operations
(1,208
)
 
2,992

Discontinued operations
(348
)
 
(1,805
)
Net (income) loss attributable to noncontrolling interests
(1,556
)
 
1,187

Net income attributable to Common Shareholders
$
9,623

 
$
4,010

 
 
 
 
Basic Earnings per Share
 

 
 

Income from continuing operations
$
0.18

 
$
0.08

Income from discontinued operations

 
0.01

Basic earnings per share
$
0.18

 
$
0.09

 
 
 
 
Diluted Earnings per Share
 

 
 

Income from continuing operations
$
0.18

 
$
0.08

Income from discontinued operations

 
0.01

Diluted earnings per share
$
0.18

 
$
0.09

See accompanying notes

2





ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2013
 
2012
(dollars in thousands)
 
 
 
 
Net income
 
$
11,179

 
$
2,823

Other Comprehensive (loss) income
 

 

Unrealized (loss) income on valuation of swap agreements
 
(1,092
)
 
57

Reclassification of realized interest on swap agreements
 
592

 
637

Other comprehensive (loss) income
 
(500
)
 
694

Comprehensive income
 
10,679

 
3,517

Comprehensive (income) loss attributable to noncontrolling interests
 
(1,681
)
 
1,087

Comprehensive income attributable to Common Shareholders
 
$
8,998

 
$
4,604

See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(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, 2012
52,482

 
$
52

 
$
581,925

 
$
(4,307
)
 
$
45,127

 
$
622,797

 
$
447,459

 
$
1,070,256

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
20

 

 
438

 

 

 
438

 
(438
)
 

Issuance of Common Shares, net of issuance costs
1,997

 
2

 
52,816

 

 

 
52,818

 

 
52,818

Dividends declared ($0.21 per Common Share)

 

 

 

 
(11,409
)
 
(11,409
)
 
(348
)
 
(11,757
)
Vesting of employee Restricted Share and LTIP awards
9

 

 
53

 

 

 
53

 
1,252

 
1,305

Common Shares issued under Employee Share Purchase Plan
1

 

 
19

 

 

 
19

 

 
19

Issuance of Common Shares to trustees

 

 
103

 

 

 
103

 

 
103

Exercise of Share options
8

 

 
143

 

 

 
143

 

 
143

Employee Restricted Shares canceled
(3
)
 

 
(83
)
 

 

 
(83
)
 

 
(83
)
Consolidation of previously unconsolidated investment

 

 

 

 

 

 
(33,949
)
 
(33,949
)
Noncontrolling interest distributions

 

 

 

 

 

 
(2,842
)
 
(2,842
)
 
54,514

 
54

 
635,414

 
(4,307
)
 
33,718

 
664,879

 
411,134

 
1,076,013

Comprehensive (loss) income:
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
9,623

 
9,623

 
1,556

 
11,179

Unrealized loss on valuation of swap agreements

 

 

 
(974
)
 

 
(974
)
 
(118
)
 
(1,092
)
Reclassification of realized interest on swap agreements

 

 

 
349

 

 
349

 
243

 
592

Total comprehensive (loss) income

 

 

 
(625
)
 
9,623

 
8,998

 
1,681

 
10,679

Balance at March 31, 2013
54,514

 
$
54

 
$
635,414

 
$
(4,932
)
 
$
43,341

 
$
673,877

 
$
412,815

 
$
1,086,692



4




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2013 AND 2012 (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, 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
161

 

 
2,534

 

 

 
2,534

 
(2,534
)
 

Issuance of Common Shares, net of issuance costs
808

 
1

 
17,760

 

 

 
17,761

 

 
17,761

Issuance of OP Units to acquire real estate

 

 

 

 

 

 
2,279

 
2,279

Dividends declared ($0.18 per Common Share)

 

 

 

 
(7,808
)
 
(7,808
)
 
(287
)
 
(8,095
)
Vesting of employee Restricted Share and LTIP awards
22

 

 
40

 

 

 
40

 
846

 
886

Common Shares issued under Employee Share Purchase Plan
1

 

 
20

 

 

 
20

 

 
20

Issuance of LTIP Unit awards to employees

 

 

 

 

 

 
2,577

 
2,577

Issuance of Common Shares to trustees

 

 
84

 

 

 
84

 

 
84

Exercise of Share options
1

 

 
23

 

 

 
23

 

 
23

Employee Restricted Shares cancelled
(7
)
 

 
(150
)
 

 

 
(150
)
 

 
(150
)
Noncontrolling interest distributions

 

 

 

 

 

 
(3,450
)
 
(3,450
)
Noncontrolling interest contributions

 

 

 

 

 

 
38,578

 
38,578

 
43,572

 
44

 
368,978

 
(3,913
)
 
31,509

 
396,618

 
423,204

 
819,822

Comprehensive income (loss):
 

 
 

 
 

 
 

 
 

 
 

 
 

 
 

Net income (loss)

 

 

 

 
4,010

 
4,010

 
(1,187
)
 
2,823

Unrealized loss on valuation of swap agreements

 

 

 
124

 

 
124

 
(67
)
 
57

Reclassification of realized interest on swap agreements

 

 

 
470

 

 
470

 
167

 
637

Total comprehensive income (loss)

 

