Document



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


For the quarterly period ended September 30, 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 October 28, 2016 there were 80,863,404 common shares of beneficial interest, par value $.001 per share, outstanding.





ACADIA REALTY TRUST AND SUBSIDIARIES

FORM 10-Q

INDEX

 
 
Page
 
 
 
Part I:
Financial Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Part II:
Other Information
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




Part I. Financial Information

Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
September 30,
2016
 
December 31,
2015
ASSETS
(unaudited)
 
 
Operating real estate
 
 
 
Land
$
533,521

 
$
514,120

Buildings and improvements
1,786,608

 
1,593,350

Construction in progress
23,068

 
19,239

 
2,343,197

 
2,126,709

Less: accumulated depreciation
276,383

 
298,703

Net operating real estate
2,066,814

 
1,828,006

Real estate under development
676,592

 
609,574

Notes receivable and preferred equity investments
266,816

 
147,188

Investments in and advances to unconsolidated affiliates
273,576

 
173,277

Cash and cash equivalents
49,242

 
72,776

Cash in escrow
22,115

 
26,444

Restricted cash
2,378

 
10,840

Rents receivable, net
42,171

 
40,425

Deferred charges, net
24,786

 
22,568

Acquired lease intangibles, net
93,819

 
52,593

Prepaid expenses and other assets
60,210

 
48,628

Total assets
$
3,578,519

 
$
3,032,319

 
 
 
 
LIABILITIES
 

 
 

Mortgage and other notes payable, net of unamortized loan costs of $11,111 and $10,567, respectively, and unamortized premiums of $1,524 and $1,364, respectively
$
887,956

 
$
1,050,051

Unsecured notes payable, net of unamortized loan costs of $1,673 and $1,155, respectively
407,563

 
308,555

Distributions in excess of income from, and investments in, unconsolidated affiliates
24,249

 
13,244

Accounts payable and accrued expenses
40,721

 
38,754

Dividends and distributions payable
21,675

 
37,552

Acquired lease intangibles, net
78,474

 
31,809

Other liabilities
108,828

 
31,000

Total liabilities
1,569,466

 
1,510,965

 
 
 
 
EQUITY
 
 
 
Shareholders' Equity
 
 
 
Common shares, $.001 par value, authorized 100,000,000 shares; issued and outstanding 80,863,404 and 70,258,415 shares, respectively
81

 
70

Additional paid-in capital
1,500,864

 
1,092,239

Accumulated other comprehensive loss
(12,844
)
 
(4,463
)
Retained earnings
8,815

 
12,642

Total shareholders’ equity
1,496,916

 
1,100,488

Noncontrolling interests
512,137

 
420,866

Total equity
2,009,053

 
1,521,354

Total liabilities and equity
$
3,578,519

 
$
3,032,319

See accompanying notes

1


ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

(unaudited)
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Rental income
$
35,710

 
$
40,722

 
$
109,486

 
$
118,693

Interest income
7,245

 
5,728

 
19,298

 
13,121

Expense reimbursements
7,192

 
8,020

 
22,920

 
25,911

Other
953

 
2,382

 
3,412

 
4,769

Total revenues
51,100


56,852

 
155,116

 
162,494

Operating Expenses
 
 
 
 
 
 
 
Property operating
5,055

 
6,304

 
15,697

 
20,231

Other operating
3,265

 
396

 
4,094

 
3,115

Real estate taxes
6,195

 
6,153

 
18,000

 
18,864

General and administrative
12,869

 
7,603

 
30,742

 
23,140

Depreciation and amortization
15,217

 
17,461

 
46,744

 
45,022

Impairment of asset

 

 

 
5,000

Total operating expenses
42,601


37,917

 
115,277

 
115,372

Operating income
8,499


18,935

 
39,839

 
47,122

Equity in (losses) earnings of unconsolidated affiliates
(102
)
 
2,195

 
3,592

 
12,194

Gain on disposition of property of unconsolidated affiliates

 
6,938

 

 
24,043

Loss on debt extinguishment

 

 
(15
)
 
(134
)
Gain on disposition of properties

 
79

 
81,965

 
89,063

Interest and other finance expense
(7,982
)
 
(9,345
)
 
(24,902
)
 
(28,130
)
Income before income tax provision
415


18,802

 
100,479

 
144,158

Income tax provision
(89
)
 
(698
)
 
(123
)
 
(2,059
)
Net income
326


18,104

 
100,356

 
142,099

Noncontrolling interests
 
 
 
 
 
 
 
Net loss (income) attributable to noncontrolling interests
5,786


(4,328
)
 
(47,401
)
 
(85,281
)
Net income attributable to Common Shareholders
$
6,112


$
13,776

 
$
52,955

 
$
56,818

 
 
 
 
 
 
 
 
Basic and diluted earnings per share
$
0.08


$
0.20

 
$
0.71

 
$
0.82

See accompanying notes

2


ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)
 
 
Three Months Ended
 
Nine Months Ended
 
 
September 30,
 
September 30,
 
 
2016
 
2015
 
2016
 
2015
(dollars in thousands)
 
 
 
 
 
 
 
 
Net income
 
$
326

 
$
18,104

 
$
100,356

 
$
142,099

Other comprehensive income (loss)
 
 
 
 
 
 
 
