10-Q



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, 2016

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.)
 
 
 
411 THEODORE FREMD AVENUE, SUITE 300, RYE, NY
 (Address of principal executive offices)
10580
 (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 April 29, 2016 there were 71,606,804 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,
2016
 
December 31,
2015
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
497,830

 
$
514,120

Buildings and improvements
1,586,398

 
1,593,350

Construction in progress
22,227

 
19,239

 
2,106,455

 
2,126,709

Less: accumulated depreciation
286,880

 
298,703

Net operating real estate
1,819,575

 
1,828,006

Real estate under development
639,759

 
609,574

Notes receivable and preferred equity investments
154,679

 
147,188

Investments in and advances to unconsolidated affiliates
210,309

 
173,277

Cash and cash equivalents
84,860

 
72,776

Cash in escrow
23,185

 
26,444

Restricted cash
10,840

 
10,840

Rents receivable, net
41,844

 
40,425

Deferred charges, net
21,776

 
22,568

Acquired lease intangibles, net
64,396

 
52,593

Prepaid expenses and other assets
50,791

 
48,628

Assets of properties held for sale
26,313

 

Total assets
$
3,148,327

 
$
3,032,319

 
 
 
 
LIABILITIES
 

 
 

Mortgage and other notes payable, net of unamortized loan costs of $9,884 and $10,567, respectively and unamortized premiums of $1,726 and $1,364, respectively
$
955,003

 
$
1,050,051

Unsecured notes payable, net of unamortized loan costs of $1,271 and $1,155, respectively
341,555

 
308,555

Distributions in excess of income from, and investments in, unconsolidated affiliates
23,613

 
13,244

Accounts payable and accrued expenses
37,962

 
38,754

Dividends and distributions payable
19,343

 
37,552

Acquired lease intangibles, net
36,373

 
31,809

Other liabilities
106,002

 
31,000

Total liabilities
1,519,851

 
1,510,965

 
 
 
 
EQUITY
 
 
 
Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 71,566,457 and 70,258,415 shares, respectively
72

 
70

Additional paid-in capital
1,140,914

 
1,092,239

Accumulated other comprehensive loss
(11,467
)
 
(4,463
)
Retained earnings
23,695

 
12,642

Total shareholders’ equity
1,153,214

 
1,100,488

Noncontrolling interests
475,262

 
420,866

Total equity
1,628,476

 
1,521,354

Total liabilities and equity
$
3,148,327

 
$
3,032,319

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)
2016
 
2015
Revenues
 
 
 
Rental income
$
38,590

 
$
38,187

Interest income
4,638

 
3,408

Expense reimbursements
7,959

 
10,066

Other
1,496

 
820

Total revenues
52,683


52,481

Operating Expenses
 
 
 
Property operating
5,537

 
7,731

Other operating
291

 
2,120

Real estate taxes
6,165

 
6,292

General and administrative
9,352

 
7,532

Depreciation and amortization
16,849

 
13,658

Total operating expenses
38,194


37,333

Operating income
14,489


15,148

Equity in earnings of unconsolidated affiliates
1,954

 
6,593

Loss on debt extinguishment

 
(109
)
Gain on disposition of properties
65,393

 
27,143

Interest and other finance expense
(8,038
)
 
(8,821
)
Income before income tax benefit (provision)
73,798


39,954

Income tax benefit (provision)
77

 
(1,417
)
Net income
73,875


38,537

Noncontrolling interests
 
 
 
Net income attributable to noncontrolling interests
(44,950
)

(21,990
)
Net income attributable to Common Shareholders
$
28,925


$
16,547

 
 
 
 
Basic and diluted earnings per share
$
0.40


$
0.24

See accompanying notes

2


ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
(dollars in thousands)
 
 
 
 
Net income
 
$
73,875

 
$
38,537

Other comprehensive loss
 
 
 
 
Unrealized loss on valuation of swap agreements
 
(8,819
)
 
(4,319
)
Reclassification of realized interest on swap agreements
 
1,046

 
1,053

Other comprehensive loss
 
(7,773
)
 
(3,266
)
Comprehensive income
 
66,102

 
35,271

Comprehensive income attributable to noncontrolling interests
 
(44,181
)
 
(21,567
)
Comprehensive income attributable to Common Shareholders
 
$
21,921

 
$
13,704

See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2016

(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, 2015
70,258

 
$
70

 
$
1,092,239

 
$
(4,463
)
 
$
12,642

 
$
1,100,488

 
$
420,866

 
$
1,521,354

Conversion of OP Units to Common Shares by limited partners of the Operating Partnership
249

 
1

 
5,679

 

 

 
5,680

 
(5,680
)
 

Issuance of Common Shares, net of issuance costs
1,050

 
1

 
35,219

 

 

 
35,220

 

 
35,220

Issuance of OP Units to acquire real estate

 

 

 

 

 

 
29,336

 
29,336

Dividends declared ($0.25 per Common Share)

 

 

 

 
(17,872
)
 
(17,872
)
 
(1,473
)
 
(19,345
)
Employee and trustee stock compensation, net
9

 

 
208

 

 

 
208

 
3,811

 
4,019

Acquisition of noncontrolling interests

 

 
7,569

 

 

 
7,569

 
(25,948
)
 
