AKR 10-Q 09.30.2013



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 September 30, 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 November 5, 2013 there were 55,549,007 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,
2013
 
December 31,
2012
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
318,539

 
$
276,109

Buildings and improvements
1,023,184

 
773,058

Construction in progress
7,256

 
2,364

 
1,348,979

 
1,051,531

Less: accumulated depreciation
218,921

 
167,689

Net operating real estate
1,130,058

 
883,842

Real estate under development
334,445

 
246,602

Notes receivable, net
95,352

 
129,278

Investments in and advances to unconsolidated affiliates
199,113

 
221,904

Cash and cash equivalents
88,421

 
91,813

Cash in escrow
19,971

 
15,846

Restricted cash
134,392

 

Rents receivable, net
23,731

 
17,320

Deferred charges, net
29,941

 
18,343

Acquired lease intangibles, net
32,583

 
28,576

Prepaid expenses and other assets
44,858

 
28,252

Assets of discontinued operations
216,503

 
226,664

Total assets
$
2,349,368

 
$
1,908,440

 
 
 
 
LIABILITIES
 

 
 

Mortgage and other notes payable
$
1,004,175

 
$
603,043

Convertible notes payable
380

 
930

Distributions in excess of income from, and investments in, unconsolidated affiliates
12,426

 
22,707

Accounts payable and accrued expenses
36,694

 
27,437

Dividends and distributions payable
11,984

 
9,674

Acquired lease intangibles, net
22,204

 
14,115

Other liabilities
16,318

 
14,207

Liabilities of discontinued operations
132,031

 
146,071

Total liabilities
1,236,212

 
838,184

 
 
 
 
EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 55,448,856 and 52,482,598 shares, respectively
55

 
52

Additional paid-in capital
660,160

 
581,925

Accumulated other comprehensive loss
(746
)
 
(4,307
)
Retained earnings
38,294

 
45,127

Total shareholders’ equity
697,763

 
622,797

Noncontrolling interests
415,393

 
447,459

Total equity
1,113,156

 
1,070,256

Total liabilities and equity
$
2,349,368

 
$
1,908,440

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)
2013
 
2012
 
2013
 
2012
Revenues
 
 
 
 
 
 
 
Rental income
$
29,913

 
$
21,708

 
$
88,067

 
$
59,208

Interest income
2,969

 
1,921

 
9,265

 
6,127

Expense reimbursements
7,279

 
4,567

 
20,800

 
13,770

Other
157

 
635

 
3,759

 
1,928

Total revenues
40,318

 
28,831

 
121,891

 
81,033

Operating Expenses
 

 
 

 
 

 
 
Property operating
5,095

 
3,874

 
13,387

 
10,112

Other operating
842

 
613

 
2,743

 
2,929

Real estate taxes
5,795

 
4,353

 
15,739

 
11,973

General and administrative
5,335

 
5,517

 
17,261

 
16,636

Depreciation and amortization
10,450

 
7,376

 
29,278

 
20,671

Total operating expenses
27,517

 
21,733

 
78,408

 
62,321

Operating income
12,801

 
7,098

 
43,483

 
18,712

Equity in earnings (losses) of unconsolidated affiliates
4,209

 
(2,538
)
 
7,274

 
1,997

Impairment of asset

 

 
(1,500
)
 

Interest and other finance expense
(10,517
)
 
(6,085
)
 
(29,562
)
 
(16,547
)
Income (loss) from continuing operations before income taxes
6,493

 
(1,525
)
 
19,695

 
4,162

Income tax (provision) benefit
(186
)
 
104

 
(53
)
 
(1,125
)
Income (loss) from continuing operations
6,307

 
(1,421
)
 
19,642

 
3,037

Discontinued Operations
 
 
 
 
 
 
 
Operating income from discontinued operations
2,835

 
2,159

 
6,100

 
9,030

Gain on sale of properties

 
5,917

 
4,191

 
8,585

Income from discontinued operations
2,835

 
8,076

 
10,291

 
17,615

Net income
9,142

 
6,655

 
29,933

 
20,652

Noncontrolling interests
 

 
 

 
 

 
 
Continuing operations
2,551

 
7,223

 
6,391

 
11,775

Discontinued operations
(2,208
)
 
(6,297
)
 
(8,459
)
 
(13,998
)
Net loss (income) attributable to noncontrolling interests
343

 
926

 
(2,068
)
 
(2,223
)
Net income attributable to Common Shareholders
$
9,485

 
$
7,581

 
$
27,865

 
$
18,429

 
 
 
 
 
 
 
 
Basic Earnings per Share
 

 
 

 
 

 
 