 
Unrealized income (loss) on valuation of swap agreements
 
1,474

 
(5,671
)
 
(12,624
)
 
(7,328
)
Reclassification of realized interest on swap agreements
 
1,210

 
1,026

 
3,396

 
4,478

Other comprehensive income (loss)
 
2,684

 
(4,645
)
 
(9,228
)
 
(2,850
)
Comprehensive income
 
3,010

 
13,459

 
91,128

 
139,249

Comprehensive loss (income) attributable to noncontrolling interests
 
5,478

 
(3,743
)
 
(46,554
)
 
(85,772
)
Comprehensive income attributable to Common Shareholders
 
$
8,488

 
$
9,716

 
$
44,574

 
$
53,477

See accompanying notes


3




ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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
350

 
1

 
7,874

 

 

 
7,875

 
(7,875
)
 

Issuance of Common Shares, net of issuance costs
10,228

 
10

 
357,252

 

 

 
357,262

 

 
357,262

Issuance of OP Units to acquire real estate

 

 

 

 

 

 
29,336

 
29,336

Dividends and dividend equivalents declared ($0.75 per Common Share)

 

 

 

 
(56,782
)
 
(56,782
)
 
(4,398
)
 
(61,180
)
Employee and trustee stock compensation, net
27

 

 
699

 

 

 
699

 
10,983

 
11,682

Acquisition of noncontrolling interests

 

 
7,546

 

 

 
7,546

 
(25,925
)
 
(18,379
)
Change in control of previously consolidated investment

 

 

 

 

 

 
(75,713
)
 
(75,713
)
Noncontrolling interest distributions

 

 

 

 

 

 
(50,849
)
 
(50,849
)
Noncontrolling interest contributions

 

 

 

 

 

 
204,412

 
204,412

Reallocation of noncontrolling interest

 

 
35,254

 

 

 
35,254

 
(35,254
)
 

 
80,863

 
81

 
1,500,864

 
(4,463
)
 
(44,140
)
 
1,452,342

 
465,583

 
1,917,925

Comprehensive (loss) income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income

 

 

 

 
52,955

 
52,955

 
47,401

 
100,356

Unrealized loss on valuation of swap agreements

 

 

 
(11,351
)
 

 
(11,351
)
 
(1,273
)
 
(12,624
)
Reclassification of realized interest on swap agreements

 

 

 
2,970

 

 
2,970

 
426

 
3,396

Total comprehensive (loss) income

 

 

 
(8,381
)
 
52,955

 
44,574

 
46,554

 
91,128

Balance at September 30, 2016
80,863

 
$
81

 
$
1,500,864

 
$
(12,844
)
 
$
8,815

 
$
1,496,916

 
$
512,137

 
$
2,009,053


See accompanying notes


4




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

 
Nine Months Ended
 
September 30,
(dollars in thousands)
2016
 
2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
100,356

 
$
142,099

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

 
 
Depreciation and amortization
46,744

 
45,022

Amortization of financing costs
2,025

 
2,577

Gain on disposition of properties
(81,965
)
 
(89,063
)
Impairment of asset

 
5,000

Stock compensation expense
9,729

 
5,669

Equity in earnings of unconsolidated affiliates
(3,592
)
 
(12,194
)
Gain on disposition of property of unconsolidated affiliates

 
(24,043
)
Distributions of operating income from unconsolidated affiliates
4,917

 
11,747

Other, net
(5,577
)
 
(5,103
)
Changes in assets and liabilities
 

 
 
Cash in escrow
1,733

 
(6,757
)
Rents receivable, net
(4,858
)
 
(2,454
)
Prepaid expenses and other assets
(11,642
)
 
1,901

Accounts payable and accrued expenses
(1,511
)
 
7,738

Other liabilities
134

 
3,203

Net cash provided by operating activities
56,493

 
85,342

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Acquisition of real estate
(292,136
)
 
(292,671
)
Deposits for properties under contract
(8,576
)
 

Redevelopment and property improvement costs
(94,459
)

(159,360
)
Deferred leasing costs
(5,451
)
 
(5,931
)
Investments in and advances to unconsolidated affiliates
(68,153
)
 
(10,581
)
Return of capital from unconsolidated affiliates
50,622

 
9,574

Proceeds from disposition of property of unconsolidated affiliates

 
38,392

Change in control of previously consolidated investment
(2,578
)
 

Proceeds from notes receivable
42,819

 
15,984

Issuance of notes receivable
(148,203
)
 
(48,350
)
Proceeds from sale of properties, net
150,379

 
198,434

Net cash used in investing activities
(375,736
)
 
(254,509
)

5




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

 
Nine Months Ended
 
September 30,
(dollars in thousands)
2016
 
2015
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
 
Principal payments on mortgage and other notes
(292,815
)
 
(92,468
)
Principal payments on unsecured debt
(516,790
)
 
(174,815
)
Proceeds received from mortgage and other notes
70,437

 
85,859

Proceeds received from unsecured debt
616,315

 
253,200

Loan proceeds held as restricted cash
8,462

 
43,315

Deferred financing and other costs
(5,288
)
 
(3,155
)
Capital contributions from noncontrolling interests
204,412

 
34,895

Distributions to noncontrolling interests
(74,612
)
 
(79,575
)
Dividends paid to Common Shareholders
(71,674
)
 