(18,379
)
Noncontrolling interest distributions

 

 

 

 

 

 
(36,174
)
 
(36,174
)
Noncontrolling interest contributions

 

 

 

 

 

 
46,343

 
46,343

 
71,566

 
72

 
1,140,914

 
(4,463
)
 
(5,230
)
 
1,131,293

 
431,081

 
1,562,374

Comprehensive income(loss):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
28,925

 
28,925

 
44,950

 
73,875

Unrealized loss on valuation of swap agreements

 

 

 
(7,905
)
 

 
(7,905
)
 
(914
)
 
(8,819
)
Reclassification of realized interest on swap agreements

 

 

 
901

 

 
901

 
145

 
1,046

Total comprehensive (loss) income

 

 

 
(7,004
)
 
28,925

 
21,921

 
44,181

 
66,102

 Balance at March 31, 2016
71,566

 
$
72

 
$
1,140,914

 
$
(11,467
)
 
$
23,695

 
$
1,153,214

 
$
475,262

 
$
1,628,476


See accompanying notes


4




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
73,875

 
$
38,537

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

 
 
Depreciation and amortization
16,849

 
13,658

Amortization of financing costs
625

 
768

Gain on disposition of properties
(65,393
)
 
(27,143
)
Stock compensation expense
4,019

 
1,889

Equity in earnings of unconsolidated affiliates
(1,954
)
 
(6,593
)
Distributions of operating income from unconsolidated affiliates
1,082

 
5,889

Other, net
(2,031
)
 
(1,346
)
Changes in assets and liabilities
 

 
 
Cash in escrow
3,259

 
(6,232
)
Rents receivable, net
(3,596
)
 
(1,354
)
Prepaid expenses and other assets
881

 
8,015

Accounts payable and accrued expenses
(792
)
 
2,437

Other liabilities
(8,849
)
 
(1,908
)
Net cash provided by operating activities
17,975

 
26,617

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(12,287
)
 
(220,271
)
Cash in escrow for property acquisitions

 
(33,000
)
Redevelopment and property improvement costs
(37,463
)

(40,494
)
Deferred leasing costs
(847
)
 
(2,805
)
Investments in and advances to unconsolidated affiliates
(8,034
)
 
(3,151
)
Return of capital from unconsolidated affiliates
34,235

 
1,946

Proceeds from notes receivable
20,500

 

Issuance of notes receivable
(27,800
)
 
(550
)
Proceeds from sale of properties, net
104,458

 
63,224

Net cash provided by (used in) investing activities
72,762

 
(235,101
)

5




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

 
Three Months Ended
 
March 31,
(dollars in thousands)
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage and other notes
(99,501
)
 
(30,390
)
Principal payments on unsecured debt
(101,500
)
 

Proceeds received from mortgage and other notes
1,945

 
42,120

Proceeds received from unsecured debt
134,616

 
127,600

Loan proceeds held as restricted cash

 
25,203

Deferred financing and other costs
(475
)
 
(1,232
)
Capital contributions from noncontrolling interests
46,343

 
50

Distributions to noncontrolling interests
(56,995
)
 
(34,718
)
Dividends paid to Common Shareholders
(35,112
)
 
(36,779
)
Proceeds from issuance of Common Shares, net of issuance costs of $1,654 and $440, respectively
32,026

 
18,605

Net cash (used in) provided by financing activities
(78,653
)
 
110,459

Increase (decrease) in cash and cash equivalents
12,084

 
(98,025
)
Cash and cash equivalents, beginning of period
72,776

 
217,580

Cash and cash equivalents, end of period
$
84,860

 
$
119,555

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $5,115 and $3,673, respectively
$
8,437

 
$
13,344

Cash paid for income taxes
$
(256
)
 
$
902

 
 
 
 
Supplemental disclosure of non-cash investing activities
 
 
 
Acquisition of real estate through assumption of debt
$
1,463

 
$
9,765

Acquisition of capital lease obligation
$
76,461

 
$

Acquisition of real estate through issuance of OP Units
$
29,336

 
$


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, 2016, the Trust controlled approximately 94% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest ("Common OP Units" or "Preferred OP Units") and employees who have been awarded restricted OP units ("LTIP Units") as long-term incentive compensation (Note 13). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Trust ("Common Shares").

As of March 31, 2016, the Company has ownership interests in 92 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 59 properties within its opportunity funds, 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 II and III, the "Funds"). The 151 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. The Company 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
Fund Size
Capital Called as of March 31, 2016 (4)
Unfunded Commitment
Equity Interest Held By Operating Partnership
Preferred Return
Total Distributions as of March 31, 2016 (4)
Mervyns I (1)
9/2001
22.22%
$90.0
$86.6
$—
37.78%
9%
$194.5
Fund II and Mervyns II (2)
6/2004
28.33%
300.0
300.0
47.1
28.33%
8%
131.6
Fund III (3)
5/2007
24.54%
502.5
387.5
62.5
39.63%
6%
497.7
Fund IV
5/2012
23.12%
540.6
239.3
301.2
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) Mervyns I was originally formed in conjunction with Acadia Strategic Opportunity Fund, LP ("Fund I"). Fund I was liquidated and dissolved as of December 31, 2015. The above table reflects the combined activity of Fund I and Mervyns I. Fund I and Mervyns I have returned all capital and preferred return. The Operating Partnership is entitled to a Promote on all future cash distributions from Mervyns I.
(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) Fund III has returned all capital and preferred return. The Operating Partnership is now entitled to a Promote on all future cash distributions.
(4) 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, 2016 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2016. 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 2015 Annual Report on Form 10-K, as filed with the SEC on February 19, 2016.

