AKR 10-Q 03.31.2015



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, 2015

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 1, 2015 there were 68,785,193 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,
2015
 
December 31,
2014
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
498,321

 
$
424,661

Buildings and improvements
1,510,444

 
1,329,080

Construction in progress
10,861

 
7,464

 
2,019,626

 
1,761,205

Less: accumulated depreciation
270,372

 
256,015

Net operating real estate
1,749,254

 
1,505,190

Real estate under development
484,676

 
447,390

Notes receivable and preferred equity investments, net
98,560

 
102,286

Investments in and advances to unconsolidated affiliates
184,500

 
184,352

Cash and cash equivalents
119,555

 
217,580

Cash in escrow
59,508

 
20,358

Restricted cash
5,401

 
30,604

Rents receivable, net
38,380

 
36,962

Deferred charges, net
32,042

 
30,679

Acquired lease intangibles, net
45,660

 
44,618

Prepaid expenses and other assets
53,330

 
56,508

Assets of properties held for sale

 
56,073

Total assets
$
2,870,866

 
$
2,732,600

 
 
 
 
LIABILITIES
 

 
 

Mortgage and other notes payable
$
1,304,739

 
$
1,130,481

Distributions in excess of income from, and investments in, unconsolidated affiliates
12,361

 
12,564

Accounts payable and accrued expenses
36,454

 
34,026

Dividends and distributions payable
17,675

 
39,339

Acquired lease intangibles, net
30,713

 
29,585

Other liabilities
27,196

 
25,148

Liabilities of properties held for sale

 
25,500

Total liabilities
1,429,138

 
1,296,643

 
 
 
 
EQUITY
 

 
 

Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 68,731,681 and 68,109,287 shares, respectively
69

 
68

Additional paid-in capital
1,048,457

 
1,027,861

Accumulated other comprehensive loss
(6,848
)
 
(4,005
)
Retained earnings
31,678

 
31,617

Total shareholders’ equity
1,073,356

 
1,055,541

Noncontrolling interests
368,372

 
380,416

Total equity
1,441,728

 
1,435,957

Total liabilities and equity
$
2,870,866

 
$
2,732,600

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)
2015
 
2014
Revenues
 
 
 
Rental income
$
38,187

 
$
33,818

Interest income
3,408

 
3,164

Expense reimbursements
10,066

 
8,790

Other
820

 
913

Total revenues
52,481

 
46,685

Operating Expenses
 
 
 
Property operating
7,731

 
7,124

Other operating
2,120

 
687

Real estate taxes
6,292

 
5,670

General and administrative
7,532

 
6,896

Depreciation and amortization
13,658

 
11,587

Total operating expenses
37,333

 
31,964

Operating income
15,148

 
14,721

Equity in earnings of unconsolidated affiliates
6,593

 
3,029

Loss on debt extinguishment
(109
)
 
(203
)
Gain on disposition of property
27,143

 
12,387

Interest and other finance expense
(8,821
)
 
(10,651
)
Income from continuing operations before income tax provision
39,954

 
19,283

Income tax provision
(1,417
)
 
(168
)
Net income
38,537

 
19,115

Net (income) loss attributable to noncontrolling interests
(21,990
)
 
2,480

Net income attributable to Common Shareholders
$
16,547

 
$
21,595

 
 
 
 
Basic and diluted earnings per share
$
0.24

 
$
0.38

See accompanying notes

2


ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
(dollars in thousands)
 
 
 
 
Net income
 
$
38,537

 
$
19,115

Other comprehensive (loss) income
 

 

Unrealized (loss) on valuation of swap agreements
 
(4,319
)
 
(2,329
)
Reclassification of realized interest on swap agreements
 
1,053

 
837

Other comprehensive (loss)
 
(3,266
)
 
(1,492
)
Comprehensive income
 
35,271

 
17,623

Comprehensive (income) loss attributable to noncontrolling interests
 
(21,567
)
 
2,433

Comprehensive income attributable to Common Shareholders
 
$
13,704

 
$
20,056

See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2015

(unaudited)
 
Common Shares
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Retained
Earnings
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
(amounts in thousands, except per share amounts)
Shares
 
Amount
 
 
 
 
 
 
Balance at December 31, 2014
68,109

 
$
68

 
$
1,027,861

 
$
(4,005
)
 
$
31,617

 
$
1,055,541

 
$
380,416

 
$
1,435,957

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
44

 

 
1,094

 

 

 
1,094

 
(1,094
)
 

Issuance of Common Shares, net of issuance costs
571

 
1

 
19,332

 

 

 
19,333

 

 
19,333

Dividends declared ($0.24 per Common Share)

 

 

 

 
(16,486
)
 
(16,486
)
 
(1,186
)
 
(17,672
)
Employee and trustee stock compensation, net
8

 

 
170

 

 

 
170

 
1,708

 
1,878

Noncontrolling interest distributions

 

 

 

 

 

 
(33,089
)
 
(33,089
)
Noncontrolling interest contributions

 

 

 

 

 

 
50

 
50

 
68,732

 
69

 
1,048,457

 
(4,005
)
 
15,131

 
1,059,652

 
346,805

 
1,406,457

Comprehensive (loss) income:
 

 
 

 
 
 
 

 
 

 
 

 
 

 
 

Net income

 

 

 

 
16,547

 
16,547

 
21,990

 
38,537

Unrealized loss on valuation of swap agreements

 

 

 
(3,536
)
 

 
(3,536
)
 
(783
)
 
(4,319
)
Reclassification of realized interest on swap agreements

 

 

 
693

 

 
693

 
360

 
1,053

Total comprehensive (loss) income

 

 

 
(2,843
)
 
16,547

 
13,704

 
21,567

 
35,271

 Balance at March 31, 2015
68,732

 
$
69

 
$
1,048,457

 
$
(6,848
)
 