(69,788
)
Proceeds from issuance of Common Shares, net of issuance costs of $7,317 and $655, respectively
357,262

 
26,933

Net cash provided by financing activities
295,709

 
24,401

Decrease in cash and cash equivalents
(23,534
)
 
(144,766
)
Cash and cash equivalents, beginning of period
72,776

 
217,580

Cash and cash equivalents, end of period
$
49,242

 
$
72,814

 
 
 
 
Supplemental disclosure of cash flow information
 

 
 

Cash paid during the period for interest, net of capitalized interest of $14,936 and $11,847, respectively
$
28,116

 
$
34,146

Cash paid for income taxes
$
1,267

 
$
2,543

 
 
 
 
Supplemental disclosure of non-cash investing activities
 
 
 
Acquisition of real estate through assumption of debt
$
60,668

 
$
90,765

Acquisition of capital lease obligation
$
76,461

 
$

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

 
$

Acquisition of real estate through conversion of notes receivable
$

 
$
6,886

Acquisition of real estate through assumption of restricted cash
$

 
$
28,192

Disposition of air rights through issuance of notes receivable
$

 
$
(29,793
)
Assumption of accounts payable and accrued expenses through acquisition of real estate
$
1,809

 
$

Assumption of prepaid expenses and other assets through acquisition of real estate
$
1,074

 
$

 
 
 
 
Change in control of previously consolidated investment
 

 
 

Real estate, net
$
90,559

 
$

Investment in unconsolidated affiliates
$
(21,421
)
 
$

Other assets and liabilities
$
3,997

 
$

Noncontrolling interest
$
(75,713
)
 
$

Cash included with change in control of previously consolidated investment
$
(2,578
)
 
$


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 September 30, 2016, 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 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").

Effective August 10, 2016, the Company formed Acadia Strategic Opportunity Fund V LLC (“Fund V”), with a total of $520.1 million of equity commitments with 12 institutional investors. The Operating Partnership's share of equity commitments is $104.5 million. The Operating Partnership is the sole managing member of Fund V. The terms and structure of Fund V are substantially the same as those of Fund IV. As of September 30, 2016, there have been no capital contributions made to Fund V and Fund V has not acquired any investments.

As of September 30, 2016, the Company has ownership interests in 116 properties within its core portfolio, which consists 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"), Acadia Strategic Opportunity Fund IV LLC ("Fund IV") and Fund V (together with Funds II, III and IV, the "Funds"). The 175 Core Portfolio and Fund properties consist of commercial properties, which are primarily 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 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).


7

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

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 September 30, 2016 (4)
Unfunded Commitment as of September 30, 2016
Equity Interest Held By Operating Partnership
Preferred Return
Total Distributions as of September 30, 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
5/2007
24.54%
502.5
396.7
53.3
24.54%
6%
509.8
Fund IV
5/2012
23.12%
540.6
290.5
239.5
23.12%
6%
101.9
Fund V
8/2016
20.10%
520.1
520.1
20.10%
6%
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. This amount was recontributed subsequent to September 30, 2016.
(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 (Losses) of Unconsolidated Affiliates. Investments in entities for which the Company does not have the ability to exercise any influence are accounted for under the cost method.

The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Operating results for the three and nine months ended September 30, 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.

During the nine months ended September 30, 2016, management determined that certain transactions involving the issuance of Common Shares of the Trust and Common OP Units, Preferred OP Units, and LTIP Units of the Operating Partnership, should have resulted in an adjustment to the Operating Partnership’s non-controlling interest ("OPU NCI") and the Trust’s Additional Paid-in-Capital ("APIC") to reflect the difference between the fair value of the consideration received or paid and the book value of the Common Shares, Common OP Units, Preferred OP Units, and LTIP Units involving these changes in ownership (the "Rebalancing"). During the nine months ended September 30, 2016, the Trust increased its APIC with an offsetting reduction to the OPU NCI of approximately $35.3 million, of which approximately $31.8 million of this Rebalancing related to prior years. Management concluded that the Rebalancing adjustments were not meaningful to the Company’s financial position for any of the prior years, and the quarterly periods in 2016, and as such, this cumulative change was recorded in the consolidated balance sheet and statement of shareholder’s


8

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

equity in the second quarter of 2016 as an out-of-period adjustment. The misclassification had no impact on the previously reported consolidated assets, liabilities or total equity or on the consolidated statements of income, comprehensive income, or cash flows.

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 matured July 1, 2016. Management does not believe that the carrying values of any of its other properties are impaired as of September 30, 2016.

Recent Accounting Pronouncements

During August 2016, the FASB issued Accounting Standards Update ("ASU") No. 2016-15, "Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments." ASU 2016-15 provided guidance on certain specific cash flow issues, including, but not limited to, debt prepayment or extinguishment costs, contingent consideration payments made after a business combination and distributions received from equity method investees. ASU 2016-15 is effective for periods beginning after December 15, 2017, with early adoption permitted and shall be applied retrospectively where practicable. The Company is in the process of evaluating the impact the adoption of ASU 2016-15 will have on its consolidated financial statements.

During June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses." ASU 2016-13 requires a financial asset measured at amortized cost basis to be presented at the net amount expected to be collected. ASU 2016-13 is effective for periods beginning after December 15, 2019, with adoption permitted for fiscal years beginning after December 15, 2018. Retrospective adjustments shall be applied through a cumulative-effect adjustment to retained earnings. The Company is in the process of evaluating the impact the adoption of ASU 2016-13 will have on its consolidated financial statements.