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. During the quarter ended June 30, 2015, as a result of the loss of a key anchor tenant, one of the properties in the Company's Brandywine Portfolio, in which an unaffiliated third party has a 77.78% noncontrolling interest, did not generate sufficient cash flow to meet the full debt service requirements leading to a default on the mortgage loan. Management performed an analysis and determined that the carrying amount of this property was not recoverable. Accordingly, the Company recorded an impairment charge of $5.0 million during the quarter ended June 30, 2015. The Operating Partnership's share of this charge, net of the noncontrolling interest, was $1.1 million. The property is collateral for $26.3 million of non-recourse mortgage debt which matures July 1, 2016. Management does not believe that the carrying values of any of its other properties are impaired as of March 31, 2016.


8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements

During February 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-02, "Leases." ASU 2016-02 requires that a lessee should recognize the assets and liabilities that arise from leases. ASU 2016-02 is effective for periods beginning after December 15, 2018, with early adoption permitted and shall be applied retrospectively. The Company is in the process of evaluating the impact the adoption of ASU 2016-02 will have on its consolidated financial statements.

On January 1, 2016, the Company adopted ASU No. 2015-02, "Consolidation - Amendments to the Consolidation Analysis," which modified the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIE's"), particularly those with fee arrangements and related party relationships. There were no entities qualifying under the scope of the revised guidance that were consolidated as a result of the adoption. Accordingly, the adoption of ASU 2015-02 had no 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, 2016, 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 and 141,593 Series C Preferred OP Units into an aggregate 428,121 and 25,067 Common Shares, for the three months ended March 31, 2016 and March 31, 2015, respectively, would be dilutive and therefore are included in the computation of diluted earnings per share.

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:
 
Three Months Ended
 
March 31,
(dollars in thousands, except per share amounts)
2016
 
2015
Numerator
 
 
 
Net income attributable to Common Shareholders
$
28,925

 
$
16,547

Less: net income attributable to participating securities
(365
)
 
(240
)
Net income attributable to Common Shareholders, net of income attributable to participating securities
28,560

 
16,307

 
 
 
 
Denominator
 

 
 

Weighted average shares for basic earnings per share
70,756

 
68,295

Effect of dilutive securities:
 

 
 

Employee Restricted Share Units and share options
16

 
40

Convertible Preferred OP Units
428

 
25

Denominator for diluted earnings per share
71,200

 
68,360

 
 
 
 
Basic and diluted earnings per Common Share attributable to Common Shareholders
$
0.40

 
$
0.24


9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During the three months ended March 31, 2016, the Company issued 1.1 million Common Shares under its $200.0 million at-the-market ("ATM") equity program, generating gross proceeds of $35.7 million and net proceeds of $35.2 million. As of March 31, 2016, there is $91.6 million remaining under this program.

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.

During the three months ended March 31, 2016, the Company issued 442,478 Common OP Units and 141,593 Series C Preferred OP Units to acquire real estate. The Series C Preferred OP Units have a value of $100.00 per unit and are entitled to a preferred quarterly distribution of $0.9375 per unit.

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’ 3,357,760 and 2,931,198 Common OP Units at March 31, 2016 and December 31, 2015, respectively; (ii) 188 Series A Preferred OP Units at March 31, 2016 and December 31, 2015, respectively; (iii) 141,593 Series C Preferred OP Units at March 31, 2016 and (iv) 1,069,813 and 929,169 LTIP Units at March 31, 2016 and December 31, 2015, respectively.


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

Acquisitions

During 2016, the Company acquired the following properties through its Core Portfolio and Fund IV:

(dollars in thousands)
 
 
 
 
 
 
 
Property
GLA

Percent Owned

Type
Month of Acquisition
Purchase Price

Location
Assumption of Debt

Core Portfolio:
 
 
 
 
 
 
 
Gotham Plaza (1)
122,902

49
%
Urban Retail Center
January
$
39,808

New York, NY
$
10,472

991 Madison Avenue (2)
6,920

100
%
Street Retail
March
76,461

New York, NY

Total Core Portfolio
129,822

 
 
 
$
116,269

 
$
10,472

 
 
 
 
 
 
 
 
Fund IV:
 
 
 
 
 
 
 
1964 Union Street
3,817

90
%
Street Retail
January
$
2,250

San Francisco, CA
$
1,463

Restaurants at Fort Point
15,711

100
%
Urban Retail Center
January
11,500

Boston, MA

Total Fund IV
19,528

 
 
 
$
13,750

 
$
1,463

 
 
 
 
 
 
 
 
Total
149,350

 
 
 
$
130,019

 
$
11,935



10

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)

Notes:

(1) The Company acquired a 49% membership interest in this property for $39.8 million. The Company's pro-rata share of debt assumed was $10.5 million. In connection with this acquisition, the Company issued 442,478 Common OP Units and 141,593 Preferred OP Units.