$
31,678

 
$
1,073,356

 
$
368,372

 
$
1,441,728


See accompanying notes


4




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
38,537

 
$
19,115

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

 
 
Depreciation and amortization
13,658

 
11,587

Amortization of financing costs
768

 
688

Gain on disposition of property
(27,143
)
 
(12,387
)
Share compensation expense
1,889

 
2,087

Equity in earnings of unconsolidated affiliates
(6,593
)
 
(3,029
)
Distributions of operating income from unconsolidated affiliates
5,889

 
2,562

Other, net
(1,346
)
 
(648
)
Changes in assets and liabilities
 

 
 
Cash in escrow
(6,232
)
 
(141
)
Rents receivable, net
(1,354
)
 
(486
)
Prepaid expenses and other assets
8,015

 
(23
)
Accounts payable and accrued expenses
2,437

 
2,507

Other liabilities
(1,908
)
 
345

Net cash provided by operating activities
26,617

 
22,177

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(220,271
)
 
(90,500
)
Cash in escrow for property acquisitions
(33,000
)
 

Redevelopment and property improvement costs
(40,494
)

(37,505
)
Deferred leasing costs
(2,805
)
 
(369
)
Investments in and advances to unconsolidated affiliates
(3,151
)
 
(21,568
)
Return of capital from unconsolidated affiliates
1,946

 
22,491

Proceeds from notes receivable

 
7,156

Issuance of notes receivable
(550
)
 

Proceeds from sale of properties, net
63,224

 

Net cash used in investing activities
(235,101
)
 
(120,295
)

5




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

 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage and other notes
(30,390
)
 
(38,972
)
Proceeds received from mortgage and other notes
169,720

 
130,700

Loan proceeds held as restricted cash
25,203

 
15,058

Deferred financing and other costs
(1,232
)
 
(921
)
Capital contributions from noncontrolling interests
50

 
8,712

Distributions to noncontrolling interests
(34,718
)
 
(33,577
)
Dividends paid to Common Shareholders
(36,779
)
 
(12,798
)
Proceeds from issuance of Common Shares, net of issuance costs of $440 and $429, respectively
18,605

 
23,519

Net cash provided by financing activities
110,459

 
91,721

Decrease in cash and cash equivalents
(98,025
)
 
(6,397
)
Cash and cash equivalents, beginning of period
217,580

 
79,189

Cash and cash equivalents, end of period
$
119,555

 
$
72,792

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $3,673 and $2,892, respectively
$
13,344

 
$
12,173

Cash paid for income taxes
$
902

 
$
281

 
 
 
 
Supplemental disclosure of non-cash investing activities
 
 
 
Acquisition of real estate through assumption of debt
$
9,765

 
$

Disposition of real estate through cancellation of debt
$

 
$
(22,865
)
 
 
 
 

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 located primarily in high-barrier-to-entry, supply-constrained, densely-populated metropolitan areas in the United States.

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, 2015, the Trust controlled approximately 95% 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 12). 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, 2015, the Company has ownership interests in 89 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 (the "Core Portfolio"). The Company also has ownership interests in 56 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 "Funds"). The 145 Core Portfolio and 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 Funds, Mervyns I and Mervyns II and earns fees or priority distributions for asset management, property management, construction, redevelopment, leasing and legal services. Cash from the Funds and RCP Venture is distributed pro-rata to the 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 Funds and Mervyns I and II:

Entity
Formation Date
Operating Partnership Share of Capital
Committed Capital (2)
 
Capital Called as of March 31, 2015 (3)
Equity Interest Held By Operating Partnership
Preferred Return
Total Distributions as of March 31, 2015 (3)
Fund I and Mervyns I (1)
9/2001
22.22
%
$
90.0

 
$
86.6

37.78
%
9
%
$
192.3

Fund II and Mervyns II (2)
6/2004
20.00
%
300.0

 
300.0

20.00
%
8
%
131.6

Fund III
5/2007
19.90
%
475.0

 
381.6

19.90
%
6
%
403.1

Fund IV
5/2012
23.12
%
540.6

 
140.2

23.12
%
6
%
101.9








7

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

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) During 2013, a distribution of $47.1 million was made to the Fund II investors, including the Operating Partnership. This amount is subject to recontribution to Fund II until December 2016, if needed to fund the on-going development and construction of existing projects.
(3) Represents the total for the Funds, including the Operating Partnership and noncontrolling interests' shares.


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 of Unconsolidated Affiliates. Investments in entities for which the Company does not have the ability to exercise any influence are accounted for under the cost method.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Operating results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2015. 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. Such adjustments consisted of normal recurring items. These consolidated financial statements should be read in conjunction with the Company's 2014 Annual Report on Form 10-K, as filed with the SEC on February 20, 2015.

Reclassifications

Certain reclassifications have been made to the 2014 financial statements to conform to the 2015 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 measures and 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 carrying values of any of its properties are impaired as of March 31, 2015.


8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements

During April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03, "Interest - Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 modifies the treatment of debt issuance costs from a deferred charge to a deduction of the carrying value of the financial liability. ASU 2015-03 is effective for periods beginning after December 15, 2015, with early adoption permitted and retrospective application. ASU 2015-03 is not expected to have a material impact on the Company's consolidated financial statements.

During February 2015, the FASB issued ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis." ASU 2015-02 (i) modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE’s"), (ii) eliminates the presumption that a general partner should consolidate a limited partnership and (iii) affects the consolidation analysis of reporting entities that are involved with VIE’s, particularly those with fee arrangements and related party relationships. ASU 2015-02 is effective for periods beginning after December 15, 2015, with early adoption permitted. The Company is in the process of evaluating the impact the adoption of ASU 2015-02 will have on the consolidated financial statements.