 

 
594

 
4,010

 
4,604

 
(1,087
)
 
3,517

Balance at March 31, 2012
43,572

 
$
44

 
$
368,978

 
$
(3,319
)
 
$
35,519

 
$
401,222

 
$
422,117

 
$
823,339




See accompanying notes


5




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
11,179

 
$
2,823

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

 
 
Depreciation and amortization
10,628

 
9,141

Amortization of financing costs
734

 
683

Share compensation expense
1,411

 
970

Equity in (earnings) losses of unconsolidated affiliates
(2,250
)
 
56

Distributions of operating income from unconsolidated affiliates
1,208

 
128

Other, net
(1,476
)
 
358

Changes in assets and liabilities
 

 
 
Cash in escrow
(274
)
 
2,268

Rents receivable, net
(878
)
 
168

Prepaid expenses and other assets
(15,029
)
 
(3,824
)
Accounts receivable from related parties
8

 
406

Accounts payable and accrued expenses
(739
)
 
(2,365
)
Other liabilities
(289
)
 
1,059

Net cash provided by operating activities
4,233

 
11,871

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(86,600
)
 
(48,689
)
Redevelopment and property improvement costs
(17,941
)

(20,081
)
Deferred leasing costs
(2,220
)
 
(1,035
)
Investments in and advances to unconsolidated affiliates
(2
)
 
(1,690
)
Return of capital from unconsolidated affiliates
482

 
1,255

Consolidation of previously unconsolidated investment
1,864

 

Proceeds from notes receivable
5,529

 
3

Issuance of notes receivable

 
(17,080
)
Net cash used in investing activities
(98,888
)
 
(87,317
)

6




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
(unaudited)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2013
 
2012
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage notes
(47,136
)
 
(3,513
)
Proceeds received from mortgage notes
254,000

 
4,250

Loan proceeds held as restricted cash
(151,596
)
 

Increase in deferred financing and other costs
(9,998
)
 
(570
)
Capital contributions from noncontrolling interests

 
38,578

Distributions to noncontrolling interests
(3,098
)
 
(3,697
)
Dividends paid to Common Shareholders
(9,417
)
 
(7,666
)
Proceeds from issuance of Common Shares, net of issuance costs of $843 and $126, respectively
51,840

 
8,029

Other employee and trustee stock compensation, net
78

 
(107
)
Net cash provided by financing activities
84,673

 
35,304

(Decrease) in cash and cash equivalents
(9,982
)
 
(40,142
)
Cash and cash equivalents, beginning of period
91,813

 
89,812

Cash and cash equivalents, end of period
$
81,831

 
$
49,670

Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $1,664 and $1,433, respectively
$
5,858

 
$
7,700

 
 
 
 
Cash paid for income taxes
$
12

 
$
70

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

 
$
23,062

Acquisition of real estate through issuance of OP Units
$

 
$
2,279

Acquisition of real estate through conversion of notes receivable
$
18,500

 
$

 
 
 
 
Consolidation of previously unconsolidated investment
 
 
 
Real estate, net
$
(118,484
)
 
$

Mortgage notes payable
166,200

 

Distributions in excess of income from, and investments in, unconsolidated affiliates
(10,298
)
 

Other assets and liabilities
(1,605
)
 

Noncontrolling interest
(33,949
)
 

Cash included in consolidation of previously unconsolidated investment
$
1,864

 
$


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 March 31, 2013, 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 March 31, 2013, the Company has ownership interests in 73 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 31 properties within four of its opportunity funds, Acadia Strategic Opportunity Fund, L.P. ("Fund I"), Acadia Strategic Opportunity Fund II, LLC ("Fund II"), Acadia Strategic Opportunity Fund III LLC ("Fund III") and Acadia Strategic Opportunity Fund IV LLC ("Fund IV" and together with Funds I, II and III, the "Opportunity Funds"). The 104 Core Portfolio and Opportunity Fund properties consist of commercial properties, which are primarily high-quality urban and/or street retail properties, community shopping centers and mixed-use properties with a retail component. The Opportunity Funds also include investments 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 Mervyns I and II and earns fees or priority distributions for asset management, property management, construction, redevelopment, 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).

Following is a table summarizing the general terms and Operating Partnership's equity interests in the Opportunity Funds and Mervyns I and II:

Entity
Formation Date
Operating Partnership Share of Capital
Committed Capital (2)
 
Capital Called as of March 31, 2013 (2)
Equity Interest Held By Operating Partnership
Preferred Return
Capital Returned as of March 31, 2013 (2)
Fund I and Mervyns I (1)
9/2001
22.22
%
$
90.0


$
86.6

37.78
%
9
%
$
86.6

Fund II and Mervyns II
6/2004
20.00
%
300.0


300.0

20.00
%
8
%
84.5

Fund III
5/2007
19.90
%
475.0


341.0

19.90
%
6
%
166.5

Fund IV
5/2012
23.12
%
540.6


64.6

23.12
%
6
%

Notes:
(1) Fund I and Mervyns I have returned all capital and preferred return. The Operating Partnership is now entitled to a Promote on all future cash distributions.
(2) Represents the total for the Opportunity Funds, including the Operating Partnership and noncontrolling interests' shares.