(2) The purchase price represents the total discounted payments pursuant to a 49-year master lease entered into by the Company, which is accounted for as a capital lease. During the three months ended March 31, 2016, lease payments totaling $7.2 million were made under this lease.

For the three months ended March 31, 2016, the Company expensed $0.2 million of acquisition costs in each of the Core Portfolio and Fund IV.

Purchase Price Allocations

With the exception of 1964 Union Street, which was an asset acquisition, and 991 Madison Avenue, a master lease position, 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 estimated allocations of the purchase prices of assets acquired and liabilities assumed during 2016 which have yet to be finalized:

(dollars in thousands)
Preliminary Purchase Price Allocations
Land
$
23,192

Buildings and improvements
69,575

Debt assumed (included in Mortgage and other notes payable)
(21,371
)
Total consideration
$
71,396



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 2015, 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 2016, 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, 2015, and the finalized allocations as adjusted as of March 31, 2016:
(dollars in thousands)
Purchase Price Allocations as Originally Reported
Adjustments
Finalized Purchase Price Allocations
Land
$
65,759

$
1,258

$
67,017

Buildings and improvements
204,532

(12,060
)
192,472

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

20,326

20,326

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

(8,809
)
(8,809
)
Below market debt assumed (in Mortgage and other notes payable)
(9,765
)
(715
)
(10,480
)
Total consideration
$
260,526

$

$
260,526


Dispositions

During 2016, Fund III sold a 65% interest in Cortlandt Town Center for $107,250, resulting in a gain on sale of $65,393.

Properties Held For Sale

At March 31, 2016, the Company had one property classified as held-for-sale. At December 31, 2015, the Company had no properties classified as held-for-sale.


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 an 88.43% tenancy-in-common interest in an 87,000 square foot retail property located in Chicago, Illinois ("840 N. Michigan"). 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.

During January 2016, the Company completed the acquisition of a 49% interest in an approximately 123,000 square foot retail property located in Manhattan, New York ("Gotham Plaza"), for a purchase price of $39.8 million. Consideration for this purchase consisted of the assumption of 49% of the existing debt of $21.4 million and the issuance of both Common and Preferred OP Units. The Company accounts for this investment 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.


12

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

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, 2016, 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, 2016, the Company received distributions from its RCP Venture of $0.1 million, of which the Operating Partnership's aggregate share was $0.02 million.

The following table summarizes activity related to the RCP Venture investments from inception through March 31, 2016:

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

 
$
48,648

 
$
4,901

 
$
11,821

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

 
3,358

 
222

 
672

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

 
2,941

 
533

 
588

Rex Stores
2007
2,701

 
4,927

 
535

 
986

Total
 
$
63,216

 
$
155,604

 
$
12,070

 
$
33,374


Other Fund Investments

The unaffiliated partners in Fund III's investments in Arundel Plaza 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.

During January 2016, Fund III completed the disposition of a 65% interest in Cortlandt Town Center for a sales price of $107.3 million. The Company now accounts for this investment 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.

13

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Summary of Investments in Unconsolidated Affiliates

The following Aggregate 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,
2016
 
December 31,
2015
Aggregate and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
553,827

 
$
302,976

Real estate under development
40,059

 
35,743

Investment in unconsolidated affiliates
6,853

 
6,853

Other assets
47,813

 
47,083

Total assets
$
648,552

 
$
392,655

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
340,417

 
$
192,684

Other liabilities
22,950

 
21,945

Partners’ equity
285,185

 
178,026

Total liabilities and partners’ equity
$
648,552

 
$
392,655

Company’s investment in and advances to unconsolidated affiliates
$
210,309

 
$
173,277

Company's share of distributions in excess of income from, and investments in, unconsolidated affiliates
$
(23,613
)
 
$
(13,244
)

 
Three Months Ended
 
March 31,
(dollars in thousands)
2016
 
2015
Aggregate and Condensed Statements of Income
 
 
 
Total revenues
$
13,372

 
$
11,930

Operating and other expenses
(3,730
)
 
(3,857
)
Interest and other finance expense
(2,736
)
 
(2,638
)
Equity in earnings of unconsolidated affiliates

 
66,655

Depreciation and amortization
(3,880
)
 
(2,307
)
Net income
$
3,026

 
$
69,783

 

 

Company’s share of net income
$
2,052

 
$
6,691

Amortization of excess investment
(98
)
 
(98
)
Company’s equity in earnings of unconsolidated affiliates
$
1,954

 
$
6,593




14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.    STRUCTURED FINANCING PORTFOLIO

As of March 31, 2016, the Company’s structured financing portfolio, consisted of notes receivable and preferred equity investments, aggregating $154.7 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 subordinate, as applicable, to senior liens, as follows:
(dollars in thousands)
 
 
 
 
 
 
Description
 
Notes
 
Effective interest rate (1)
 
First Priority liens
 
Net Carrying Amounts of Structured Financing Portfolio as of March 31, 2016
 
Net Carrying Amounts of Structured Financing Portfolio as of December 31, 2015
 
Maturity date
 
Extension Options
First Mortgage Loan
 
 
 
6.0%
 
 
 