During January 2015, the FASB issued ASU No. 2015-01, "Income Statement - Extraordinary and Unusual Items." ASU 2015-01 eliminates the concept of extraordinary items. However, the presentation and disclosure requirements for items that are either unusual in nature or infrequent in occurrence remain and will be expanded to include items that are both unusual in nature and infrequent in occurrence. ASU 2015-01 is effective for periods beginning after December 15, 2015. ASU 2015-01 is not expected to have a material impact on the Company's consolidated financial statements.

2.    EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed by dividing net income attributable to Common Shareholders by the weighted average Common Shares outstanding. At March 31, 2015, the Company has unvested LTIP Units (Note 12) 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 12). The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares would be dilutive and therefore are included in the computation of diluted earnings per share for the three months ended March 31, 2015 and 2014.

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 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
 
March 31,
(dollars in thousands, except per share amounts)
2015
 
2014
Numerator
 
 
 
Income from continuing operations
$
16,547

 
$
21,595

Less: net income attributable to participating securities
(240
)
 
(392
)
Income from continuing operations, net of income attributable to participating securities
16,307

 
21,203

 
 
 
 
Denominator
 

 
 

Weighted average shares for basic earnings per share
68,295

 
55,953

Effect of dilutive securities:
 

 
 

Employee Restricted Share Units and share options
40

 
40

 Convertible Preferred OP Units
25

 
25

Denominator for diluted earnings per share
68,360

 
56,018

 
 
 
 
Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
$
0.24

 
$
0.38



3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

For the three months ended March 31, 2015, the Company issued 0.6 million Common Shares under its at-the-market ("ATM") equity program, generating gross proceeds of $19.8 million and net proceeds of $19.5 million.

The net proceeds from the Company's ATM equity programs have been, and are anticipated to be, used by the Company primarily to fund Core Portfolio acquisitions, its capital contributions to the Funds and for general corporate purposes.

Noncontrolling interests represent the portion of equity in entities consolidated in the accompanying consolidated 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 Funds and other entities. It also includes interests in the Operating Partnership which represent (i) the limited partners’ 2,975,277 and 2,988,277 Common OP Units at March 31, 2015 and December 31, 2014; (ii) 188 Series A Preferred OP Units at March 31, 2015 and December 31, 2014; and (iii) 937,651 and 675,367 LTIP Units at March 31, 2015 and December 31, 2014, respectively.



10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


4.    ACQUISITION AND DISPOSITION OF REAL ESTATE AND PROPERTIES HELD FOR SALE

Acquisitions

During 2015, the Company acquired the following properties through its Core Portfolio and Fund IV as follows:

(dollars in thousands)
 
 
 
 
 
 
 
Property
GLA

Percent Owned

Type
Month of Acquisition
Purchase Price

Location
Assumption of Debt

Core Portfolio:
 
 
 
 
 
 
 
City Center
205,000

100
%
Urban Retail Center
March
$
155,000

San Fransisco, CA
$

163 Highland Avenue
40,500

100
%
Suburban Shopping Center
March
24,000

Needham, MA
9,765

Total Core Portfolio
245,500

 
 
 
$
179,000

 
$
9,765

 
 
 
 
 
 
 
 
Fund IV:
 
 
 
 
 
 
 
1035 Third Avenue (1)
53,294

100
%
Street Retail
January
$
51,036

New York, NY
$

Total Fund IV
53,294

 
 
 
$
51,036

 
$

 
 
 
 
 
 
 
 
Total
298,794

 
 
 
$
230,036

 
$
9,765


Note:

(1) GLA includes a portion of office space and a below-grade operator controlled parking garage.

The Company expensed $0.6 million of acquisition costs for the three months ended March 31, 2015, related to the Core Portfolio and $1.6 million of acquisition costs for the three months ended March 31, 2015, 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 assumed 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.

The following table summarizes the Company's preliminary allocations of the purchase prices of assets acquired and liabilities assumed during 2015 which have yet to be finalized:

(dollars in thousands)
Preliminary Purchase Price Allocations
Land
$
57,509

Buildings and improvements
172,527

Above-below market debt assumed (included in Mortgage and other notes payable)
(9,765
)
Total consideration
$
220,271







11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


4.    ACQUISITION AND DISPOSITION OF REAL ESTATE AND PROPERTIES HELD FOR SALE(continued)

Acquisitions (continued)

During 2014, the Company acquired properties and recorded the preliminary allocations of the purchase prices to the assets acquired and liabilities assumed based on provisional measurements of fair value. During 2015, 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, 2014, and the finalized allocations as adjusted as of March 31, 2015:

(dollars in thousands)
Purchase Price Allocations as Originally Reported
Adjustments
Finalized Purchase Price Allocations
Land
$
22,625

$
10,765

$
33,390

Buildings and improvements
67,875

(12,626
)
55,249

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

4,705

4,705

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

(2,844
)
(2,844
)
Total consideration
$
90,500

$

$
90,500


Dispositions

During 2015, the Company disposed of the following property:

(dollars in thousands)
 
 
 
 
 
Dispositions
GLA
Sale Price
Gain on Sale
Month Sold
Owner
Lincoln Park Centre
61,761

$
64,000

$
27,143

January
Fund III

Properties Held For Sale

At March 31, 2015, no assets were held for sale. At December 31, 2014, The Company had two properties classified as held-for-sale. The assets and liabilities relating to those properties are summarized as follows:

(dollars in thousands)
December 31, 2014
Assets of properties held for sale
$
56,073

Liabilities of properties held for sale
$
25,500




12

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") and a 88.43% tenancy in common interest in an 87,000 square foot retail property located in Chicago, Illinois. As our unaffiliated partners in these investments maintain operating control, these are accounted for under the equity method.

Funds

RCP Venture

The 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, 2015, 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. During the three months ended March 31, 2015, the Company received distributions from its RCP Venture of $4.5 million, of which the Operating Partnership's aggregate share was $0.9 million.