Income from continuing operations
$
0.16

 
$
0.12

 
$
0.47

 
$
0.33

Income from discontinued operations
0.01

 
0.04

 
0.03

 
0.08

Basic earnings per share
$
0.17

 
$
0.16

 
$
0.50

 
$
0.41

 
 
 
 
 
 
 
 
Diluted Earnings per Share
 

 
 

 
 

 
 
Income from continuing operations
$
0.16

 
$
0.12

 
$
0.47

 
$
0.33

Income from discontinued operations
0.01

 
0.04

 
0.03

 
0.08

Diluted earnings per share
$
0.17

 
$
0.16

 
$
0.50

 
$
0.41

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,
 
 
2013
 
2012
 
2013
 
2012
(dollars in thousands)
 
 
 
 
 
 
 
 
Net income
 
$
9,142

 
$
6,655

 
$
29,933

 
$
20,652

Other comprehensive (loss) income
 

 

 
 
 
 
Unrealized (loss) income on valuation of swap agreements
 
(857
)
 
(1,315
)
 
2,247

 
(3,870
)
Reclassification of realized interest on swap agreements
 
795

 
681

 
2,132

 
1,964

Other comprehensive (loss) income
 
(62
)
 
(634
)
 
4,379

 
(1,906
)
Comprehensive income
 
9,080

 
6,021

 
34,312

 
18,746

Comprehensive loss (income) attributable to noncontrolling interests
 
416

 
1,282

 
(2,886
)
 
(1,167
)
Comprehensive income attributable to Common Shareholders
 
$
9,496

 
$
7,303

 
$
31,426

 
$
17,579

See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013

(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
92

 

 
1,548

 

 

 
1,548

 
(1,548
)
 

Issuance of Common Shares, net of issuance costs
2,822

 
3

 
75,762

 

 

 
75,765

 

 
75,765

Dividends declared ($0.63 per Common Share)

 

 

 

 
(34,698
)
 
(34,698
)
 
(1,014
)
 
(35,712
)
Employee and trustee stock compensation, net
53

 

 
925

 

 

 
925

 
3,667

 
4,592

Consolidation of previously unconsolidated investment

 

 

 

 

 

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

 

 

 

 

 

 
(29,623
)
 
(29,623
)
Noncontrolling interest contributions

 

 

 

 

 

 
27,515

 
27,515

 
55,449

 
55

 
660,160

 
(4,307
)
 
10,429

 
666,337

 
412,507

 
1,078,844

Comprehensive income:
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
27,865

 
27,865

 
2,068

 
29,933

Unrealized income on valuation of swap agreements

 

 

 
2,173

 

 
2,173

 
74

 
2,247

Reclassification of realized interest on swap agreements

 

 

 
1,388

 

 
1,388

 
744

 
2,132

Total comprehensive income

 

 

 
3,561

 
27,865

 
31,426

 
2,886

 
34,312

Balance at September 30, 2013
55,449

 
$
55

 
$
660,160

 
$
(746
)
 
$
38,294

 
$
697,763

 
$
415,393

 
$
1,113,156





4




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Nine Months Ended
 
September 30,
(dollars in thousands)
2013
 
2012
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
29,933

 
$
20,652

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

 
 
Depreciation and amortization
32,054

 
29,653

Amortization of financing costs
2,801

 
2,395

Gain on sale of property
(4,191
)
 
(8,585
)
Impairment of asset
1,500

 

Share-based compensation expense
4,590

 
3,056

Equity in earnings of unconsolidated affiliates
(7,274
)
 
(1,997
)
Distributions of operating income from unconsolidated affiliates
4,644

 
4,087

Other, net
(3,598
)
 
336

Changes in assets and liabilities
 

 
 
Cash in escrow
(3,378
)
 
1,939

Rents receivable, net
(4,315
)
 
(5,639
)
Prepaid expenses and other assets
(19,894
)
 
(7,625
)
Accounts payable and accrued expenses
5,845

 
(3,013
)
Other liabilities
2,904

 
739

Net cash provided by operating activities
41,621

 
35,998

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(140,075
)
 
(137,208
)
Redevelopment and property improvement costs
(79,549
)

(55,817
)
Deferred leasing costs
(4,226
)
 
(3,397
)
Investments in and advances to unconsolidated affiliates
(54,207
)
 
(19,356
)
Return of capital from unconsolidated affiliates
88,403

 
13,497

Consolidation of previously unconsolidated investment
1,864

 

Proceeds from notes receivable
15,779

 
2,005

Issuance of notes receivable

 
(34,500
)
Proceeds from sale of properties, net
11,815

 
44,703

Net cash used in investing activities
(160,196
)
 
(190,073
)

5




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

 
Nine Months Ended
 
September 30,
(dollars in thousands)
2013
 
2012
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage notes
(140,037
)
 