$
15,000

 
$
15,000

 
5/1/2016
 
1 x 12 Months
First Mortgage Loan
 
(2)
 
7.0%
 
 
 
13,250

 

 
7/13/2016
 
1 x 3 Months
First Mortgage Loan
 
(3)
 
8.8%
 
 
 

 
7,500

 
11/1/2016
 
 
Preferred Equity
 
(4)
 
8.1%
 
 
 

 
13,000

 
9/1/2017
 
 
First Mortgage Loan
 
 
 
LIBOR + 7.1%
 
 
 
26,000

 
26,000

 
6/25/2018
 
1 x 12 Months
Zero Coupon Loan
 
(5)
 
2.5%
 
 
 
30,424

 
30,234

 
5/31/2020
 
 
Mezzanine Loan
 
 
 
15.0%
 
166,200

 
30,879

 
30,879

 
11/9/2020
 
 
Preferred Equity
 
(6)
 
15.3%
 
 
 
14,000

 

 
1/13/2021
 
2 x 12 Months
First Mortgage Loan
 
(7)
 
7.7%
 
 
 
12,000

 
12,000

 
Demand
 
 
Individually less than 3%
 
(8) (9)
 
5.5% to 18.0%
 
 
 
13,126

 
12,575

 
4/1/2016 to 7/1/2017
 
 
Total
 
 
 
 
 
 
 
$
154,679

 
$
147,188

 
 

 
Notes:

(1) Includes origination and exit fees
(2) During January 2016, Fund IV made a $13.3 million loan, which is collateralized by a property, bears interest at 7.0% and matures on July 13, 2016.
(3) During February 2016, the Company received full principal repayment of this $7.5 million note.
(4) During February 2016, the Company received a payment of $13.4 million, which included $13.0 million of full principal repayment and $0.4 million of prepayment penalty representing interest through June 2016 on this preferred equity investment that was originally scheduled to mature on September 1, 2017.
(5) The principal balance for this loan, which requires no current payments of interest, is increased by the interest accrued.
(6) During January 2016, Fund IV made a preferred equity investment in a joint venture for $14.0 million. The investment has a mandatory redemption date of January 13, 2021 and earns a preferred return rate of 15.3%.
(7) Loan was non-performing as of March 31, 2016. Based on the value of the underlying collateral, no reserve has been established against this loan.
(8) During 2016, the Company advanced an additional $0.4 million on a loan collateralized by a property.
(9) Consists of four loans as of March 31, 2016.



15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.
STRUCTURED FINANCING PORTFOLIO (continued)

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, 2016, the Company held one non-performing note.


7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of March 31, 2016, the Company's derivative financial instruments consisted of 16 interest rate swaps with an aggregate notional value of $305.7 million, which effectively fix the London Inter-Bank Offer Rate ("LIBOR") at rates ranging from 1.3% to 3.8% and mature between July 2018 and March 2025. The Company also has one derivative financial instrument with a notional value of $29.5 million which caps LIBOR at 4.0% and matures April 2018. The fair value of these derivative instruments that represent liabilities are included in other liabilities in the Consolidated Balance Sheets and totaled $12.4 million and $5.9 million at March 31, 2016 and December 31, 2015, 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 $0.8 million at December 31, 2015. 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, 2016 and December 31, 2015, unrealized losses totaling $11.5 million and $4.5 million, respectively, were reflected in accumulated other comprehensive loss on the Consolidated Balance Sheets.

As of March 31, 2016 and December 31, 2015, 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 notes payable during the three months ended March 31, 2016:

(dollars in thousands)
 
 
Borrowings
 
Repayments
Property
Date
Description
Amount
Interest Rate
Maturity Date
Amount
Interest Rate
Cortlandt Town Center
January
Repayment
$



$
83,070

 LIBOR+1.85%
1964 Union Street
January
Assumption
1,463

3.8%
10/1/2025

 
Chicago Street Retail Portfolio
January
Repayment

 
 
14,955

5.62%
Total
 
 
$
1,463

 
 
$
98,025

 




16

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9.    UNSECURED NOTES PAYABLE

The Company completed the following transactions related to its unsecured credit facilities during the three months ended March 31, 2016:

The Company repaid the remaining $20.8 million of its revolving unsecured credit facility.

The Company borrowed $7.5 million on its Fund II credit facility. The outstanding balance under this facility is $20.0 million as of March 31, 2016.

The Company repaid $9.2 million on its Fund IV subscription line. The outstanding balance under this facility is $82.7 million as of March 31, 2016.

The Company borrowed $5.6 million on its Fund IV term loan. The outstanding balance under this facility is $40.1 million as of March 31, 2016.

During January 2016, the Company closed on a $50.0 million unsecured term loan. The facility bears interest at LIBOR+1.30% and matures January 4, 2021.


10.    FAIR VALUE MEASUREMENTS

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

The following table presents the Company’s fair value hierarchy for those assets and liabilities measured at fair value on a recurring basis as of March 31, 2016:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
12,450

 
$


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 as well as any assets that have been impaired (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, 2016
 
December 31, 2015
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Notes receivable and preferred equity investments, net
$
154,679

 
$
154,679

 
$
147,188

 
$
147,188

Mortgage and other notes payable
$
1,296,558

 
$
1,323,937

 
$
1,358,606

 
$
1,382,318




17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

11.    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 each of the three months ended March 31, 2016 and 2015, respectively.