The following table summarizes activity related to the RCP Venture investments from inception through March 31, 2015:
(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

 
$
48,547

 
$
4,901

 
$
11,801

Mervyns Add-On investments
2005/2008
7,547

 
9,272

 
1,252

 
2,017

Albertsons
2006
20,717

 
81,594

 
4,239

 
16,318

Albertsons Add-On investments
2006/2007
2,416

 
4,864

 
388

 
972

Shopko
2006
1,110

 
2,460

 
222

 
492

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

 
2,639

 
533

 
528

Rex Stores
2007
2,701

 
4,727

 
535

 
946

 
 
$
63,216

 
$
154,103

 
$
12,070

 
$
33,074


13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Other Fund Investments

The unaffiliated partners in Fund II's investment in Albee Tower I Owners, Fund III's investments in Parkway Crossing, Arundel Plaza and the White City Shopping Center as well as Fund IV's investments in 1701 Belmont Avenue, 2819 Kennedy Boulevard, Promenade at Manassas, Eden Square and the Broughton Street Portfolio, 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.

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)
March 31,
2015
 
December 31,
2014
Combined and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
388,590

 
$
387,739

Real estate under development
66,942

 
60,476

Investment in unconsolidated affiliates
7,548

 
11,154

Other assets
63,288

 
62,862

Total assets
$
526,368

 
$
522,231

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
317,103

 
$
315,897

Other liabilities
71,551

 
66,116

Partners’ equity
137,714

 
140,218

Total liabilities and partners’ equity
$
526,368

 
$
522,231

Company’s investment in and advances to unconsolidated affiliates
$
184,500

 
$
184,352

Company's share of distributions in excess of income from, and investments in, unconsolidated affiliates
$
(12,361
)
 
$
(12,564
)


14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

 
Three Months Ended
 
March 31,
(dollars in thousands)
2015
 
2014
Combined and Condensed Statements of Income
 
 
 
Total revenues
$
11,930

 
$
12,105

Operating and other expenses
(3,857
)
 
(3,815
)
Interest and other finance expense
(2,638
)
 
(2,524
)
Equity in earnings (losses) of unconsolidated affiliates
66,655

 
(328
)
Depreciation and amortization
(2,307
)
 
(2,706
)
Loss on debt extinguishment

 
(187
)
Net income
$
69,783

 
$
2,545

 

 

Company’s share of net income
$
6,691

 
$
3,127

Amortization of excess investment
(98
)
 
(98
)
Company’s equity in earnings of unconsolidated affiliates
$
6,593

 
$
3,029




15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.    STRUCTURED FINANCINGS, NET

As of March 31, 2015, the Company’s structured financing portfolio, net consisted of notes receivable and preferred equity investments, aggregating $98.6 million. These investments were collateralized either by underlying properties, the borrowers' ownership interests in the entities that own properties and/or by the borrowers' personal guarantee subject, as applicable, to senior liens, as follows:
(dollars in thousands)
 
 
 
 
 
 
Description
 
Effective interest rate (1)
 
First Priority liens
 
Net Carrying Amounts of Notes Receivable as of March 31, 2015
 
Net Carrying Amounts of Notes Receivable as of December 31, 2014
 
Maturity date
 
Extension Options
First Mortgage Loan
 
7.7%
 
 
 
$
12,000

 
$
12,000

 
Demand
 
 
Mezzanine Loan
 
12.7%
 
18,900

 
8,000

 
8,000

 
10/3/2015
 
 
First Mortgage Loan
 
8.8%
 
 
 
7,500

 
7,500

 
10/31/2015
 
1 x 12 Months
Zero Coupon Loan (2)
 
24.0%
 
166,200

 
5,149

 
4,986

 
1/3/2016
 
 
First Mortgage Loan
 
5.5%
 
 
 
4,000

 
4,000

 
4/1/2016
 
1 x 6 Months
Preferred Equity
 
13.5%
 
 
 
4,000

 
4,000

 
5/9/2016
 
 
Other
 
18.0%
 
 
 
3,457

 
3,307

 
7/1/2017
 
 
Preferred Equity
 
8.1%
 
20,855

 
13,000

 
13,000

 
9/1/2017
 
 
Other
 
15.0%
 
 
 
30,879

 
30,879

 
11/9/2020
 
 
Other
 
LIBOR + 2.5%
 
 
 

 
4,000

 
12/30/2020
 
 
Mezzanine Loan (3)
 
10.0%
 
87,477

 
7,983

 
7,983

 
Demand
 
 
Individually less than 3% (4)
 
3.9% to 11.6%
 


 
2,592

 
2,631

 
12/31/2015 to 5/1/2024
 

Total
 
 
 
 
 
$
98,560

 
$
102,286

 
 

 
Notes:

(1) Includes origination and exit fees
(2) The principal balance for this accrual-only loan is increased by the interest accrued
(3) Comprised of three cross-collateralized loans from one borrower, which are non-performing
(4) Consists of two loans as of March 31, 2015

During February 2015, the Company made an additional investment of $0.4 million to an already existing loan collateralized by a property.

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 March 31, 2015, the Company held three non-performing notes.




16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of March 31, 2015, the Company's derivative financial instruments consisted of 16 interest rate swaps with an aggregate notional value of $272.6 million, which effectively fix the London Inter-Bank Offer Rate ("LIBOR") at rates ranging from 0.7% to 3.8% and mature between May 2015 and March 2025. The Company also has four derivative financial instruments with an aggregate notional value of $139.3 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 that represent liabilities are included in other liabilities in the Consolidated Balance Sheets and totaled $7.5 million and $4.6 million at March 31, 2015 and December 31, 2014, respectively. The fair value of these derivative instruments representing assets are included in prepaid expenses and other assets in the Consolidated Balance Sheets and totaled $0.2 million at December 31, 2014. 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 and other debt. Such instruments are reported at their fair values as stated above. As of March 31, 2015 and December 31, 2014, unrealized losses totaling $(6.8) million and $(4.0) million, respectively, were reflected in accumulated other comprehensive loss on the Consolidated Balance Sheets.