8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

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 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 Company owns a 22.22% interest in an approximately one million square foot retail portfolio (the "Brandywine Portfolio") located in Wilmington, Delaware. Effective January 1, 2013, following certain changes in the financial and operating controls of the joint venture, the Company now accounts for this investment on a consolidated basis.

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 months ended March 31, 2013 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013. 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 2012 Annual Report on Form 10-K, as filed with the SEC on February 27, 2013.

Reclassifications

Certain reclassifications have been made to the 2012 financial statements to conform to the 2013 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 March 31, 2013.

Recent Accounting Pronouncements

During February 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." ASU 2013-02 requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. ASU 2013-02 is effective prospectively for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 as of January 1, 2013 and the adoption 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)


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 March 31, 2013, 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 months ended March 31, 2013 and 2012.

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.

The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated:
 
Three Months Ended
 
March 31,
(dollars in thousands, except per share amounts)
2013
 
2012
Numerator
 
 
 
Income from continuing operations
$
9,574

 
$
3,488

Less: net income attributable to participating securities
172

 
73

Income from continuing operations net of income attributable to participating securities
9,402

 
3,415

Numerator for diluted earnings per Common Share
$
9,402

 
$
3,415

 
 
 
 
Denominator
 

 
 

Weighted average shares for basic earnings per share
53,414

 
42,736

Effect of dilutive securities:
 

 
 

Employee Restricted Share Units and share options
437

 
410

Dilutive potential Common Shares
437

 
410

Denominator for diluted earnings per share
53,851

 
43,146

 
 
 
 
Basic earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.18

 
$
0.08

Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.18

 
$
0.08




10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During the first quarter 2013, the Company issued 2.0 million Common Shares under its at-the-market ("ATM") program generating gross proceeds of $53.7 million and net proceeds of $52.9 million. Subsequent to March 31, 2013, the Company completed this ATM program with an aggregate offering amount of $125.0 million of gross proceeds from the sale of Common Shares. Under this program, the Company issued a total of 4.9 million Common Shares which generated net proceeds of $123.1 million. In addition, the Company established a new ATM equity program with an additional aggregate offering amount of up to $150.0 million of gross proceeds from the sale of Common Shares. The net proceeds from these ATM equity programs have been, and 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’ 284,097 Common OP Units at March 31, 2013 and December 31, 2012; (ii) 188 Series A Preferred OP Units at March 31, 2013 and December 31, 2012; and (iii) 379,522 and 168,357 LTIP Units at March 31, 2013 and December 31, 2012, respectively.

4.
ACQUISITION OF REAL ESTATE AND DISCONTINUED OPERATIONS

Acquisitions

2013 Core Portfolio Acquisitions

During March 2013, the Company acquired 664 North Michigan Avenue, an 18,141 square foot retail condominium in Chicago, Illinois for $86.6 million.

2013 Fund III Acquisitions

Fund III had previously acquired a $23.0 million maturing note receivable at a discounted price of $18.5 million during April 2012. The note receivable was collateralized by a 79,526 square foot shopping center located in Brooklyn, New York ("Nostrand Place"). The Company commenced foreclosure proceedings, but ultimately agreed to a settlement with the unaffiliated borrower. Pursuant to the settlement, in February 2013, Fund III and the borrower formed a joint venture whereby Fund III contributed its interest in the note for a 99% controlling interest in the joint venture, and the borrower contributed the deed to Nostrand Place in exchange for a 1% interest in the joint venture.

Purchase Price Allocation

The above 2013 Core Portfolio and Fund III acquisitions 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 the Company's preliminary allocations of the purchase prices of assets acquired and liabilities assumed during 2013:

(dollars in thousands)
Preliminary Purchase Price Allocations (1)
Land
$
22,182

Buildings and improvements
83,865

Total consideration
$
106,047

Note:

(1) Represents preliminary allocations for 2013 acquisitions where purchase price allocations have not been finalized.

11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Acquisitions (continued)

During 2012, the Company acquired properties and recorded the preliminary allocations of the purchase prices to the assets acquired based on provisional measurements of fair value. During 2013, the Company finalized the allocations of the purchase prices and made certain measurement period adjustments.

The following table summarizes the preliminary allocations of the purchase prices of these properties as recorded as of December 31, 2012, and the finalized allocations of the purchase prices as adjusted as of March 31, 2013:

(dollars in thousands)
Finalized Purchase Price Allocations
Preliminary Purchase Price Allocations
Land
$
4,933

$
5,175

Buildings and improvements
14,587

15,525

Acquisition-related intangible assets (in Acquired lease intangibles, net)
1,180


Total consideration
$
20,700

$
20,700


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. As of March 31, 2013, two of the properties within the Opportunity Funds were under contract for sale.