During February 2016, the FASB issued 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. Consolidated VIE's are those where the Company is considered to be the primary beneficiary of a VIE. The primary beneficiary is the entity that has a controlling financial interest in the VIE, which is defined by the entity having both of the following characteristics: 1) the power to direct the activities that, when taken together, most significantly impact the VIE’s performance and 2) the obligation to absorb losses or the right to receive the returns from the VIE that could potentially be significant to the VIE. The Company reviewed all of its entities in accordance with ASU 2015-02 and concluded that certain of its legal entities, including the Operating Partnership and the Funds, which had previously been consolidated, are now VIE's. As a result of the classification of the Operating Partnership as a VIE, substantially all of the Company's assets and liabilities are assets and liabilities of a VIE. 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.

9

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

1.    ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements (continued)

During August 2014, the FASB issued ASU No. 2014-15, "Presentation of Financial Statements - Going Concern." ASU 2014-15 requires an entity's management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued. ASU 2014-15 is effective for periods beginning after December 15, 2016. ASU 2014-15 is not expected to have a material impact on the Company's financial statements.

During May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers," which supersedes nearly all existing revenue recognition guidance under GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing GAAP. The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures). The Company is currently evaluating the impact of its pending adoption of ASU 2014-09 on its consolidated financial statements and has not yet determined the method by which the standard will be adopted in 2017.

2.    EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed by dividing net income attributable to Common Shareholders by the weighted average Common Shares outstanding. At September 30, 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") awards issued under the Company's Share Incentive Plans (Note 13). The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares would be anti-dilutive and therefore not included for the three and nine months ended September 30, 2016 and three months ended September 30, 2015. Conversely, the assumed conversion of these would be dilutive and included in the computation of diluted earning per share for the nine months ended September 30, 2015 . The effect of the assumed conversion of 141,593 Series C Preferred OP Units into 402,252 Common Shares, would be anti-dilutive and therefore not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2016. Additionally, the 2,732,388 Common Shares that were subject to the forward sales agreement entered into in April 2016 that were not settled would be dilutive and are included in the computation of diluted earnings per share for the three and nine months ended September 30, 2016.

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.


10

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


2.    EARNINGS PER COMMON SHARE (continued)

The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands, except per share amounts)
2016
 
2015
 
2016
 
2015
Numerator
 
 
 
 
 
 
 
Net income attributable to Common Shareholders
$
6,112

 
$
13,776

 
$
52,955

 
$
56,818

Less: net income attributable to participating securities
(58
)
 
(196
)
 
(617
)
 
(810
)
Net income attributable to Common Shareholders, net of income attributable to participating securities
6,054

 
13,580

 
52,338

 
56,008

 
 
 
 
 
 
 
 
Denominator
 

 
 

 
 
 
 
Weighted average shares for basic earnings per share
78,449

 
68,943

 
74,050

 
68,690

Effect of dilutive securities:
 

 
 

 
 
 
 

Employee Restricted Share Units and share options
3

 
14

 
8

 
24

Forward settlement agreement
169

 

 
76

 

Convertible Preferred OP Units

 

 

 
25

Denominator for diluted earnings per share
78,621

 
68,957

 
74,134

 
68,739

 
 
 
 
 
 
 
 
Basic and diluted earnings per Common Share attributable to Common Shareholders
$
0.08

 
$
0.20

 
$
0.71

 
$
0.82



3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS

During the nine months ended September 30, 2016, the Company issued 4.6 million Common Shares under its at-the-market ("ATM") equity programs, generating gross proceeds of $158.8 million and net proceeds of $156.8 million. The Company has established a new ATM equity program, effective July 2016, with an additional aggregate offering amount of up to $250.0 million of gross proceeds from the sale of Common Shares, replacing its $200.0 million program that was launched in 2014. As of September 30, 2016, there was $218.0 million remaining under this $250.0 million program.

During the nine months ended September 30, 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. The Series C Preferred OP Units are convertible into Common OP Units at a rate based on the share price at the time of conversion. If the share price is below $28.80 on the conversion date, each Series C Preferred OP Units will be convertible into 3.4722 Common OP Units. If the share price is between $28.80 and $35.20 on the conversion date, each Series C Preferred OP Units will be convertible a number of Common OP Units equal to $100.00 divided by the closing share price. If the share price is above $35.20 on the conversion date, each Series C Preferred OP Units will be convertible into 2.8409 Common OP Units. The Series C Preferred OP Units have a mandatory conversion date of December 31, 2025, at which time all units that have not been converted will automatically be converted into Common OP Units based on the same calculations.

During April 2016, the Company entered into a forward sale agreement to issue 3,600,000 Common Shares for net proceeds of $124.5 million. As of September 30, 2016, 867,612 of these shares have been physically settled, generating net proceeds of $30.0 million. Subject to the Company's right to elect cash or net share settlement, the Company expects to physically settle the forward sale agreement in conjunction with the closing of its acquisitions. The forward sale agreement expires during April 2017.

During August 2016, the Company issued 4,830,000 Common Shares in a public offering, generating gross proceeds of $175.2 million and net proceeds of $172.1 million.