As of March 31, 2015 and December 31, 2014, 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, 2015:

Secured Debt:

(dollars in thousands)
 
 
Borrowings
 
Repayments
Property
Date
Description
Amount
Interest Rate
Maturity Date
Amount
Interest Rate
1035 Third Ave
January
New Borrowing
$
42,000

2.52% (LIBOR+2.35%)
1/27/2021
$

 
Lincoln Park Centre
January
Repayment

 
12/3/2016
28,000

1.62% (LIBOR+1.45%)
163 Highland Avenue
March
Assumption
9,765

4.66%
2/1/2024

 
Total
 
 
$
51,765

 
 
$
28,000

 



17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

8.
MORTGAGE AND OTHER NOTES PAYABLE (continued)

Unsecured Debt:

During the three months ended March 31, 2015, the Company redeemed the remaining $0.4 million of its outstanding convertible notes at par value.

During the three months ended March 31, 2015, the Company borrowed $50.0 million on its unsecured credit facility. The outstanding balance under this facility is $50.0 million as of March 31, 2015.

During the three months ended March 31, 2015, the Company borrowed $46.6 million on its Fund IV subscription line. The outstanding balance under this facility is $123.7 million as of March 31, 2015.

During March 2015, Fund IV closed on a $50.0 million unsecured credit facility. At closing, Fund IV drew down $31.0 million. The facility bears interest at LIBOR plus 275 basis points and matures February 9, 2017 with one 6-month extension option. Along with a guarantee with respect to customary non-recourse carve outs, the Operating Partnership, as the managing member of Fund IV, has provided a guarantee of principal, interest and fees upon a default as a result of Fund IV’s breach of certain specified financial covenants.

9.    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, 2015:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Assets
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$

 
$

Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
7,504

 
$


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

Financial Instruments

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

The Company has determined the estimated fair values of the following financial instruments within Level 2 of the hierarchy 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)
March 31, 2015
 
December 31, 2014
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Notes receivable and preferred equity investments, net
$
98,560

 
$
98,560

 
$
102,286

 
$
102,286

Mortgage and other notes payable
$
1,304,739

 
$
1,318,299

 
$
1,130,481

 
$
1,141,371



18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

10.    RELATED PARTY TRANSACTIONS

The Company earned property management fees, construction, legal and leasing fees from its investments in unconsolidated affiliates totaling $0.1 million for the three months ended March 31, 2015.


11.    SEGMENT REPORTING

The Company has three reportable segments: Core Portfolio, Funds and Structured Financing. 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 Funds, these investments are typically held for shorter terms. Fees earned by the Company as the general partner/managing member of the Funds are eliminated in the Company's consolidated financial statements. Structured Financing represents the Company's investments in notes receivable and preferred equity. The following tables set forth certain segment information for the Company, as of and for the three months ended March 31, 2015 and 2014, and does not include unconsolidated affiliates:



ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11.    SEGMENT REPORTING (continued)

Three Months Ended March 31, 2015

(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing
 
Total
Revenues
 
$
35,593

 
$
13,480

 
$
3,408

 
$
52,481

Property operating expenses, other operating and real estate taxes
 
(9,691
)
 
(6,452
)
 

 
(16,143
)
General and administrative expenses
 
(6,811
)
 
(721
)
 

 
(7,532
)
Depreciation and amortization
 
(9,907
)
 
(3,751
)
 

 
(13,658
)
Operating income
 
9,184

 
2,556

 
3,408

 
15,148

Equity in earnings of unconsolidated affiliates
 
434

 
6,159

 

 
6,593

Loss on debt extinguishment
 

 
(109
)
 

 
(109
)
Gain on disposition of property
 

 
27,143

 

 
27,143

Interest and other finance expense
 
(6,468
)
 
(2,353
)
 

 
(8,821
)
Income tax provision
 
(480
)
 
(937
)
 

 
(1,417
)
Net income
 
2,670

 
32,459

 
3,408

 
38,537

Noncontrolling interests
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
(179
)
 
(21,811
)
 

 
(21,990
)
Net income attributable to Common Shareholders
 
$
2,491

 
$
10,648

 
$
3,408

 
$
16,547

 
 
 
 
 
 
 
 
 
Real Estate at Cost
 
$
1,550,695

 
$
953,607

 
$

 
$
2,504,302

Total Assets
 
$
1,666,987

 
$
1,105,319

 
$
98,560

 
$
2,870,866

Acquisition of Real Estate
 
$
169,235

 
$
51,036

 
$

 
$
220,271

Investment in Redevelopment and Improvements
 
$
6,353

 
$
34,141

 
$

 
$
40,494



20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11.    SEGMENT REPORTING (continued)

Three Months Ended March 31, 2014
(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing
 
Total
Revenues
 
$
30,149

 
$
12,642

 
$
3,894

 
$
46,685

Property operating expenses, other operating and real estate taxes
 
(7,906
)
 
(5,575
)
 

 
(13,481
)
General and administrative expenses
 
(6,413
)
 
(483
)
 

 
(6,896
)
Depreciation and amortization
 
(8,333
)
 
(3,254
)
 

 
(11,587
)
Operating income
 
7,497

 
3,330

 
3,894

 
14,721

Equity in earnings of unconsolidated affiliates
 
95

 
2,934

 

 
3,029

Gain on disposition of property
 
12,387

 

 

 
12,387

Loss on debt extinguishment
 

 
(203
)
 

 
(203
)
Interest and other finance expense
 
(7,200
)
 
(3,451
)
 