The combined assets and liabilities as of March 31, 2013 and December 31, 2012, and the results of operations of the properties classified as discontinued operations for the three months ended March 31, 2013 and March 31, 2012, respectively, are summarized as follows:

BALANCE SHEET
 
 

 
ASSETS
 
March 31, 2013
December 31, 2012
(dollars in thousands)
 
 

 
Net real estate
 
$
19,468

$
19,400

Rents receivable, net
 
875

917

Deferred charges, net
 
360

612

Prepaid expenses and other assets
 
311

1,132

Total assets of discontinued operations
 
$
21,014

$
22,061

LIABILITIES
 
 

 
Mortgage notes payable
 
$
9,178

$
9,208

Accounts payable and accrued expenses
 
2,124

3,125

Other liabilities
 
609

765

Total liabilities of discontinued operations
 
$
11,911

$
13,098



12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Discontinued Operations (continued)
 
 
Three Months Ended
STATEMENTS OF OPERATIONS
 
March 31,
(dollars in thousands) 
 
2013
 
2012
Total revenues
 
$
1,170

 
$
9,713

Total expenses
 
773

 
7,386

Income from discontinued operations
 
397

 
2,327

Income from discontinued operations attributable to noncontrolling interests
 
(348
)
 
(1,805
)
Income from discontinued operations attributable to Common Shareholders
 
$
49

 
$
522



5.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

The Company owns a 49% interest in a 311,000 square foot shopping center located in White Plains, New York ("Crossroads"), a 50% interest in an approximately 28,000 square foot retail portfolio located in Georgetown, Washington D.C. (the "Georgetown Portfolio") and a 22.22% interest in an approximately 20,000 square foot retail property located in Wilmington, Delaware ("Route 202 Shopping Center"). These investments are accounted for under the equity method.

Opportunity Funds

RCP Venture

The Opportunity Funds, together with two unaffiliated partners formed an investment group, the RCP Venture, for the purpose of making investments in surplus or underutilized properties owned by retailers and, in some instances, the retailers' operating company. The RCP Venture is neither a single entity nor a specific investment and the Company has no control or rights with respect to the formation and operation of these investments. 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 March 31, 2013, 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 Company accounts for its investments in Mervyns and Albertsons on the equity method as it has the ability to exercise significant influence, but does not have any rights with respect to financial or operating control. The Company accounts for its investments in its Add-On Investments and Other RCP Investments on the cost method as it does not have any influence over such entities' operating and financial policies nor any rights with respect to the control and operation of these entities.


13

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 March 31, 2013:
(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
7,547

3,558

1,252

819

Albertsons
2006
20,717

81,594

4,239

16,318

Albertsons Add-On investments
2006/2007
2,416

4,864

388

972

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

1,956

535

392

 
 
$
63,214

$
142,236

$
12,070

$
30,612


Other Opportunity Fund Investments

The unaffiliated partners for Fund III's investments in Lincoln Road, Parkway Crossing, Arundel Plaza, the White City Shopping Center and Self-Storage Management maintain control over these entities and, as such, the Company accounts for these investments under the equity method.

The unaffiliated partners for Fund IV's investments in Lincoln Road and 1701 Belmont Avenue maintain control over these entities and, as such, the Company accounts for these investments 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:

(dollars in thousands)
March 31,
2013
 
December 31,
2012
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
321,445

 
$
441,611

Investment in unconsolidated affiliates
93,009

 
93,923

Other assets
30,192

 
39,035

Total assets
$
444,646

 
$
574,569

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
159,255

 
$
326,296

Other liabilities
16,913

 
24,267

Partners’ equity
268,478

 
224,006

Total liabilities and partners’ equity
$
444,646

 
$
574,569

Company’s investment in and advances to unconsolidated affiliates
$
222,462

 
$
221,694

Company's share of distributions in excess of income from and investments in unconsolidated affiliates
$
(12,488
)
 
$
(22,707
)


14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

 
Three Months Ended
(dollars in thousands)
March 31,
2013
 
March 31,
2012
Combined and Condensed Statements of Operations
 
 
 
Total revenues
$
10,999

 
$
12,296

Operating and other expenses
4,281

 
4,454

Interest and other finance expense
2,031

 
4,638

Equity in losses of unconsolidated affiliates
(711
)
 
(1,623
)
Depreciation and amortization
2,081

 
2,272

Net income
$
1,895

 
$
(691
)
 
 
 
 
Company’s share of net income
$
2,348

 
$
42

Amortization of excess investment
(98
)
 
(98
)
Company’s equity in earnings (losses) of unconsolidated affiliates
$
2,250

 
$
(56
)

6.
NOTES RECEIVABLE

As of March 31, 2013, the Company’s notes receivable, net, aggregated $105.4 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:
Note description
Effective interest rate (1)
Maturity date
First Priority liens
Net Carrying Amounts of Notes Receivable
Extension Options
(dollars in thousands)
 
 
 
 

 

First Mortgage Loan
9.0%
6/1/2013
$

$
12,204

1 x 6 months

First Mortgage Loan
6.0%
12/31/2013

10,250


First Mortgage Loan
8.0%
12/31/2013

8,000


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

9,089


First Mortgage Loan
11.0%
1/1/2014

25,000

1 x 6 months

Zero Coupon Loan
24.0%
1/3/2016
166,200

4,078


Mezzanine Loan
15.0%
11/9/2020

30,879


Mezzanine Loan
15.0%
Upon Capital Event
13,265

3,834


Individually less than 3%
11.00% to 17.50%
12/31/13 to Capital Event
37,623

2,033


Total
 
 
 
$
105,367



Note:

(1) The effective interest rate includes points and exit fees.