12.    SEGMENT REPORTING

The Company has three reportable segments: Core Portfolio, Funds and Structured Financing Portfolio. 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. The Structured Financing Portfolio 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, 2016 and 2015, and does not include unconsolidated affiliates:

Three Months Ended March 31, 2016

(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing Portfolio
 
Total
Revenues
 
$
38,107

 
$
9,938

 
$
4,638

 
$
52,683

Property operating expenses, other operating and real estate taxes
 
(8,562
)
 
(3,431
)
 

 
(11,993
)
General and administrative expenses
 
(9,073
)
 
(279
)
 

 
(9,352
)
Depreciation and amortization
 
(13,495
)
 
(3,354
)
 

 
(16,849
)
Operating income
 
6,977

 
2,874

 
4,638

 
14,489

Equity in earnings of unconsolidated affiliates
 
592

 
1,362

 

 
1,954

Gain on disposition of properties
 

 
65,393

 

 
65,393

Interest and other finance expense
 
(6,764
)
 
(1,274
)
 

 
(8,038
)
Income tax benefit
 
77

 

 

 
77

Net income
 
$
882

 
$
68,355

 
$
4,638

 
$
73,875

Noncontrolling interests
 
 
 
 
 
 
 
 
Net income attributable to noncontrolling interests
 
$
(2,822
)
 
$
(42,128
)
 
$

 
$
(44,950
)
Net income attributable to Common Shareholders
 
$
(1,940
)
 
$
26,227

 
$
4,638

 
$
28,925

 
 
 
 
 
 
 
 
 
Real Estate at Cost
 
$
1,641,312

 
$
1,104,902

 
$

 
$
2,746,214

Total Assets
 
$
1,827,059

 
$
1,166,589

 
$
154,679

 
$
3,148,327

Acquisition of Real Estate
 
$

 
$
12,287

 
$

 
$
12,287

Investment in Redevelopment and Improvements
 
$
3,248

 
$
34,215

 
$

 
$
37,463



18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.    SEGMENT REPORTING (continued)

Three Months Ended March 31, 2015

(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing Portfolio
 
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



13.    LONG-TERM INCENTIVE COMPENSATION

During the three months ended March 31, 2016, the Company issued 289,925 LTIP Units and 11,094 Restricted Share Units to employees of the Company pursuant to its Amended and Restated 2006 Share Incentive Plan (the "Share Incentive Plan"). These awards were measured at their fair value on the grant date, which was established as the market price of the Company's Common Shares as of the close of trading on the day preceding the grant date. The total value of the above Restricted Share Units and LTIP Units as of the grant date was $10.4 million, of which $1.9 million was recognized as compensation expense in 2015, and $8.5 million 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, 2016. Total long-term incentive compensation expense, including the expense related to the above-mentioned plans, was $1.9 million and $1.8 million for the three months ended March 31, 2016 and 2015, 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 for each of the three months ended March 31, 2016 and 2015, respectively.

In 2009, the Company adopted the Long Term Investment Alignment Program (the "Program") pursuant to which the Company may grant awards to employees, entitling them to receive up to 25% of any potential future payments of Promote to the Operating Partnership from Funds III and IV. The Company has awarded units to employees representing 25.0% of the potential Promote payments from Fund III to the Operating Partnership and 9.3% of the potential Promote payments from Fund IV to the Operating Partnership. Payments to senior executives under the Program require further Board approval at the time any potential payments are due pursuant to these grants. Compensation relating to these awards will be recognized in each reporting period in which Board approval is granted.



19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


13.    LONG-TERM INCENTIVE COMPENSATION (continued)

As payments to other employees are not subject to further Board approval, compensation relating to these awards will be recorded based on the change in the estimated fair value at each reporting period in accordance with ASC Topic 718, "Compensation - Stock Compensation."

During the three months ended March 31, 2016, compensation expense of $1.5 million was recognized related to the Program in connection with Fund III.

The awards in connection with Fund IV were determined to have no value as of March 31, 2016.


14.    SUBSEQUENT EVENTS

During April 2016, the Company entered into a forward sale and an underwritten public offering of 3.6 million Common Shares, which, if settled in Common Shares, will result in gross proceeds of approximately $125.0 million, before any underwriting discount and offering expenses. The forward sale will settle on one or more dates occurring no later than approximately 12 months after the date of the offering.

During April 2016, Fund III completed the disposition of Heritage Shops in Chicago, Illinois for a sales price of $46.5 million.

During April 2016, the Company borrowed $130.0 million under its unsecured credit facility, and repaid $140.0 million of secured debt that was scheduled to mature July 1, 2016. Additionally, the Company received repayment on a note receivable with accrued interest to an affiliated third party of $42.7 million that was scheduled to mature November 9, 2020 and issued a new note for $153.4 million, which is secured by the affiliates interest in the related property, bears interest at 8.1% and matures April 30, 2019.

20


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, 2016 and December 31, 2015 and for each of the three months ended March 31, 2016 and 2015. 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, 2015 (our "2015 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, 2016, we operated 151 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.