 
(10,651
)
Income tax provision
 
(104
)
 
(64
)
 

 
(168
)
Net Income
 
12,675

 
2,546

 
3,894

 
19,115

Noncontrolling interests
 
 
 
 
 
 
 


Net (income) loss attributable to noncontrolling interests
 
(419
)
 
2,899

 

 
2,480

Net income attributable to Common Shareholders
 
$
12,256

 
$
5,445

 
$
3,894

 
$
21,595

 
 
 
 
 
 
 
 


Real Estate at Cost
 
$
1,128,790

 
$
794,120

 
$

 
$
1,922,910

Total Assets
 
$
1,101,385

 
$
1,124,838

 
$
119,639

 
$
2,345,862

Acquisition of Real Estate
 
$
90,500

 
$

 
$

 
$
90,500

Investment in Redevelopment and Improvements
 
$
1,428

 
$
36,077

 
$

 
$
37,505




21

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.    LONG-TERM INCENTIVE COMPENSATION

During the quarter ended March 31, 2015, the Company issued 247,863 LTIP Units and 8,357 Restricted Share Units to employees of the Company pursuant to its Amended and Restated 2006 Share Incentive Plan (the "Share Incentive Plan"). Vesting of some of these units is subject to the Company achieving certain performance measures. With respect to the executive officers, these units vest over a 5-year period, with 60% of the units earned at the end of the third year and the remaining 40% vesting ratably over the following two years. With the exception of those units, vesting of all other awards will occur ratably over the vesting period.
 
Units Issued
 
 
 
LTIPs
Restricted Shares
Vesting Period
% Performance Based
Executive Officers
236,924


5 Years
17
%
Other Officers
7,879

1,308

3 Years
24
%
Other Employees
3,060

7,049

3 Years

 
 
 
 
 
Total
247,863

8,357

 
 

These awards were measured at their fair value 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 $8.8 million, which will be recognized as compensation expense over the vesting period. Compensation expense of $0.5 million has been recognized in the accompanying consolidated statements of income related to these awards for the three months ended March 31, 2015.

Total long-term incentive compensation expense, including the expense related to the above-mentioned plans, was $1.8 million and $1.4 million for the three months ended March 31, 2015 and 2014, respectively.

In addition, members of the Board of Trustees have been issued units under the Share Incentive Plan. Total trustee fee expense related to these issuances was $0.2 million and $0.1 million for the three months ended March 31, 2015 and 2014, respectively.

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 or Fund IV Promote when and if such Promotes are ultimately realized. The Company has awarded all of the units under the Program related to the Fund III Promote and 20% of the units related to the Fund IV Promote. These units were determined to have no value at issuance or as of March 31, 2015. 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.

13.    SUBSEQUENT EVENTS

During April 2015, Fund III completed the disposition of its White City property located in Shrewsbury, Massachusetts for a sales price of $96.8 million.

During April 2015, Fund IV completed the acquisition of 801 Madison Avenue located in Manhattan, New York for a purchase price of $33.0 million.

During April 2015, the Company acquired the remaining 77.78% interest in the Route 202 Shopping Center (Note 5) for $5.6 million. In connection with this transaction, the Company was repaid $5.6 million on an outstanding note receivable.



22


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, 2015 and 2014 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, 2014 (our "2014 Form 10-K") and include, among others, the following: general economic and business conditions, 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, densely-populated metropolitan areas. Our goal is to create value through accretive redevelopment and re-tenanting activities within our existing portfolio and grow this platform through the acquisition of high-quality assets that have the long-term potential to outperform the asset class.

Generate additional growth through our Funds in which we co-invest with high-quality institutional investors. Our Fund strategy focuses on opportunistic yet disciplined acquisition with high inherent opportunity for the creation of additional value, execution on this opportunity and the realization of value through the sale of these assets. In connection with this strategy, we focus on:

value-add investments in street retail properties, located in established and "next generation" submarkets, with re-tenanting or repositioning opportunities,
opportunistic acquisitions of well-located real estate anchored by distressed retailers, and
other opportunistic acquisitions, which vary based on market conditions and may include high-yield acquisitions and purchases of distressed debt.

Some of these investments have also included, and may in the future 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, 2015, we operated 145 properties, which we own or have an ownership interest in, within our Core Portfolio and Funds. These properties primarily consist of high-quality retail properties located in key street and urban retail corridors as well as suburban locations within high-barrier-to-entry, densely-populated metropolitan areas in the United States.


23


Core Portfolio

Our Core Portfolio consists of those properties we either entirely own, or partially own in joint ventures, through the Operating Partnership, or subsidiaries thereof, not including those properties owned through our Funds. There are 89 properties in our Core Portfolio totaling 4.7 million square feet. As of March 31, 2015, the Core Portfolio physical occupancy was 96.2% and leased occupancy, which includes executed leases for which rent has not yet commenced, was 97.1%.

Funds

Fund I has three properties totaling 0.1 million square feet.
Fund II has five properties, three of which (representing 0.3 million square feet) are operating, one of which is under construction, and one of which is in the design phase.
Fund III has 12 properties, nine of which (representing 1.6 million square feet) are operating and three of which are in various stages of redevelopment.
Fund IV has 36 properties, 10 of which (representing 0.9 million square feet) are operating and 26 of which are in the design phase.

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 2014 Form 10-K.

RESULTS OF OPERATIONS
A discussion of the significant variances and primary factors contributing thereto within our 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, 2015 ("2015") to the three months ended March 31, 2014 ("2014")

(dollars in millions)
2015
2014
Revenues
Core
Portfolio
Funds
Structured Financing
Core
Portfolio
Funds
Structured Financing
Rental income
$
28.5

$
9.7

$

$
24.3

$
9.5

$

Interest income


3.4



3.2

Expense reimbursements
6.7

3.4


5.8

3.0


Other
0.4

0.4



0.1

0.7

Total revenues
$
35.6

$
13.5

$
3.4

$
30.1

$
12.6

$
3.9


Rental income in the Core Portfolio increased $4.2 million primarily as a result of additional rents from property acquisitions in 2014 and 2015 ("Core Acquisitions").