During January 2013, Fund III received a payment of $2.5 million, representing the full principal and interest amount on a note that had been previously written off.

During February 2013, Fund III, in conjunction with its acquisition of Nostrand Place (Note 4), received repayment on a portion of its first mortgage loan of $18.5 million and contributed the remaining unliquidated balance to a joint venture.


15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
NOTES RECEIVABLE (continued)

During March 2013, the Company received a payment of $5.4 million, representing full payment on a construction loan.

The Company has provided allowances against two notes receivable with interest payments in arrears that have an aggregate outstanding gross carrying balance of $5.6 million. The following table reconciles the allowance for notes receivable from December 31, 2012 to March 31, 2013:

(dollars in thousands)
Allowance for Notes Receivable
Balance at December 31, 2012
$
3,681

Change in allowance, net
39

Balance at March 31, 2013
$
3,720


7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of March 31, 2013, the Company's derivative financial instruments consisted of eight interest rate swaps with an aggregate notional value of $148.6 million, which effectively fix LIBOR at rates ranging from 0.52% to 3.77% and mature between May 2015 and January 2023. The Company is also a party to two forward starting interest rate swap transactions with respect to $25.0 million of LIBOR-based variable-rate debt. The Company also has six derivative financial instruments with a notional value of $182.9 million which cap LIBOR at rates ranging from 3.0% to 4.3% and mature between April 2013 and April 2018. The fair value of these derivative instruments, which is included in other liabilities in the Consolidated Balance Sheets, was a liability totaling $5.0 million and $4.4 million at March 31, 2013 and December 31, 2012, 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 March 31, 2013 and December 31, 2012, unrealized losses totaling $4.9 million and $4.3 million, respectively, were reflected in accumulated other comprehensive
loss on the consolidated balance sheets.

As of March 31, 2013 and December 31, 2012, 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 AND OTHER NOTES PAYABLE

The Company completed the following transactions related to mortgage and other notes payable and credit facilities during the three months ended March 31, 2013:

During January, the Company closed on a new $150.0 million unsecured credit facility, replacing the $64.5 million secured credit facility that had matured. The new facility bears interest at a spread which varies based on the ratio of total debt to total asset value of the Company ranging from LIBOR plus 155 basis points (<45%) to LIBOR plus 220 basis points (>55%) depending on the level of leverage. There is also an unused fee of 0.35% if the total outstanding principal is less than or equal to 50% of the aggregate commitments and 0.25% if it is more. This facility matures on January 3, 2016 and has a one-year extension option. As of March 31, 2013, there was no balance outstanding under this credit facility.

During January, the Company closed on a $16.5 million loan collateralized by a property. The loan bears interest at LIBOR plus 190 basis points and matures on January 23, 2023.

During February, the Company closed on a $13.0 million loan collateralized by a property. The loan bears interest at LIBOR plus 265 basis points and matures on February 1, 2016.

During March, the Company refinanced a $28.9 million loan bearing interest at LIBOR plus 600 basis points with a new $29.5 million loan collateralized by a property. The new loan bears interest at LIBOR plus 250 basis points and matures on April 1, 2018.

16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.
MORTGAGE AND OTHER NOTES PAYABLE (continued)

During March, the Company modified a $50.0 million construction loan collateralized by a property. The modification converted the construction loan, on which no previous balance was drawn, into a first mortgage loan of $20.0 million and increased the interest rate from LIBOR plus 330 basis points to LIBOR plus 500 basis points. In addition, the Company modified a separate $20.0 million loan collateralized by this property. The previous loan bore interest at LIBOR plus 250 basis points and was scheduled to mature during August 2013. The modification extended the maturity date to August 23, 2015 and adjusted the interest rate to LIBOR plus 300 basis points until August 2013, LIBOR plus 350 basis points until August 2014 and LIBOR plus 400 basis points thereafter.

During 2012, the U.S. Citizenship and Immigration Services ("USCIS") approved the City Point project's application for $200.0 million of construction financing under the U.S.'s Immigrant Investor Program, commonly known as "EB-5." Funds are released into a restricted cash account upon the approval of the USCIS. As of March 31, 2013, $160.0 million of funds had been released into this restricted cash account and $8.4 million have been drawn to fund construction activities. The remaining amount in the restricted cash account is $151.6 million.


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. Through March 31, 2013, the Company had purchased $114.1 million in principal amount of its Convertible Notes, none of which were repurchased subsequent to December 31, 2011, and the remaining outstanding balance is $0.9 million.

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 if-converted value of the Convertible Notes does not exceed their aggregate principal amount as of March 31, 2013 and there are no derivative transactions that were entered into in connection with the issuance of the Convertible Notes.

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 March 31, 2013:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
5,044

 
$


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).


17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10.    FAIR VALUE MEASUREMENTS (continued)

Financial Instruments

Certain of the Company’s assets and liabilities meet the definition of financial instruments. Except as disclosed below, the carrying amounts of these financial instruments 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:
 
March 31, 2013
 
December 31, 2012
(dollars in thousands)
Carrying
Amount
 
Estimated
Fair
Value
 
Carrying
Amount
 
Estimated
Fair
Value
Mortgage, Convertible Notes and Other Notes Payable
$
1,102,321

 
$
1,125,617

 
$
727,978

 
$
734,807


11.
RELATED PARTY TRANSACTIONS

The Company earned property management fees, legal and leasing fees from its investments in unconsolidated affiliates totaling $0.01 million and $0.3 million for the three months ended March 31, 2013 and 2012, respectively.