(189,747
)
Proceeds received from mortgage notes
360,943

 
214,276

Loan proceeds held as restricted cash
(134,392
)
 

Purchase of convertible notes payable
(550
)
 

Deferred financing and other costs
(11,018
)
 
(6,684
)
Capital contributions from noncontrolling interests
27,515

 
122,309

Distributions to noncontrolling interests
(30,572
)
 
(63,463
)
Dividends paid to Common Shareholders
(32,471
)
 
(23,671
)
Proceeds from issuance of Common Shares, net of issuance costs of $1,430 and $2,000, respectively
75,765

 
96,540

Net cash provided by financing activities
115,183

 
149,560

Decrease in cash and cash equivalents
(3,392
)
 
(4,515
)
Cash and cash equivalents, beginning of period
91,813

 
89,812

Cash and cash equivalents, end of period
$
88,421

 
$
85,297

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $6,429 and $4,515, respectively
$
29,758

 
$
24,528

Cash paid for income taxes
$
281

 
$
941

 
 
 
 
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
$
18,500

 
$
14,000

 
 
 
 
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


6

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)



1.
ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

Acadia Realty Trust (the "Trust") and subsidiaries (collectively, the "Company"), is a fully-integrated equity real estate investment trust ("REIT") focused on the ownership, 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, 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 September 30, 2013, the Company has ownership interests in 74 properties within its core portfolio, which consist of those properties either wholly 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 32 properties within its four 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 106 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. Fund I and Fund II also include investments in operating companies through Acadia Mervyn Investors I, LLC ("Mervyns I"), Acadia Mervyn Investors II, LLC ("Mervyns II") and, in certain instances, directly through 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 the 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 September 30, 2013 (2)
Equity Interest Held By Operating Partnership
Preferred Return
Capital Returned as of September 30, 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

 
353.5

19.90
%
6
%
196.8

Fund IV
5/2012
23.12
%
540.6

 
74.0

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.

7

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 and nine months ended September 30, 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 periods. 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. During the quarter ended June 30, 2013, the Company determined that the value of the Walnut Hill Plaza, a Core Portfolio property, was impaired as a result of a deterioration in the local economic environment. Accordingly, the Company recorded an impairment charge of $1.5 million, which is included in the statement of income for the nine months ended September 30, 2013. This property is collateral for $23.1 million of non-recourse mortgage debt which matures October 1, 2016. Management does not believe that the values of any of its other properties are impaired as of September 30, 2013.

Recent Accounting Pronouncements

During July 2013, the FASB issued Accounting Standards Update ("ASU") No. 2013-11, "Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists." ASU 2013-11 requires an entity to present an unrecognized tax benefit relating to a net operating loss carryforward, a similar tax loss or a tax credit carryforward as a reduction to a deferred tax asset except in certain situations. To the extent the net operating loss carry forward, similar tax loss or tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of the tax position or the tax law of the applicable jurisdiction does not require the entity to use and the entity does not intend to use the deferred tax asset for such purpose, the unrecognized tax benefit should be presented as a liability. ASU No. 2013-11 is effective for fiscal years, and interim periods within those years, beginning on or after December 15, 2013. The adoption of ASU No. 2013-11 is not expected to have a material impact on the Company's financial condition or results of operations.

8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements (continued)

During February 2013, the FASB issued 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.

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, 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 and nine months ended September 30, 2013 and September 30, 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:

9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


2.
EARNINGS PER COMMON SHARE (continued)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2013
 
2012
 
2013
 
2012
Numerator
 
 
 
 
 
 
 
Income from continuing operations
$
8,858

 
$
5,802

 
$
26,033

 
$
14,812

Less: net income attributable to participating securities
156

 
118

 
460

 
298

Income from continuing operations, net of income attributable to participating securities
8,702

 
5,684

 
25,573

 
14,514

Numerator for basic and diluted earnings per Common Share
$
8,702

 
$
5,684

 
$
25,573

 
$
14,514

 
 
 
 
 
 
 
 
Denominator
 

 
 

 
 
 
 
Weighted average shares for basic earnings per share
55,460

 
46,338

 
54,686

 
44,447

Effect of dilutive securities:
 

 
 

 
 
 
 

Employee Restricted Share Units and share options
358

 
474

 
406

 
437

Denominator for diluted earnings per share
55,818

 
46,812

 
55,092

 
44,884

 
 
 
 
 
 
 
 
Basic earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.16

 
$
0.12

 
$
0.47

 
$
0.33

Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.16

 
$
0.12

 
$
0.47

 
$
0.33


3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During April 2013, the Company completed the total allotted sales pursuant to an at-the-market (“ATM”) equity 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.

During April 2013, 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. Through September 30, 2013, the Company issued approximately 0.7 million Common Shares under this new ATM which generated gross proceeds of approximately $20.9 million and net proceeds of approximately $20.5 million.