Expense reimbursements in the Core Portfolio increased $0.9 million primarily as a result of the Core Acquisitions and increased reimbursement from higher winter related costs during 2015.




24


(dollars in millions)
2015
2014
Operating Expenses 
Core
Portfolio
Funds
Structured Financing
Core
Portfolio
Funds
Structured Financing
Property operating
$
5.1

$
2.6

$

$
4.0

$
3.1

$

Other operating
0.5

1.6


0.5

0.2


Real estate taxes
4.1

2.2


3.4

2.3


General and administrative
6.8

0.7


6.4

0.5


Depreciation and amortization
9.9

3.8


8.3

3.3


Total operating expenses
$
26.4

$
10.9

$

$
22.6

$
9.4

$


Property operating in the Core Portfolio increased $1.1 million primarily as a result of $0.5 million related to the Core Acquisitions and $0.4 million related to increased winter related costs during 2015.

Other operating in the Funds increased $1.4 million primarily as a result of additional acquisition costs.

Depreciation and amortization in the Core Portfolio increased $1.6 million primarily as a result of the Core Acquisitions.

(dollars in millions)
2015
2014
Other
Core
Portfolio
Funds
Structured Financing
Core
Portfolio
Funds
Structured Financing
Equity in earnings of unconsolidated affiliates
$
0.4

$
6.2

$

$
0.1

$
2.9

$

Loss on debt extinguishment

(0.1
)


(0.2
)
 
Gain on disposition of property

27.1


12.4



Interest and other finance expense
(6.5
)
(2.4
)

(7.2
)
(3.5
)

Income tax provision
(0.5
)
(0.9
)

(0.1
)
(0.1
)

Net (income) loss attributable to noncontrolling interests -
 
 
 
 
 
 
  - Continuing operations
(0.2
)
(21.8
)

(0.4
)
2.9



Equity in earnings of unconsolidated affiliates in the Funds increased $3.3 million primarily as a result of distributions in excess of basis from our RCP Venture during 2015.

Gain on disposition of property in the Funds during 2015 represents the sale of Lincoln Park Centre. The 2014 activity in the Core Portfolio relates to the gain on the disposal of Walnut Hill Plaza through foreclosure.

Interest and other finance expense decreased in the Funds by $1.1 million primarily as a result of (i) a $1.5 million decrease related to lower average interest rates during 2015 and (ii) a $0.6 million increase in capitalized interest related to our City Point redevelopment project during 2015. These decreases were partially offset by a $0.9 million increase related to higher average outstanding borrowings during 2015.

Income tax provision in the Funds in 2015 related to corporate federal income taxes incurred by a Fund IV investor.

Net (income) loss attributable to noncontrolling interests in the Funds represents the noncontrolling interests share of all the Funds variances discussed above.






25


CORE PORTFOLIO PERFORMANCE

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

NOI represents property revenues less property expenses. We consider 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 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.

Net Property Operating Income

NOI is determined as follows:

(dollars in millions)
 
 
 
 
Reconciliation of Consolidated Operating Income to NOI - Core Portfolio
 
 
Three Months Ended March 31,
 
 
2015
 
2014
Consolidated Operating Income
 
$
15.1

 
$
14.7

Add back:
 
 
 
 
  General and administrative
 
7.5

 
6.9

  Depreciation and amortization
 
13.7

 
11.6

Less:
 
 
 
 
  Interest income
 
(3.4
)
 
(3.2
)
  Straight-line rent and other adjustments
 
(0.5
)
 
(1.7
)
Consolidated NOI
 
32.4

 
28.3

Noncontrolling interest in consolidated NOI
 
(9.4
)
 
(8.6
)
Less: Operating Partnership's interest in Fund NOI included above
 
(1.6
)
 
(1.4
)
Add: Operating Partnership's share of unconsolidated joint ventures NOI 1
 
2.5

 
0.9

Core Portfolio NOI
 
$
23.9

 
$
19.2


Note:

(1) Does not include the Operating Partnership's share of NOI from unconsolidated joint ventures within the Funds

Same-property NOI includes properties in our Core Portfolio that we owned for both the current and prior periods presented, but excludes those properties which we acquired, sold or expected to sell, and redeveloped during these periods. We define a redevelopment property as an asset that is being repositioned in its market or undergoing significant renovation. Redevelopment activities involve taking a substantial portion of leasable space temporarily out of service and typically include structural work, demising of existing space and/or facade renovation. The following table summarizes same-property NOI for our Core Portfolio for the three months ended March 31, 2015 and 2014:


26


(dollars in millions)
 
 
 
 
Reconciliation of Core Portfolio NOI to Same-Property NOI
 
 
Three Months Ended
 
 
March 31,
 
 
2015
 
2014
Core Portfolio NOI
 
$
23.9

 
$
19.2

Less properties excluded from Same-Property NOI
 
(5.7
)
 
(1.5
)
Same-Property NOI
 
$
18.2

 
$
17.7

 
 
 
 
 
Percent change from 2014
 
3.1
%
 
 
 
 
 
 
 
Components of Same-Property NOI
 
 
 
 
Same-Property Revenues
 
$
24.8

 
$
23.9

Same-Property Operating Expenses
 
(6.6
)
 
(6.2
)
Same-Property NOI
 
$
18.2

 
$
17.7


The increase in Same-Property NOI in the Core Portfolio for the three months ended March 31, 2015 were primarily attributable to contractual rent increases.