Related party receivables due from unconsolidated affiliates totaled $1.1 million at March 31, 2013 and $0.2 million at December 31, 2012.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for the three months ended March 31, 2013 and 2012, respectively.



12.
SEGMENT REPORTING

The Company has three reportable segments: Core Portfolio, Opportunity Funds and Notes Receivable. 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 months ended March 31, 2013 and 2012 and does not include unconsolidated affiliates:


18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)
Three Months Ended March 31, 2013
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Notes
Receivable
 
Total
Revenues
$
26,877

 
$
17,525

 
$
2,869

 
$
47,271

Property operating expenses, other operating and real estate taxes
7,163

 
5,182

 

 
12,345

General and administrative
5,481

 
145

 

 
5,626

Income before depreciation and amortization and interest and other finance expense
$
14,233

 
$
12,198

 
$
2,869

 
$
29,300

Depreciation and amortization
$
6,636

 
$
3,992

 
$

 
$
10,628

Interest and other finance expense
$
6,149

 
$
4,160

 
$

 
$
10,309

Real estate at cost
$
979,553

 
$
787,623

 
$

 
$
1,767,176

Total assets
$
1,075,253

 
$
1,115,249

 
$
105,367

 
$
2,295,869

Expenditures for redevelopment and improvements
$
456

 
$
17,485

 
$

 
$
17,941

Acquisition of real estate
$
86,600

 
$

 
$

 
$
86,600

 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 

Income before depreciation and amortization and interest and other finance expense
$
29,300

Other interest income
29

Depreciation and amortization
(10,628
)
Equity in earnings of unconsolidated affiliates
2,250

Interest and other finance expense
(10,309
)
Income tax benefit
140

Income from discontinued operations
397

Net income
11,179

Net income attributable to noncontrolling interests
(1,556
)
Net income attributable to Common Shareholders
$
9,623


19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)
Three Months Ended March 31, 2012
(dollars in thousands)
Core
Portfolio
 
Opportunity
Funds
 
Notes
Receivable
 
Total
Revenues
$
15,708

 
$
12,150

 
$
2,055

 
$
29,913

Property operating expenses, other operating and real estate taxes
4,532

 
5,064

 

 
9,596

General and administrative
5,651

 
274

 

 
5,925

Income before depreciation and amortization and interest and other finance expense
$
5,525

 
$
6,812

 
$
2,055

 
$
14,392

Depreciation and amortization
$
3,742

 
$
3,404

 
$

 
$
7,146

Interest and other finance expense
$
3,358

 
$
3,202

 
$

 
$
6,560

Real estate at cost
$
548,075

 
$
642,529

 
$

 
$
1,190,604

Total assets
$
661,545

 
$
633,708

 
$
77,180

 
$
1,372,433

Expenditures for redevelopment and improvements
$
7,204

 
$
12,877

 
$

 
$
20,081

Acquisition of real estate
$
16,189

 
$
32,500

 
$

 
$
48,689

 
 
 
 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
Net property income before depreciation and amortization and interest and other finance expense
$
14,392

Other interest income
54

Depreciation and amortization
(7,146
)
Equity in losses of unconsolidated affiliates
(56
)
Interest and other finance expense
(6,560
)
Income tax provision
(188
)
Income from discontinued operations
2,327

Net income
2,823

Net loss attributable to noncontrolling interests
1,187

Net income attributable to Common Shareholders
$
4,010




13.
LONG-TERM INCENTIVE COMPENSATION

On February 22, 2013, the Company issued a total of 284,447 LTIP Units and 590 Restricted Share Units to officers of the Company and 11,532 Restricted Share Units to other employees of the Company pursuant to its Amended and Restated 2006 Share Incentive Plan (the "Share Incentive Plan"). Vesting with respect to these awards is generally recognized ratably over the five annual anniversaries following the issuance date. Vesting with respect to 16% of the awards issued to officers is also generally subject to achieving certain Company performance measures. Unvested LTIP Units provide for non-forfeitable rights to dividend equivalent payments (Note 2).

These awards were measured at their fair value as if they were vested on the grant date. Fair value was established as the market price of the Company's Common Shares as of the close of trading on the day preceding the grant date. The total value of the above Restricted Share Units and LTIP Units as of the grant date was $7.9 million. Compensation expense of $0.4 million has been recognized in the accompanying statement of income related to these awards for the three months ended March 31, 2013.

Total long-term incentive compensation expense, including the expense related to the above-mentioned plans, was $1.3 million and $0.9 million for the three months ended March 31, 2013 and 2012, respectively.

20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

13.
LONG-TERM INCENTIVE COMPENSATION (continued)

In 2009, the Company adopted the Long Term Investment Alignment Program (the "Program") pursuant to which the Company may award units primarily to senior executives which would entitle them to receive up to 25% of any future Fund III Promote when and if such Promote is ultimately realized. During the quarter, the Company awarded the remaining 19% of the available units under the Program. These units, along with those previously awarded, were determined to have no value at issuance or as of March 31, 2013. In accordance with ASC Topic 718, "Compensation - Stock Compensation," compensation relating to these awards will be recorded based on the change in the estimated fair value at each reporting period.