21


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 92 properties in our Core Portfolio totaling 4.7 million square feet. As of March 31, 2016, the Core Portfolio physical occupancy was 96.3% and leased occupancy, which includes executed leases for which rent has not yet commenced, was 96.6%.

Funds

Fund II has four properties, two 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 10 properties, seven of which (representing 1.1 million square feet) are operating and three of which are in various stages of redevelopment.
Fund IV has investments in 20 individual properties, 16 of which (representing 1.0 million square feet) are operating and 4 of which are in various stages of development. In addition, Fund IV is invested in a portfolio of 25 properties (the Broughton Street Portfolio), 14 of which are operating and 11 of which are in various stages of development.

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 2015 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, 2016 ("2016") to the three months ended March 31, 2015 ("2015")

(dollars in millions)
2016
 
2015
Revenues
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
 
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
Rental income
$
30.4

 
$
8.2

 
$

 
$
28.5

 
$
9.7

 
$

Interest income

 

 
4.6

 

 

 
3.4

Expense reimbursements
6.5

 
1.4

 

 
6.7

 
3.4

 

Other
1.2

 
0.3

 

 
0.4

 
0.4

 

Total revenues
$
38.1

 
$
9.9

 
$
4.6

 
$
35.6

 
$
13.5

 
$
3.4


Rental income in the Core Portfolio increased $1.9 million primarily as a result of additional rents from property acquisitions in 2015 and 2016 ("Core Acquisitions"). Rental income in the Funds decreased $1.5 million due to decreases of $2.4 million relating to property dispositions in 2015 and 2016 ("Fund Dispositions"). These decreases were partially offset by property acquisitions in 2015 and 2016 ("Fund Acquisitions").

The $1.2 million increase in interest income in the Structured Financing Portfolio was primarily the result of new loans originated during 2015 and 2016.


22


Expense reimbursements in the Funds decreased $2.0 million primarily due to Fund Dispositions and a decrease in property operating expenses during 2016.

(dollars in millions)
2016
 
2015
Operating Expenses 
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
 
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
Property operating
$
3.9

 
$
1.6

 
$

 
$
5.1

 
$
2.6

 
$

Other operating
0.2

 
0.1

 

 
0.5

 
1.6

 

Real estate taxes
4.5

 
1.7

 

 
4.1

 
2.2

 

General and administrative
9.1

 
0.3

 

 
6.8

 
0.7

 

Depreciation and amortization
13.5

 
3.4

 

 
9.9

 
3.8

 

Total operating expenses
$
31.2

 
$
7.1

 
$

 
$
26.4

 
$
10.9

 
$


Property operating expenses in the Core Portfolio decreased $1.2 million primarily as a result of lower seasonal costs during 2016. Property operating expenses in the Funds decreased $1.0 million primarily as a result of lower seasonal costs during 2016 and Fund Dispositions.

Other operating expenses in the Funds decreased $1.5 million as a result of lower acquisition costs during 2016.

General and administrative in the Core Portfolio increased $2.3 million due to increased compensation expense, which included $1.5 million related to the Program (Note 13).

The $3.6 million increase in depreciation and amortization in the Core Portfolio was attributable to Core Acquisitions.

(dollars in millions)
2016
 
2015
Other
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
 
Core
Portfolio
 
Funds
 
Structured Financing Portfolio
Equity in earnings of unconsolidated affiliates
$
0.6

 
$
1.4

 
$

 
$
0.4

 
$
6.2

 
$

Loss on debt extinguishment

 

 

 

 
(0.1
)
 

Gain on disposition of properties

 
65.4

 

 

 
27.1

 

Interest and other finance expense
(6.8
)
 
(1.3
)
 

 
(6.5
)
 
(2.4
)
 

Income tax benefit (provision)
0.1

 

 

 
(0.5
)
 
(0.9
)
 

Net income attributable to noncontrolling interests -
 
 
 
 
 
 


 


 


  - Continuing operations
(2.8
)
 
(42.1
)
 

 
(0.2
)
 
(21.8
)
 


Equity in earnings of unconsolidated affiliates in the Funds decreased $4.8 million primarily as a result of additional distributions in excess of basis from the RCP Venture in 2015.

The gain on disposition of properties in the Funds during 2016 represents our gain on sale from Cortlandt Town Center. Gain on disposition of properties in the Funds in 2015 represents our gain on sale from Lincoln Park Center.

Interest and other finance expense in the Funds decreased $1.1 million primarily due to a $1.5 million increase in capitalized interest related to our City Point redevelopment project during 2016, offset by a $0.5 million increase related to higher average interest rates during 2016.

The variance in the income tax benefit (provision) in the Funds resulted from a 2015 corporate federal tax incurred by a Fund IV investor.

23



Net income attributable to noncontrolling interests in the Funds represents their share of all Fund variances discussed above.