11

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

3.
SHAREHOLDERS' EQUITY AND NONCONTROLLING INTERESTS (continued)

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’ 3,308,875 and 2,931,198 Common OP Units at September 30, 2016 and December 31, 2015, respectively; (ii) 188 Series A Preferred OP Units at September 30, 2016 and December 31, 2015, respectively; (iii) 141,593 Series C Preferred OP Units at September 30, 2016 and (iv) 1,163,841 and 929,169 LTIP Units at September 30, 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
76,628

New York, NY

165 Newbury Street
1,588

100
%
Street Retail
May
6,250

Boston, MA

Renaissance Portfolio (3)
305,000

20
%
Street Retail
June
67,600

Washington, D.C.
20,000

Concord & Milwaukee
13,105

100
%
Street Retail
July
6,000

Chicago, IL
2,902

State & Washington
84,604

100
%
Street Retail
August
70,250

Chicago, IL
25,651

151 North State Street
27,385

100
%
Street Retail
August
30,500

Chicago, IL
14,556

North & Kingsbury
41,700

100
%
Street Retail
August
34,000

Chicago, IL
13,409

Sullivan Center
199,122

100
%
Urban Retail Center
August
146,939

Chicago, IL

California & Armitage
18,275

100
%
Street Retail
September
9,250

Chicago, IL
2,692

Total Core Portfolio
820,601

 
 
 
$
487,225

 
$
89,682

 
 
 
 
 
 
 
 
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

Wake Forest Crossing
203,006

100
%
Suburban Shopping Center
September
36,600

Wake Forest, NC

Total Fund IV
222,534

 
 
 
$
50,350

 
$
1,463

 
 
 
 
 
 
 
 
Total
1,043,135

 
 
 
$
537,575

 
$
91,145

Notes:

(1) The Company acquired a 49% noncontrolling 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.

12

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)

(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 nine months ended September 30, 2016, lease payments totaling $7.8 million were made under this lease.

(3) The Company acquired a 20% noncontrolling membership interest in an existing joint venture for $67.6 million. The Company's pro-rata share of debt assumed was $20.0 million. The assets and liabilities of the underlying entity are stated at historical cost basis. The difference between the Company's investment and the historical cost basis has been allocated based on the estimated fair value of the underlying assets and liabilities and amortized over their respective lives.

For the nine months ended September 30, 2016, the Company expensed $5.1 million of acquisition costs in the Core Portfolio and $0.4 million of acquisition costs in Fund IV. These amounts include costs related to both consolidated assets and investments in unconsolidated affiliates.

Purchase Price Allocations

With the exception of 1964 Union Street, which was an asset acquisition, and 991 Madison Avenue, a capital lease, 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 following table summarizes the Company's allocations of the purchase prices of assets acquired and liabilities assumed during 2016:

(dollars in thousands)
Purchase Price Allocations
Land
$
58,740

Buildings and improvements
291,820

Prepaid expenses and other assets
4,320

Acquisition-related intangible assets (in Acquired lease intangibles, net)
40,554

Acquisition-related intangible liabilities (in Acquired lease and other intangibles, net)
(43,753
)
Debt assumed (included in Mortgage and other notes payable)
(59,601
)
Total consideration
$
292,080


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. These allocation adjustments resulted in an increase to depreciation and amortization expense of $1.9 million and a reduction to rental income of $0.1 million for the nine months ended September 30, 2016, which related to 2015.


13

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)

The following table summarizes the preliminary allocations of the purchase prices of these properties and the finalized allocations as adjusted as of September 30, 2016:

(dollars in thousands)
Purchase Price Allocations as Originally Reported
Adjustments
Finalized Purchase Price Allocations
Land
$
83,890

$
4,178

$
88,068

Buildings and improvements
258,926

(14,023
)
244,903

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

22,660

22,660

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

(12,094
)
(12,094
)
Below market debt assumed (in Mortgage and other notes payable)
(10,885
)
(721
)
(11,606
)
Total consideration
$
331,931

$

$
331,931


Dispositions

During 2016, the Company disposed of the following properties:

(dollars in thousands)
 
 
 
 
 
Dispositions
GLA
Sales Price
Gain on Sale
Month Sold
Owner
Cortlandt Town Center (1)

$
107,250

$
65,393

January
Fund III
Heritage Shops
82,098

46,500

16,572

April
Fund III
Total
82,098

$
153,750

$
81,965

 
 

Note:
(1) Fund III sold a 65% controlling interest in Cortlandt Town Center for $107,250, resulting in a gain on sale of $65,393.

Properties Held For Sale

At September 30, 2016 and December 31, 2015, the Company had no properties classified as held-for-sale.


14

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Pro Forma Financial Information

The pro forma financial information set forth below is based on the Company's Consolidated Statement of Income for the nine months ended September 30, 2016 and 2015, adjusted to give effect to properties acquired during the nine months ended September 30, 2016, as if they were acquired as of January 1, 2015. The pro forma financial information is presented for informational purposes only and may not be indicative of what actual results would have been, nor does it represent the results for future periods.