For the nine months ended September 30, 2013, the Company issued a total of 2.8 million Common Shares under the ATM programs, which generated gross proceeds of $77.1 million and net proceeds of $75.8 million.

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’ 224,134 and 284,097 Common OP Units at September 30, 2013 and December 31, 2012, respectively; (ii) 188 Series A Preferred OP Units at September 30, 2013 and December 31, 2012; and (iii) 368,424 and 168,357 LTIP Units at September 30, 2013 and December 31, 2012, respectively.


10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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 building underlying a multi-story office and residential condominium in Chicago, Illinois for $86.6 million.

During June 2013, the Company acquired 8-12 East Walton Street, an 8,244 square foot retail property in Chicago, Illinois for $22.5 million.

During July 2013, the Company acquired 3200-3204 M Street, a 7,000 square foot retail property in Washington D.C. for $11.8 million.

The Company expensed $1.6 million of acquisition costs for the nine months ended September 30, 2013 related to the Core Portfolio.

2013 Fund III Acquisitions

Fund III had previously acquired a $23.0 million note receivable at a discounted price of $18.5 million during April 2012. The note receivable, which was scheduled to mature in May 2012, 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. As a result, Fund III consolidates its investment in Nostrand Place.

2013 Fund IV Acquisitions

During June 2013, Fund IV acquired a 98% initial interest in 2819 Kennedy Boulevard in a joint venture with an unaffiliated partner, which acquired a 53,680 square foot retail property in North Bergen, New Jersey for $9.0 million.

During June 2013, Fund IV acquired a 99% initial interest in Promenade at Manassas in a joint venture with an unaffiliated partner, which acquired a 265,442 square foot shopping center in Manassas, Virginia for $38.0 million.

During August 2013, Fund IV acquired a 50% initial interest in Paramus Plaza, in a joint venture with an unaffiliated partner, which acquired a 152,118 square foot retail property in Paramus, New Jersey for $18.9 million.

The Company expensed $1.8 million of acquisition costs for the nine months ended September 30, 2013 related to Fund IV.

Purchase Price Allocations

The above acquisitions have been accounted for as business combinations. The purchase prices were allocated to the acquired assets and liabilities based on their estimated fair values at the dates of acquisition. The preliminary measurements of 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.


11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Acquisitions (continued)

The following table summarizes the Company's preliminary allocations of the purchase prices of assets acquired and liabilities assumed during 2013 which have yet to be finalized:

(dollars in thousands)
Preliminary Purchase Price Allocations
Land
$
47,242

Buildings and improvements
159,045

Total consideration
$
206,287


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 as adjusted as of September 30, 2013:

(dollars in thousands)
Purchase Price Allocations as Originally Reported
Adjustments
Finalized Purchase Price Allocations
Land
$
38,028

$
2,819

$
40,847

Buildings and improvements
80,997

(1,971
)
79,026

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

11,069

11,069

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

(9,672
)
(9,672
)
Below market debt assumed (in Mortgage and other notes payable)

(2,245
)
(2,245
)
Total consideration
$
119,025

$

$
119,025



Dispositions

During May 2013, Fund II sold the storage facility located at its Pelham Manor property for $11.9 million. This sale resulted in a $4.2 million gain.


12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Discontinued Operations

The Company reports properties held for sale and properties sold during the periods presented 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 September 30, 2013, three of the properties within the Opportunity Funds and one property within the Core Portfolio were held for sale.

The combined assets and liabilities and the results of operations of the properties classified as discontinued operations, in each period presented, are summarized as follows:

(dollars in thousands)
 
 

 
 
BALANCE SHEET
 
September 30, 2013
 
December 31, 2012
ASSETS
 
 

 
 
Net real estate
 
$
187,954

 
$
197,669

Cash in escrow
 
3,450

 
3,088

Rents receivable, net
 
11,909

 
12,257

Deferred charges, net of amortization
 
8,435

 
9,046

Acquired lease intangibles, net
 
3,196

 
3,399

Prepaid expenses and other assets, net
 
1,559

 
1,205

Total assets of discontinued operations
 
$
216,503

 
$
226,664

LIABILITIES
 
 

 
 
Mortgage notes payable
 
$
121,426

 
$
133,213

Accounts payable and accrued expenses
 
3,088

 
4,997

Other liabilities
 
7,517

 
7,861

Total liabilities of discontinued operations
 
$
132,031

 
$
146,071


 
Three Months Ended
 
Nine Months Ended
(dollars in thousands) 
September 30,
 
September 30,
STATEMENTS OF INCOME
2013
 
2012
 
2013
 
2012
Total revenues
$
6,439

 
$
15,466

 
$
20,176

 
$
44,623

Total expenses
3,604

 
13,307

 
14,076

 
35,593

Operating income
2,835

 
2,159

 
6,100

 
9,030

Gain on sale of property

 
5,917

 
4,191

 
8,585

Income from discontinued operations
2,835

 
8,076

 
10,291

 
17,615

Income from discontinued operations attributable to noncontrolling interests
(2,208
)
 
(6,297
)
 
(8,459
)
 
(13,998
)
Income from discontinued operations attributable to Common Shareholders
$
627

 
$
1,779

 
$
1,832

 
$
3,617





13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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 September 30, 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.