14.    SUBSEQUENT EVENTS

During April 2013, the Company closed on a $8.6 million loan collateralized by a property. The new loan bears interest at LIBOR plus 175 basis points and matures on April 3, 2023.

During May 2013, the Company closed on the sale of its self-storage facility located in Pelham, NY for $11.9 million.


21




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

The following discussion is based on our consolidated financial statements as of March 31, 2013 and 2012 and for each of the three months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto ("Notes to Consolidated Financial Statements").

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors are set forth under the heading "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2012 (our "2012 Form 10-K") and include, among others, the following: general economic and business conditions, including the current post-recessionary period, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in our real estate markets, including, among other things, competition with other companies; risks of real estate development, acquisition and investment; risks related to our use of leverage; demands placed on our resources due to the growth of our business; risks related to operating through a partnership structure; our limited control over joint venture investments; the risk of loss of key members of management; uninsured losses; REIT distribution requirements and ownership limitations; concentration of ownership by certain institutional investors; governmental actions and initiatives; and environmental/safety requirements. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.

OVERVIEW

Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective:

Own and operate a Core Portfolio of high-quality retail properties located primarily in high-barrier-to-entry, supply constrained, densely-populated metropolitan areas and create value through accretive redevelopment and re-anchoring activities coupled with the acquisition of high-quality assets that have the long-term potential to outperform the asset class as part of our Core asset acquisition and recycling initiative.

Generate additional external growth through an opportunistic yet disciplined acquisition program through our Opportunity Funds. We target transactions with high inherent opportunity for the creation of additional value through:

value-add investments in high-quality urban and/or street retail properties with re-tenanting or repositioning opportunities,
opportunistic acquisitions of well-located real estate anchored by distressed retailers or by motivated sellers and
opportunistic purchases of debt which may include restructuring.

These may also include joint ventures with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.

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

As of March 31, 2013, we operated 104 properties, which we own or have an ownership interest in, within our Core Portfolio or within our Opportunity Funds. These properties primarily consist of urban/street retail, dense suburban neighborhood and community shopping centers and mixed-use properties with a strong retail component. The properties we operate are located primarily along the East Coast and in Chicago.

Core Portfolio

Our Core Portfolio consists of those properties either 100% owned, or partially owned through joint venture interests, by the Operating Partnership, or subsidiaries thereof, not including those properties owned through

22




our Opportunity Funds. There are 73 properties in our Core Portfolio totaling 5.3 million square feet. As of March 31, 2013, the Core Portfolio physical occupancy was 93.6%; leased occupancy was 94.0% including executed leases.

Opportunity Funds

Fund I has three properties totaling 0.1 million square feet.
Fund II has six properties totaling 0.8 million square feet, four of which are currently operating, one of which is under construction, and one of which is in the design phase.
Fund III has 17 properties totaling 1.7 million square feet, 12 of which are currently operating and five of which are in the design phase.
Fund IV has five properties totaling 0.1 million square feet, four of which are operating and one of which is in the design phase.

The majority of our operating income is derived from rental revenues from properties, including recoveries from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating companies, we consider these investments to be private-equity style, as opposed to solely real estate, investments. Since these are not generally traditional investments in operating rental real estate but investments in operating businesses, the Operating Partnership principally invests in these through a taxable REIT subsidiary ("TRS").

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our 2012 Form 10-K.

RESULTS OF OPERATIONS
A discussion of the significant variances and primary factors contributing thereto within the results of operations are addressed below. Where there were no significant variances from period to period, the information in the following tables is presented without further discussion:

Comparison of the three months ended March 31, 2013 ("2013") to the three months ended March 31, 2012 ("2012")

Revenues
2013
 
2012
(dollars in millions)
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
 
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
Rental income
$
21.1

 
$
12.0

 
$

 
$
12.6

 
$
9.3

 
$

Interest income

 

 
2.9

 

 

 
2.1

Expense reimbursements
5.1

 
2.9

 

 
2.7

 
2.7

 

Other
0.7

 
2.7

 

 
0.4

 
0.1

 

Total revenues
$
26.9

 
$
17.6

 
$
2.9

 
$
15.7

 
$
12.1

 
$
2.1


Rental income in the Core Portfolio increased $8.5 million primarily as a result of additional rents of (i) $3.9 million following our acquisitions of 330 River Street, 340 River Street, 28 Jericho Turnpike, a portfolio of Chicago street retail properties, 930 Rush Street, 83 Spring Street and Rhode Island Place ("2012 Core Acquisitions"), (ii) $4.2 million following the consolidation of our Brandywine investment formerly presented under the equity method ("Brandywine") and (iii) $0.5 million as a result of re-anchoring and leasing activities at Bloomfield Town Square and Branch Plaza ("Core Re-anchorings"). Rental income in the Opportunity Funds increased $2.7 million primarily as a result of additional rents of (i) $1.2 million following our acquisitions of 640 Broadway, Lincoln Park Centre and New Hyde Park Shopping Center ("2012 Fund Acquisitions") and (ii) $1.1 million from leases that commenced during 2012 at Fordham Place and 161st Street ("Fund Leasing").