 
Nine Months Ended
 
September 30,
(dollars in thousands, except per share amounts)
2016
2015
Aggregate and Condensed Statements of Income
 
 
Total revenues
$
171,224

$
182,413

Operating and other expenses
$
(126,512
)
$
(129,702
)
Interest and other finance expense
$
(25,485
)
$
(29,948
)
Net income
$
105,069

$
146,638

 Net income attributable to Common Shareholders
$
57,436

$
61,088

Basic and diluted earnings per Common Share attributable to Common Shareholders
$
0.70

$
0.79



5.    INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

The Company owns a 49% noncontrolling 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 financial or operating control.

During January 2016, the Company completed the acquisition of a 49% noncontrolling 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 non-recourse 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 financial or operating control.

During May 2016, the Company completed the acquisition of a 20% noncontrolling interest in a portfolio of 17 mixed-use properties, 16 of which are located in Georgetown, Washington D.C. and one which is located in Alexandria, Virginia (the "Renaissance Portfolio"). The Company accounts for this investment under the equity method as it has the ability to exercise significant influence, but does not have financial or operating control.

The Company owns a 22.22% interest in an approximately one million square foot retail portfolio (the "Brandywine Portfolio") located in Wilmington, Delaware. Prior to the second quarter of 2016, the Company had a controlling interest in the Brandywine Portfolio, and it was therefore consolidated within the Company’s financial statements. During the second quarter of 2016, the arrangement with the partners of the Brandywine Portfolio was modified to change the legal ownership from a partnership to a tenancy in common (“TIC”), as well as to provide certain participating rights to the outside partners. As a result of these modifications, the Company deconsolidated the Brandywine Portfolio and accounts for its interest under the equity method of accounting. Furthermore, as the owners of the Brandywine Portfolio had consistent ownership interests before and after the modification and the underlying nets assets are unchanged, the Company has reflected the change from consolidation to equity method based upon its historical cost.



15

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


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

Additionally, during the quarter ended June 30, 2016, the outstanding balance of $140.0 million of non-recourse debt collateralized by the Brandywine Portfolio was repaid. The Company provided a loan collateralized by the partners’ ownership interest in the TIC, as further described in Note 6, for their proportionate share of the repayment.

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 September 30, 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 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 Albertsons, 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 nine months ended September 30, 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 September 30, 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
21,108

 
81,594

 
4,350

 
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
 
$
63,607

 
$
155,604

 
$
12,181

 
$
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, 650 Bald Hill Road 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 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 its remaining 35% interest under the equity method as it has the ability to exercise significant influence, but does not have financial or operating control.


16

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)
September 30,
2016
 
December 31,
2015
Aggregate and Condensed Balance Sheets
 
 
 
Assets
 
 
 
Rental property, net
$
734,311

 
$
302,976

Real estate under development
23,486

 
35,743

Investment in unconsolidated affiliates
6,853

 
6,853

Other assets
95,264

 
47,083

Total assets
$
859,914

 
$
392,655

Liabilities and partners’ equity
 

 
 

Mortgage notes payable
$
499,899

 
$
192,684

Other liabilities
51,472

 
21,945

Partners’ equity
308,543

 
178,026

Total liabilities and partners’ equity
$
859,914

 
$
392,655

Company’s investment in and advances to unconsolidated affiliates
$
273,576

 
$
173,277

Company's share of distributions in excess of income from, and investments in, unconsolidated affiliates
$
(24,249
)
 
$
(13,244
)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Aggregate and Condensed Statements of Income
 
 
 
 
 
 
 
Total revenues
$
26,590

 
$
10,712

 
$
58,984

 
$
32,727

Operating and other expenses
(7,066
)
 
(3,022
)
 
(18,082
)
 
(9,855
)
Interest and other finance expense
(5,242
)
 
(2,183
)
 
(11,355
)
 
(7,080
)
Equity in earnings of unconsolidated affiliates

 

 

 
66,655

Depreciation and amortization
(15,398
)
 
(2,791
)
 
(24,262
)
 
(7,828
)
(Loss) gain on disposition of property
(1,452
)
 
7,416

 
(1,452
)
 
32,623

Net (loss) income
$
(2,568
)
 
$
10,132

 
$
3,833

 
$
107,242

 

 

 
 
 
 
Company’s share of net (loss) income
$
377

 
$
9,231

 
$
4,267

 
$
36,531

Amortization of excess investment
(479
)
 
(98
)
 
(675
)
 
(294
)
Company’s equity in (losses) earnings of unconsolidated affiliates
$
(102
)
 
$
9,133

 
$
3,592

 
$
36,237



17

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.    STRUCTURED FINANCING PORTFOLIO

As of September 30, 2016, the Company’s structured financing portfolio (the "Structured Financing Portfolio"), consisted of notes receivable and preferred equity investments, aggregating $266.8 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)
 
Net Carrying Amounts of Structured Financing Portfolio as of September 30, 2016
 
Net Carrying Amounts of Structured Financing Portfolio as of December 31, 2015
 
Maturity date
 
Extension Options
First Mortgage Loan
 
(2)
 
7.0%
 
$

 
$

 
8/3/2016
 

First Mortgage Loan
 
(3)
 
8.8%
 

 
7,500

 
11/1/2016
 
 
First Mortgage Loan
 
 
 
6.0%
 
15,000

 
15,000

 
5/1/2017
 

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
First Mortgage Loan
 
(5)
 
8.1%
 
153,400

 
30,879

 
4/30/2019
 
 
Preferred Equity
 
(6)
 