The following table summarizes activity related to the RCP Venture investments from inception through September 30, 2013:
(dollars in thousands)
 
Investment Group Share
 
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

 
5,334

 
1,252

 
1,193

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

 
2,460

 
222

 
492

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

 
2,639

 
533

 
528

Rex Stores
2007
2,701

 
1,956

 
535

 
392

 
 
$
63,214

 
$
144,813

 
$
12,070

 
$
31,146


Other Opportunity Fund Investments

During the third quarter of 2013, Fund II, through a joint venture ("Albee Tower I Owners") with an unaffiliated entity, executed an agreement to acquire the development rights for the residential components of Fund II's City Point project. Fund II contributed $1.1 million of cash and $6.8 million of prepaid ground rent and previously incurred construction costs into this joint venture.

The unaffiliated partners for Fund II's investment in Albee Tower I Owners, Fund III's investments in Lincoln Road, Parkway Crossing, Arundel Plaza and the White City Shopping Center as well as Fund IV's investments in Lincoln Road, 1701 Belmont Avenue, 2819 Kennedy Boulevard and Promenade at Manassas maintain control over these entities. The Company accounts for these investments under 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.


14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Self-Storage Management, a Fund III investment, was determined to be a variable interest entity. Management has evaluated the applicability of ASC Topic 810 to this joint venture and determined that the Company is not the primary beneficiary and, therefore, consolidation of this venture is not required. The Company accounts for this investment using the equity method of accounting.

Summary of Investments in Unconsolidated Affiliates

The following Combined and Condensed Balance Sheets and Statements of Income, summarize the financial information of the Company’s investments in unconsolidated affiliates:

(dollars in thousands)
September 30,
2013
 
December 31,
2012
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
365,399

 
$
441,611

Real estate under development
2,224

 

Investment in unconsolidated affiliates
63,745

 
93,923

Other assets
40,908

 
39,035

Total assets
$
472,276

 
$
574,569

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
241,907

 
$
326,296

Other liabilities
20,718

 
24,267

Partners’ equity
209,651

 
224,006

Total liabilities and partners’ equity
$
472,276

 
$
574,569

Company’s investment in and advances to unconsolidated affiliates
$
199,113

 
$
221,904

Company's share of distributions in excess of income from, and investments in, unconsolidated affiliates
$
(12,426
)
 
$
(22,707
)


 
Three Months Ended
 
Nine Months Ended
(dollars in thousands)
September 30,
2013
 
September 30,
2012
 
September 30,
2013
 
September 30,
2012
Combined and Condensed Statements of Income
 
 
 
 
 
 
 
Total revenues
$
13,731

 
$
11,903

 
$
35,577

 
$
36,121

Operating and other expenses
(4,139
)
 
(4,977
)
 
(13,117
)
 
(13,793
)
Interest and other finance expense
(2,359
)
 
(4,603
)
 
(6,446
)
 
(13,854
)
Equity in earnings of unconsolidated affiliates
1,284

 
1,398

 
7,154

 
6,244

Depreciation and amortization
(3,200
)
 
(2,573
)
 
(7,888
)
 
(7,216
)
Gain on sale of property

 

 

 
3,402

Net income
$
5,317

 
$
1,148

 
$
15,280

 
$
10,904

 
 
 
 
 
 
 
 
Company’s share of net income (losses)
$
4,307

 
$
(2,440
)
 
$
7,568

 
$
2,291

Amortization of excess investment
(98
)
 
(98
)
 
(294
)
 
(294
)
Company’s equity in earnings (losses) of unconsolidated affiliates
$
4,209

 
$
(2,538
)
 
$
7,274

 
$
1,997




15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
NOTES RECEIVABLE

As of September 30, 2013, the Company’s notes receivable, net, aggregated $95.4 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:
(dollars in thousands)
 
 
 
 
Note description
Effective interest rate (1)
First Priority liens
Net Carrying Amounts of Notes Receivable as of September 30, 2013
 
Net Carrying Amounts of Notes Receivable as of December 31, 2012
Maturity date
Extension Options
First Mortgage Loan
12.0%
$