23





The increase in interest income was primarily due to the origination of two notes during December 2012 partially offset by the repayment of two other notes during 2012.

Expense Reimbursements in the Core Portfolio increased $2.4 million primarily as a result of $0.7 million from the 2012 Core Acquisitions, $0.9 million from Brandywine as well as an increase in snow related expense reimbursements.

Other income in the Opportunity Funds increased by $2.6 million primarily as a result of the collection of a note receivable originated in 2010, which had been written off prior to 2013.

Operating Expenses 
2013
 
2012
(dollars in millions)
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
 
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
Property operating
$
3.2

 
$
2.5

 
$

 
$
1.8

 
$
2.6

 
$

Other operating
0.7

 
0.8

 

 
0.5

 
0.6

 

Real estate taxes
3.3

 
1.9

 

 
2.3

 
1.9

 

General and administrative
5.5

 
0.1

 

 
5.6

 
0.3

 

Depreciation and amortization
6.4

 
4.2

 

 
3.7

 
3.4

 

Total operating expenses
$
19.1

 
$
9.5

 
$

 
$
13.9

 
$
8.8

 
$


Property operating expense in the Core Portfolio increased $1.4 million primarily due to $0.7 million from Brandywine and snow related expenses.

Real estate taxes in the Core Portfolio increased $1.0 million primarily as a result of $0.3 million from the 2012 Core Acquisitions and $0.7 million from Brandywine.

Depreciation and amortization in the Core Portfolio increased $2.7 million primarily as a result of $1.3 million from the 2012 Core Acquisitions, $0.9 million from Brandywine and $0.3 million from the Core Re-anchorings.

Other
2013
 
2012
(dollars in millions)
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
 
Core
Portfolio
 
Opportunity Funds
 
Notes
Receivable
Equity in earnings (losses) of unconsolidated affiliates
$

 
$
2.3

 
$

 
$
0.2

 
$
(0.3
)
 
$

Other interest income

 

 

 
0.1

 

 

Interest and other finance expense
(6.1
)
 
(4.2
)
 

 
(3.4
)
 
(3.2
)
 

Income tax benefit (provision)
0.1

 

 

 
(0.6
)
 
0.4

 

Income from discontinued operations

 
0.4

 

 

 
2.3

 

Net (income) loss attributable to noncontrolling interests -
 
 
 
 
 
 
 
 
 
 
 
  - Continuing operations
(0.6
)
 
(0.6
)
 

 

 
3.0

 

  - Discontinued operations

 
(0.3
)
 

 

 
(1.8
)
 


Equity in earnings (losses) of unconsolidated affiliates in the Opportunity Funds increased primarily as a result of $0.8 million from additional lease up activity at Lincoln Road and Parkway Crossing as well as $1.0 million of additional income following our acquisitions of Arundel Plaza, 1701 Belmont Avenue and Fund IV's Lincoln Road ("2012 Fund Unconsolidated Acquisitions").

Interest expense in the Core Portfolio increased $2.7 million primarily due to Brandywine. Interest expense in the Opportunity Funds increased $1.0 million in 2013, which was primarily the result of an increase of $0.7 million due to higher average outstanding

24




borrowings and a $0.5 million increase related to higher average interest rates in 2013.

Income from discontinued operations represents activity related to properties held for sale in 2013 and properties sold during 2012. See Note 4 in the Notes to Consolidated Financial Statements for a discussion of our 2012 dispositions.

Net loss (income) attributable to noncontrolling interests - Continuing operations and Discontinued operations primarily represents the noncontrolling interests' share of all the Opportunity Funds variances discussed above.

CORE PORTFOLIO PERFORMANCE

The following discussion of net property operating income ("NOI"), same-store NOI and rent spreads on new and renewal leases includes both consolidated and our pro-rata share of unconsolidated properties within our Core Portfolio. In contrast, our Opportunity Funds invest primarily in properties that typically require significant leasing and redevelopment. Given that our Opportunity Funds are finite-life investment vehicles, these assets are typically sold following stabilization. Accordingly, we believe these measures are not meaningful for our Opportunity Fund investments.

NOI represents property-related revenues less property expenses. We consider NOI, same-store NOI and rent spreads on new and renewal leases for our Core Portfolio to be appropriate supplemental disclosures of portfolio operating performance due to their widespread acceptance and use within the REIT investor and analyst communities. NOI, same-store NOI and rent spreads on new and renewal leases are presented to assist investors in analyzing our property performance, however, our method of calculating these may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

NOI for our Core Portfolio is determined as follows:
Reconciliation of Consolidated Operating Income to NOI - Core Portfolio
(dollars in millions)
 
Three Months Ended March 31,
 
 
2013
 
2012
Consolidated Operating Income
 
$
18.7

 
$
7.2

Add back:
 
 
 
 
  General and administrative
 
5.6

 
5.9

  Depreciation and amortization
 
10.6

 
7.2

Less:
 
 
 
 
  Management fee income
 

 
(0.4
)
  Interest income
 
(2.9
)
 
(2.0
)
  Straight-line rent and other adjustments
 
(0.7
)
 
0.4