8.7%
 
10,000

 

 
9/9/2019
 
1 x 12 Months
Zero Coupon Loan
 
(7)
 
2.5%
 
30,810

 
30,234

 
5/31/2020
 
 
Preferred Equity
 
(8)
 
15.3%
 
15,250

 

 
2/3/2021
 
2 x 12 Months
First Mortgage Loan
 
(9)
 
9.0%
 
12,000

 
12,000

 
Demand
 
 
Individually less than 3%
 

 
18.0%
 
4,356

 
12,575

 
7/1/2017
 
 
Total
 
 
 
 
 
$
266,816

 
$
147,188

 
 

 
Notes:

(1) Includes the effects of origination and exit fees
(2) During January 2016, Fund IV made a $13.3 million loan, which was collateralized by a property and bore interest at 7.0%. The Company received received a payment of $13.8 million, which included $13.3 million of full principal repayment and $0.5 million of accrued unpaid interest during the three months ended September 30, 2016.
(3) During February 2016, the Company received full principal repayment of this $7.5 million loan.
(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.
(5) During April 2016, the Company restructured a $30.9 million mezzanine loan, which bore interest at 15%, and replaced it with a new $153.4 million loan collateralized by a first mortgage in the borrower's TIC interest. The new loan, which was made to our partners in the Brandywine Portfolio, bears interest at 8.1% (Note 5).
(6) During September 2016, the Company made a preferred equity investment in a joint venture for $10.0 million. This investment earns a preferred rate of return of 8.0%.
(7) The principal balance for this loan, which requires no current payments of interest, is increased by the interest accrued.
(8) During January 2016, Fund IV made a preferred equity investment in a joint venture for $14.0 million. This investment earns a preferred rate of return of 15.3%. During September 2016, Fund IV increased its investment by $1.3 million.



18

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


6.    STRUCTURED FINANCING PORTFOLIO (continued)

(9) Loan was non-performing as of September 30, 2016. Based on the value of the underlying collateral, no reserve has been established against this loan.

The Company monitors the credit quality of its notes receivable on an ongoing basis and considers indicators of credit quality such as loan payment activity, the estimated fair value of the underlying collateral, the seniority of the Company's loan in relation to other debt secured by the collateral and the prospects of the borrower. As of September 30, 2016, the Company held one non-performing note.


7.
DERIVATIVE FINANCIAL INSTRUMENTS

As of September 30, 2016, the Company's derivative financial instruments consisted of 18 interest rate swaps with an aggregate notional amount of $366.2 million, which effectively fix the London Inter-Bank Offer Rate ("LIBOR") at rates ranging from 1.2% to 3.8% and mature between July 2018 and June 2026. The Company also has two derivative financial instruments with a notional value of $59.4 million which cap LIBOR at rates ranging from 3.0% to 4.0% and mature during April 2018 and August 2019. The fair value of these derivative instruments that represent liabilities are included in other liabilities in the Consolidated Balance Sheets and totaled $13.8 million and $5.9 million at September 30, 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 September 30, 2016 and December 31, 2015, unrealized losses totaling $12.8 million and $4.5 million, respectively, were reflected in accumulated other comprehensive loss on the Consolidated Balance Sheets. It is estimated that approximately $4.1 million included in accumulated other comprehensive loss related to derivatives will be reclassified to interest expense in the next 12 months.

As of September 30, 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.


19

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)


8.
MORTGAGE AND OTHER NOTES PAYABLE

The Company completed the following transactions related to mortgage notes payable during the nine months ended September 30, 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+1.65%
1964 Union Street
January
Assumption
1,463

3.8%
10/1/2025

 
Chicago Street Retail Portfolio
January
Repayment

 
14,955

5.62%
Heritage Shops
April
Repayment

 
24,456

LIBOR+1.55%
330-340 River Street
May
Refinancing
12,000

LIBOR+1.70%
6/1/2026
10,336

5.24%
2208-2216 Fillmore Street
June
New borrowing
5,606

3.4%
6/1/2026

 
1861 Union Street
June
New borrowing
2,315

3.4%
6/1/2026

 
Brandywine Portfolio
June
Repayment

 
 
139,950

6.0%
Sherman Avenue
July
New borrowing
14,250

LIBOR+3.25%
7/1/2018
 
 
146 Geary Street
July
New borrowing
27,700

LIBOR+3.40%
7/14/2019
 
 
Concord & Milwaukee
July
Assumption
2,902

4.4%
6/1/2030
 
 
151 North State Street
August
Assumption
14,556

4.0%
12/1/2029
 
 
North & Kingsbury
August
Assumption
13,409

4.0%
11/5/2029
 
 
State & Washington
August
Assumption
25,651

4.4%
9/5/2028
 
 
Restaurants at Fort Point
August
New borrowing
6,500

LIBOR+2.35%
8/25/2021
 
 
California & Armitage
September
Assumption
2,692

5.9%
4/15/2035
 
 
Rhode Island Shopping Center
September
Repayment

 
12/1/2016
15,554

6.35%
Total
 
 
$
129,044

 
 
$
288,321

 

Additionally, the Company is in default on one loan with respect to $26.3 million of non-recourse mortgage debt which is collateralized by a property, in which the Company holds a 22% interest.