$
12,204

 
$
12,333

12/1/2013

First Mortgage Loan
6.0%


 
10,250

12/31/2013

First Mortgage Loan
8.0%

8,000

 
8,000

12/31/2013

Mezzanine Loan 2
10.0%
89,566

9,089

 
9,089

12/31/2013

First Mortgage Loan
11.0%

25,000

 
25,000

1/1/2014
1 x 6 months

Zero Coupon Loan 3
24.0%
166,200

4,314

 
3,961

1/3/2016

Mezzanine Loan
15.0%

30,879

 
30,879

11/9/2020

Mezzanine Loan 4
15.0%
16,668

3,834

 
3,834

Upon Capital Event

First Mortgage Loan
5.3%


 
18,500

Demand

Construction Loan
20.5%


 
5,400

12/31/2012

Individually less than 3% 5
11.6% to 17.5%
37,623

2,032

 
2,032

12/31/13 to Capital Event

Total
 
 
$
95,352

 
$
129,278

 


Notes:

(1) The effective interest rate includes origination and exit fees.
(2) Comprised of three cross-collateralized loans from one borrower, which are non-performing
(3) The principal balance for this accrual only loan is increased by the interest accrued
(4) Non-performing loan
(5) Consists of three loans two of which are non-performing, with an aggregate face value of $5.7 million, of which $3.9 million has been reserved

During January 2013, Fund III received a payment of $2.5 million, representing the full principal and interest 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 $13.0 million of its first mortgage loan of $18.5 million and contributed the remaining unliquidated balance to a joint venture.

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

During September 2013, the Company received a payment of $10.3 million, representing full payment of principal and accrued interest on a first mortgage loan that was scheduled to mature on December 31, 2013.

The Company monitors the credit quality of its notes receivable on an ongoing basis and considers indicators of credit quality such as loan payment activity, the estimated fair value of the underlying collateral, the seniority of the Company's loan in relation to other debt secured by the collateral and the prospects of the borrower. As of September 30, 2013, the Company held six non-performing notes aggregating $18.6 million for which payment was delinquent. Based primarily on the indicators noted above, the Company has established a reserve of $3.9 million as of September 30, 2013 related to these notes. The following table reconciles the allowance for notes receivable from December 31, 2012 to September 30, 2013:


16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
NOTES RECEIVABLE (continued)
(dollars in thousands)
Allowance for Notes Receivable
Balance at December 31, 2012
$
3,681

Additional reserves
238

Recoveries

Charge-offs and reclassifications

Balance at September 30, 2013
$
3,919


7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of September 30, 2013, the Company's derivative financial instruments consisted of 11 interest rate swaps with an aggregate notional value of $180.5 million, which effectively fix LIBOR at rates ranging from 0.52% to 3.77% and mature between May 2015 and April 2023. The Company also has four derivative financial instruments with a notional value of $141.0 million which cap LIBOR at rates ranging from 3.0% to 4.3% and mature between July 2015 and April 2018. The fair value of these derivative instruments, included in other liabilities in the Consolidated Balance Sheets, totaled $2.5 million and $4.4 million at September 30, 2013 and December 31, 2012, respectively. The fair value of these derivative instruments, included in prepaid expenses and other assets in the Consolidated Balance Sheets, totaled $1.7 million at September 30, 2013. 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, 2013 and December 31, 2012, unrealized losses totaling $0.7 million and $4.3 million, respectively, were reflected in accumulated other comprehensive loss on the consolidated balance sheets.

As of September 30, 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 nine months ended September 30, 2013:

During January 2013, 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 a maximum of LIBOR plus 220 basis points (>55%) depending on the level of leverage. There is also an unused credit facility 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. During the nine months ended September 30, 2013, the Company borrowed $45.0 million on this facility, all of which has been repaid. As of September 30, 2013, there was no balance outstanding under this credit facility.

During January 2013, 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 2013, 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 2013, the Company refinanced a $28.9 million loan collateralized by a property, bearing interest at LIBOR plus 600 basis points with a new $29.5 million loan. The new loan bears interest at LIBOR plus 250 basis points and matures on April 1, 2018.


17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.
MORTGAGE AND OTHER NOTES PAYABLE (continued)

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

During June 2013, the Company closed on a $52.5 million loan collateralized by a property. The loan bears interest at LIBOR plus 165 basis points, matures on June 28, 2018, and has a five-year extension option. As of September 30, 2013, no proceeds have been funded under this loan.

During June 2013, the Company closed on a $4.6 million loan collateralized by a property. The loan bears interest at LIBOR plus 195 basis points, matures on June 1, 2014, and has a one-year extension option.