The following table summarizes rent spreads on both a cash basis and straight-line basis for new and renewal leases based on leases executed within our Core Portfolio during the three months ended March 31, 2015. Cash basis represents a comparison of rent most recently paid on the previous lease as compared to the initial rent paid on the new lease. Straight-line basis represents a comparison of rents as adjusted for contractual escalations, abated rent and lease incentives for the same comparable leases.
Rent Spreads on New and Renewal Leases - Core Portfolio
 
Three Months Ended
 
March 31, 2015
Core Portfolio New and Renewal Leases
Cash Basis
 
Straight-Line Basis (GAAP)
Number of new and renewal leases executed
9

 
9

Gross leasable area
61,962

 
61,962

New average base rent
$
20.55

 
$
21.48

Expiring average base rent
$
16.67

 
$
16.26

Percent growth in average base rent
23.3
%
 
32.1
%
Average cost per square foot (1)
$
20.40

 
$
20.40

Weighted average lease term (years)
8.8

 
8.8

Note:
(1) The average cost per square foot includes tenant improvement costs, leasing commissions and tenant allowances.

FUNDS FROM OPERATIONS

Consistent with the National Association of Real Estate Investment Trusts ("NAREIT") definition, we define funds from operations ("FFO") as net income attributable to common shareholders (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated property, plus depreciation and amortization, impairment of depreciable assets and after adjustments for unconsolidated partnerships and joint ventures.

We consider FFO to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of operating performance, such as gains

27


(losses) from sales of depreciated property, depreciation and amortization, and impairment of depreciable real estate. However, our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. FFO should not be considered as an alternative to net income for the purpose of evaluating our performance or to cash flows as a measure of liquidity.

The reconciliation of net income to FFO for the three months ended March 31, 2015 and 2014 is as follows:

 
Three Months Ended
 
March 31,
(amounts in millions, except per share amounts) 
2015
 
2014
Funds From Operations
 
 
 
Net income attributable to Common Shareholders
$
16.5

 
$
21.6

Depreciation of real estate and amortization of leasing costs (net of noncontrolling interests’ share)
10.9

 
8.8

Gain on sale (net of noncontrolling interests’ share)
(5.4
)
 
(12.4
)
Income attributable to noncontrolling interests’ in Operating Partnership
1.0

 
0.9

Funds from operations
$
23.0

 
$
18.9

Funds From Operations per Share - Diluted
 

 
 

Weighted average number of Common Shares and OP Units
72.6

 
58.4

Diluted funds from operations, per share
$
0.32

 
$
0.32



USES OF LIQUIDITY

Our principal uses of liquidity are (i) distributions to our shareholders and OP unit holders, (ii) investments which include the property acquisitions and redevelopment/re-tenanting activities within our Core Portfolio and the funding of our capital committed to the Funds, (iii) distributions to our Fund investors and (iv) debt service and loan repayments.

Distributions

In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. For the three months ended March 31, 2015, we paid dividends and distributions on our Common Shares, Common OP Units and LTIP Unit holders totaling $39.3 million, which were funded from the Operating Partnership's share of operating cash flow.

Distributions of $27.7 million were made to noncontrolling interests in Fund III during the three months ended March 31, 2015. This distribution resulted from proceeds following the disposition of the Lincoln Park Centre (Note 2).

Distributions of $4.6 million were made to noncontrolling interests in Fund IV during the three months ended March 31, 2015. Of this, $0.2 million was made from operating cash flows and $4.4 million resulted from financing proceeds.

Investments

Core Portfolio

For the three months ended March 31, 2015, we acquired two properties for an aggregate purchase price of $179.0 million. See Note 4 to the Notes to Consolidated Financial Statements for a discussion of these investments.

Structured Financings

As of March 31, 2015, our structured financing portfolio, net of allowances aggregated $98.6 million with related accrued interest of $7.1 million. The notes were collateralized by the underlying properties, the borrower's ownership interest in the entities that

28


own the properties and/or by the borrower's personal guarantee. Effective interest rates on our notes receivable ranged from 3.9% to 24.0% with maturities from April 2015 through May 2024.

Investments made in our structured financing portfolio during 2015 are discussed in Note 6 in the Notes to the Consolidated Financial Statements.

Funds

For the three months ended March 31, 2015, Fund IV acquired one property for a purchase price of $51.0 million, of which the Operating Partnership's share was $11.8 million. See Note 4 to the Notes to Consolidated Financial Statements for a discussion of this investment.

Subsequent to March 31, 2015, Fund IV acquired one property for a purchase price of $33.0 million, of which the Operating Partnership's share was $7.6 million.

As part of our Fund investment strategy, we acquire real estate assets that require significant redevelopment. As of March 31, 2015, we had eight redevelopment projects, one of which is under construction and seven of which are in various stages of development as follows:

(dollars in millions)
 
 
 
 
 
 
 
Property
 
Owner
 
Costs
to date
 
Anticipated
additional
costs (1)
Status
Anticipated square
feet upon
completion
Anticipated completion dates
City Point (2)
 
Fund II
 
$
363.2

 
($43.2) - ($13.2)
Construction commenced
675,000

2016
Sherman Plaza
 
Fund II
 
36.1

 
To be determined
Pre-construction
To be determined

To be determined
Cortlandt Crossing
 
Fund III
 
13.1

 
33.9 - 42.9
Pre-construction
150,000 - 170,000

2017
3104 M Street NW
 
Fund III
 
4.1

 
3.9 - 4.9
Construction commenced
10,000

2016
Broad Hollow Commons
 
Fund III
 
14.1

 
35.9 - 45.9
Pre-construction
180,000 - 200,000

2016
210 Bowery
 
Fund IV
 
9.6

 
8.9 - 12.9
Construction commenced
16,000

2016
Broughton Street Portfolio
 
Fund IV
 
45.6

 
16.4 - 22.4
Construction commenced
200,000

2016
27 E. 61st St
 
Fund IV
 
20.5