9.    UNSECURED NOTES PAYABLE

The Company completed the following transactions related to its unsecured credit facilities during the nine months ended September 30, 2016:

The Company repaid the remaining $20.8 million of its revolving unsecured credit facility. During June 2016, the Company canceled the existing credit facility and entered into a new $150.0 million revolving unsecured credit facility. The new facility bears interest at LIBOR plus 140 basis points and matures June 27, 2020 with a one-year extension option. There is no outstanding balance as of September 30, 2016.

The Company repaid the $50.0 million term loan and closed on a new $150.0 million unsecured term loan. The facility bears interest at LIBOR+1.30% and matures June 27, 2021.

The Company borrowed $12.5 million on its Fund II credit facility. The outstanding balance under this facility is $25.0 million as of September 30, 2016, and was repaid upon maturity in October 2016.


20

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

9.    UNSECURED NOTES PAYABLE (continued)

The Company repaid $47.8 million on its Fund IV subscription line. The outstanding balance under this facility is $44.1 million as of September 30, 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 September 30, 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 September 30, 2016:
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
Derivative financial instruments (Note 7)
$

 
$
13,775

 
$


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)
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Estimated Fair Value
 
Carrying
Amount
 
Estimated Fair Value
Notes receivable and preferred equity investments, net
$
266,816

 
$
266,816

 
$
147,188

 
$
147,188

Mortgage and other notes payable
$
1,295,519

 
$
1,316,605

 
$
1,358,606

 
$
1,382,318




21

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 $0.3 million and $0.1 million for the three months ended September 30, 2016 and 2015, respectively and $0.9 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.

As further described in Notes 5 and 6, the Company provided a loan of $153.4 million to the owners of a TIC interest in the Brandywine Portfolio. Additionally, the Company made a preferred equity investment of $10.0 million in an entity owned by the Company's partners in Gotham Plaza.



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 and nine months ended September 30, 2016 and 2015, and does not include unconsolidated affiliates:

Three Months Ended September 30, 2016

(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing Portfolio
 
Total
Revenues
 
$
36,376

 
$
7,479

 
$
7,245

 
$
51,100

Property operating expenses, other operating and real estate taxes
 
(11,612
)
 
(2,903
)
 

 
(14,515
)
General and administrative expenses
 
(11,915
)
 
(954
)
 

 
(12,869
)
Depreciation and amortization
 
(12,428
)
 
(2,789
)
 

 
(15,217
)
Operating income
 
421

 
833

 
7,245

 
8,499

Equity in earnings (losses) of unconsolidated affiliates
 
1,495

 
(1,597
)
 

 
(102
)
Interest and other finance expense
 
(6,431
)
 
(1,551
)
 

 
(7,982
)
Income tax provision
 
(70
)
 
(19
)
 

 
(89
)
Net (loss) income
 
$
(4,585
)
 
$
(2,334
)
 
$
7,245

 
$
326

Net loss attributable to noncontrolling interests
 
$
60

 
$
5,726

 
$

 
$
5,786

Net (loss) income attributable to Common Shareholders
 
$
(4,525
)
 
$
3,392

 
$
7,245

 
$
6,112

 
 
 
 
 
 
 
 
 
Real Estate at Cost
 
$
1,832,863

 
$
1,186,926

 
$

 
$
3,019,789

Total Assets
 
$
2,097,386

 
$
1,214,317

 
$
266,816

 
$
3,578,519

Acquisition of Real Estate
 
$
237,729

 
$
36,600

 
$

 
$
274,329

Investment in Redevelopment and Improvements
 
$
7,296

 
$
31,235

 
$

 
$
38,531


22

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

12.    SEGMENT REPORTING (continued)

Three Months Ended September 30, 2015

(dollars in thousands)
 
Core Portfolio
 
Funds
 
Structured Financing Portfolio
 
Total
Revenues
 
$
37,744

 
$
11,783

 
$
7,325

 
$
56,852

Property operating expenses, other operating and real estate taxes
 
(8,885
)
 
(3,968
)
 

 
(12,853
)
General and administrative expenses
 
(6,963
)
 
(640
)
 

 
(7,603
)
Depreciation and amortization
 
(13,979
)
 
(3,482
)
 

 
(17,461
)
Operating income
 
7,917

 
3,693

 
7,325

 
18,935

Equity in earnings of unconsolidated affiliates
 
434

 
1,761

 

 
2,195

Gain on disposition of property of unconsolidated affiliates
 

 
6,938

 

 
6,938

Gain on disposition of properties
 

 
79

 

 
79

Interest and other finance expense
 
(7,203
)
 
(2,142
)
 

 
(9,345
)
Income tax provision
 
(461
)
 
(237
)
 

 
(698
)
Net income
 
$
687

 
$
10,092

 
$
7,325

 
$
18,104

Net income attributable to noncontrolling interests
 
$
(686
)
 
$
(3,642
)
 
$

 
$
(4,328
)
Net income attributable to Common Shareholders
 
$
1

 
$
6,450

 
$
7,325

 
$
13,776

 
 
 
 
 
 
 
 
 
Real Estate at Cost
 
$
1,553,174

 
$
1,025,406

 
$

 
$
2,578,580

Total Assets
 
$
1,650,555

 
$
1,154,213

 
$
168,931

 
$
2,973,699

Acquisition of Real Estate