During August 2013, the Company completed the modification of a loan collateralized by a property. The previous outstanding balance on the loan was $73.0 million at the time of the modification and included two tranches which bore interest at a blended rate of LIBOR plus 203 basis points. The modified loan increased the principal balance to $85.0 million and adjusted the interest rate to LIBOR plus 165 points. The maturity date of October 26, 2015 remained the same.

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." Upon such approval, the USCIS has released funds from time to time into a restricted cash account. As of September 30, 2013, $197.0 million of funds have been released into this restricted cash account and $62.6 million have been drawn to fund construction activities, with $134.4 million remaining in the restricted cash account.


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 in 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. During the nine months ended September 30, 2013, the Company re-purchased $0.6 million of Convertible Notes. Through September 30, 2013, the Company had re-purchased $114.6 million in principal amount of its Convertible Notes, and the remaining outstanding balance is $0.4 million.

As of December 31, 2011, all loan costs associated with the issuance had 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 September 30, 2013 and there are no derivative transactions that were entered into in connection with the issuance of the Convertible Notes.



18

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

 
$
1,684

 
$

Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
2,497

 
$


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).

During the quarter ended June 30, 2013, the Company determined that the value of the Walnut Hill Plaza was impaired and recorded an impairment loss of $1.5 million (Note 1). The Company estimated the fair value by using projected future cash flows, which it determined were not sufficient to recover the property's net book value. The inputs used to determine this fair value are classified within Level 3 of the hierarchy.

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:
(dollars in thousands)
September 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Mortgage, Convertible Notes and Other Notes Payable
$
1,004,555

 
$
1,027,131

 
$
603,973

 
$
611,280


11.
RELATED PARTY TRANSACTIONS

The Company earned property management fees, construction, legal and leasing fees from its investments in unconsolidated affiliates totaling $0.02 million and $0.2 million for the three months ended September 30, 2013 and 2012, respectively, and $0.06 million and $0.6 million for the nine months ended September 30, 2013 and 2012, respectively.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for the three months ended September 30, 2013 and 2012, respectively and $75,000 for the nine months ended September 30, 2013 and 2012, respectively.




19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 and nine months ended September 30, 2013 and 2012 and does not include unconsolidated affiliates:


Three Months Ended September 30, 2013
(dollars in thousands)
Core Portfolio
Opportunity Funds
Notes Receivable
Total
Revenues
$
28,115

$
9,234

$
2,969

$
40,318

Property and other operating expenses and real estate taxes
7,723

4,009


11,732

General and administrative
4,954

381


5,335

Income before depreciation and amortization and interest and other finance expense
$
15,438

$
4,844

$
2,969

$
23,251

Depreciation and amortization
$
7,890

$
2,560

$

$
10,450

Interest and other finance expense
$
6,683

$
3,834

$

$
10,517

Real estate at cost
$
998,711

$
684,713

$

$
1,683,424

Total assets
$
993,472

$
1,260,544

$
95,352

$
2,349,368

Expenditures for redevelopment and improvements
$
5,246

$
30,736

$

$
35,982

Acquisition of real estate
$
11,800

$
19,175

$

$
30,975

 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders

Net property income before depreciation and amortization and interest and other finance expense
$
23,251

Depreciation and amortization
(10,450
)
Equity in earnings of unconsolidated affiliates
4,209

Interest and other finance expense
(10,517
)
Income tax provision
(186
)
Income from discontinued operations
2,835

Net income
9,142

Net loss attributable to noncontrolling interests
343

Net income attributable to Common Shareholders
$
9,485


20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)

Three Months Ended September 30, 2012
(dollars in thousands)
Core Portfolio
Opportunity Funds
Notes Receivable
Total
Revenues
$
17,794

$
9,116

$
1,921

$
28,831

Property and other operating expenses and real estate taxes
5,687

3,153


8,840

General and administrative
4,948

569


5,517

Income before depreciation and amortization and interest and other finance expense
$
7,159

$
5,394

$
1,921

$
14,474

Depreciation and amortization
$
4,379

$
2,997

$

$
7,376

Interest and other finance expense
$
4,184

$
1,901

$

$
6,085

Real estate at cost
$
608,971

$
554,552

$

$
1,163,523

Total assets
$
605,694

$
1,183,430

$
80,766

$
1,869,890

Expenditures for redevelopment and improvements
$
(915
)
$
15,024

$

$
14,109

Acquisition of real estate
$
11,492

$
14,601

$

$
26,093

 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 
Net property income before depreciation and amortization and interest and other finance expense
$
14,474

Depreciation and amortization
(7,376
)
Equity in losses of unconsolidated affiliates
(2,538
)
Interest and other finance expense
(6,085
)
Income tax benefit
104

Income from discontinued operations
2,159

Gain on sale of properties
5,917

Net income
6,655

Net loss attributable to noncontrolling interests
926

Net income attributable to Common Shareholders
$
7,581



21

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)