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 frequently 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, excluding above and below market rent as well as straight-line rent, 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,
 
 
2016
 
2015
Consolidated Operating Income
 
$
14.5

 
$
15.1

Add back:
 
 
 
 
  General and administrative
 
9.4

 
7.5

  Depreciation and amortization
 
16.8

 
13.7

Less:
 
 
 
 
  Interest income
 
(4.6
)
 
(3.4
)
  Above/below market rent, straight-line rent and other adjustments
 
(3.5
)
 
(0.5
)
Consolidated NOI
 
32.6

 
32.4

Less: Noncontrolling interest in consolidated NOI
 
(7.1
)
 
(9.4
)
Less: Operating Partnership's interest in Fund NOI included above
 
(1.3
)
 
(1.6
)
Add: Operating Partnership's share of unconsolidated joint ventures NOI 1
 
3.3

 
2.5

Core Portfolio NOI
 
$
27.5

 
$
23.9


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, 2016 and 2015:

24



(dollars in millions)
 
 
 
 
Reconciliation of Core Portfolio NOI to Same-Property NOI
 
 
Three Months Ended
 
 
March 31,
 
 
2016
 
2015
Core Portfolio NOI
 
$
27.5

 
$
23.9

Less: properties excluded from Same-Property NOI
 
(3.3
)
 
(0.6
)
Same-Property NOI
 
$
24.2

 
$
23.3

 
 
 
 
 
Percent change from 2015
 
3.6
%
 
 
 
 
 
 
 
Components of Same-Property NOI
 
 
 
 
Same-Property Revenues
 
$
31.7

 
$
31.5

Same-Property Operating Expenses
 
(7.5
)
 
(8.2
)
Same-Property NOI
 
$
24.2

 
$
23.3


The increase in Same-Property NOI in the Core Portfolio for the three months ended March 31, 2016 were primarily attributable to contractual rent increases and the realization of rent increases from below-market leases.

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, 2016. 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, 2016
Core Portfolio New and Renewal Leases
Cash Basis
 
Straight-Line Basis (GAAP)
Number of new and renewal leases executed
12

 
12

Gross leasable area
43,015

 
43,015

New average base rent
$
27.36

 
$
26.39

Expiring average base rent
$
24.99

 
$
25.33

Percent growth in average base rent
9.5
%
 
4.2
%
Average cost per square foot (1)
$
25.07

 
$
25.07

Weighted average lease term (years)
8.2

 
8.2

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.


25


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 (losses) from sales of depreciated property, depreciation and amortization, and impairment of depreciable real estate. Although we calculate FFO consistent with the NAREIT definition, other REITs may calculate it differently and, accordingly, our calculation 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, 2016 and 2015 is as follows:

 
Three Months Ended
 
March 31,
(amounts in millions, except per share amounts) 
2016
 
2015
Funds From Operations
 
 
 
Net income attributable to Common Shareholders
$
28.9

 
$
16.5

Depreciation of real estate and amortization of leasing costs (net of noncontrolling interests’ share)
15.3

 
10.9

Gain on sale (net of noncontrolling interests’ share)
(15.1
)
 
(5.4
)
Income attributable to Common OP Unit holders
2.0

 
1.0

Funds from operations attributable to Common Shareholders and Common OP Unit holders
$
31.1

 
$
23.0

Funds From Operations per Share - Diluted
 

 
 

Weighted average number of Common Shares and Common OP Units
75.8

 
72.6

Diluted funds from operations, per Common Share and Common OP Unit
$
0.41

 
$
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, 2016, we paid dividends and distributions on our Common Shares, Common OP Units and LTIP Units totaling $37.6 million. This amount included an $18.8 million special dividend which related to the Operating Partnership's share of cash proceeds from property dispositions during 2015. The balance of the distribution was funded from the Operating Partnership's share of operating cash flow.

Distributions of $47.0 million were made to noncontrolling interests in Fund III during the three months ended March 31, 2016. This resulted from proceeds following the disposition of Cortlandt Town Center as discussed in Note 4 to the Notes to Consolidated Financial Statements.

Investments

Core Portfolio

For the three months ended March 31, 2016, we acquired two properties for an aggregate purchase price of $116.3 million. This was funded primarily through the issuance of OP Units and the assumption of our pro-rata share of debt. See Note 4 to the Notes to Consolidated Financial Statements for a discussion of these investments.


26


We currently have an acquisition pipeline of $156.3 million under contract, including $59.7 million of mortgage indebtedness with various lenders that we expect to assume in connection with this pipeline. As this acquisition pipeline is subject to customary closing conditions, no assurance can be given that closing will be successfully completed.

Structured Financing Portfolio

As of March 31, 2016, our structured financing portfolio aggregated $154.7 million with related accrued interest of $15.9 million. The notes were collateralized by the underlying properties, the borrower's ownership interest in the entities that own the properties and/or by the borrower's personal guarantee. Effective interest rates on our notes receivable ranged from 2.5% to 18.0% with maturities from April 2016 through January 2021.

During 2016, we have made investments aggregating $27.8 million in our structured financing portfolio. See Note 6 in the Notes to the Consolidated Financial Statements for a discussion of these investments.

Funds

During 2016, Fund IV has acquired two properties for an aggregate purchase price of $13.8 million, of which the Operating Partnership's share was $3.0 million. See Note 4 to the Notes to Consolidated Financial Statements for a discussion of these investments.

As part of our Fund investment strategy, we acquire real estate assets that require significant redevelopment. As of March 31, 2016, we had 10 redevelopment projects, four of which are under construction and six of which are in various stages of development as follows:

(dollars in millions)
 
 
 
 
 
 
 
Property
 
Owner
 
Costs
to date