Nine Months Ended September 30, 2013
(dollars in thousands)
Core Portfolio
Opportunity Funds
Notes Receivable
Total
Revenues
$
82,252

$
30,374

$
9,265

$
121,891

Property and other operating expenses and real estate taxes
21,098

10,771


31,869

General and administrative
16,042

1,219


17,261

Income before depreciation and amortization and interest and other finance expense
$
45,112

$
18,384

$
9,265

$
72,761

Depreciation and amortization
$
21,187

$
8,091

$

$
29,278

Interest and other finance expense
$
19,169

$
10,393

$

$
29,562

Real estate at cost
$
998,711

$
684,713

$

$
1,683,424

Total assets
$
993,472

$
1,260,544

$
95,352

$
2,349,368

Expenditures for redevelopment and improvements
$
8,957

$
70,592

$

$
79,549

Acquisition of real estate
$
120,900

$
19,175

$

$
140,075

 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 

Net property income before depreciation and amortization and interest and other finance expense
$
72,761

Depreciation and amortization
(29,278
)
Equity in earnings of unconsolidated affiliates
7,274

Interest and other finance expense
(29,562
)
Income tax provision
(53
)
Impairment of asset
(1,500
)
Income from discontinued operations
6,100

Gain on sale of properties
4,191

Net income
29,933

Net income attributable to noncontrolling interests
(2,068
)
Net income attributable to Common Shareholders
$
27,865



22

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.
SEGMENT REPORTING (continued)

Nine Months Ended September 30, 2012
(dollars in thousands)
Core Portfolio
Opportunity Funds
Notes Receivable
Total
Revenues
$
50,166

$
24,740

$
6,127

$
81,033

Property and other operating expenses and real estate taxes
14,960

10,054


25,014

General and administrative
15,200

1,436


16,636

Income before depreciation and amortization and interest and other finance expense
$
20,006

$
13,250

$
6,127

$
39,383

Depreciation and amortization
$
12,016

$
8,655

$

$
20,671

Interest and other finance expense
$
11,352

$
5,195

$

$
16,547

Real estate at cost
$
608,971

$
554,552

$

$
1,163,523

Total assets
$
605,694

$
1,183,430

$
80,766

$
1,869,890

Expenditures for redevelopment and improvements
$
13,333

$
42,484

$

$
55,817

Acquisition of real estate
$
78,370

$
58,838

$

$
137,208

 
 
 
 
 
Reconciliation to net income and net income attributable to Common Shareholders
 

Net property income before depreciation and amortization and interest and other finance expense
$
39,383

Depreciation and amortization
(20,671
)
Equity in earnings of unconsolidated affiliates
1,997

Interest and other finance expense
(16,547
)
Income tax provision
(1,125
)
Income from discontinued operations
9,030

Gain on sale of properties
8,585

Net income
20,652

Net income attributable to noncontrolling interests
(2,223
)
Net income attributable to Common Shareholders
$
18,429




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 their respective grant dates was $7.9 million. Compensation expense of $0.4 million and $1.2 million has been recognized in the accompanying consolidated statements of income related to these awards for the three and nine months ended September 30, 2013, respectively.

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 September 30, 2013 and 2012, respectively and $3.8 million and $2.7 million for the nine months ended September 30, 2013 and 2012, respectively.


23

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. The Company has awarded all of the units under the Program and these units were determined to have no value at issuance or as of September 30, 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 October 2013, Fund IV completed the acquisition of 1151 Third Avenue, located in Manhattan, New York, for a purchase price of $18.0 million.

During October 2013, Fund IV completed the acquisition of Lake Montclair, located in Dumfries, Virginia, for a purchase price of $19.3 million.

On November 4, 2013, the Board of Trustees declared a cash dividend for the quarter ended December 31, 2013 of $0.23 per Common Share, to be paid on January 15, 2014 to holders of record as of December 31, 2013.

24


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 September 30, 2013 and 2012 and for each of the three and nine 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 industry asset class.

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 September 30, 2013, we operated 106 properties, which we own or have an ownership interest in, within our Core Portfolio and 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 we either 100% own, or partially own in joint ventures, through the Operating Partnership, or subsidiaries thereof, not including those properties owned through our Opportunity

25


Funds. There are 74 properties in our Core Portfolio totaling 4.9 million square feet. As of September 30, 2013, the Core Portfolio physical occupancy was 93.7% and leased occupancy, which includes executed leases for which rent has not yet commenced, was 95.7%.

Opportunity Funds

Fund I has three properties totaling 0.1 million square feet.
Fund II has four properties totaling 0.3 million square feet, two of which are operating, one of which is under construction, and one of which is in the design phase.
Fund III has 1