a6090622.htm
UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 
Washington, DC 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, 2009
 
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)
 
 1311 MAMARONECK AVENUE, SUITE 260 WHITE PLAINS, NY
 (Address of principal executive offices)
23-2715194
 (I.R.S. Employer
 Identification No.)
 
 10605
 (Zip Code)

(914) 288-8100
 
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
YES x   NO o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

YES o    NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large Accelerated Filer x      Accelerated Filer o
 
Non-accelerated Filer o   Smaller Reporting Company o
 
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o No x
 
As of November 6, 2009 there were 39,770,652 common shares of beneficial interest, par value $.001 per share, outstanding.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
FORM 10-Q
 
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Part I. Financial Information
 
Item 1. Financial Statements.
 
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED BALANCE SHEETS
 
(dollars in thousands)
  
September 30,
2009
    
December 31,
 2008
  
   
(unaudited)
    
as adjusted
  
ASSETS
      
Operating real estate
            
Land
   $ 215,697     $ 192,496  
Buildings and improvements
     774,193       648,112  
Construction in progress
     24,729       16,618  
      1,014,619       857,226  
Less: accumulated depreciation
     185,475       165,067  
Net operating real estate
     829,144       692,159  
Real estate under development
     177,887       234,769  
Cash and cash equivalents
     117,831       86,691  
Cash in escrow
     8,897       6,794  
Investments in and advances to unconsolidated affiliates
     52,727       54,978  
Rents receivable, net
     15,814       12,648  
Notes receivable and preferred equity investment, net
     120,001       125,587  
Deferred charges, net of amortization
     28,791       21,899  
Acquired lease intangibles, net of amortization
     23,449       19,476  
Prepaid expenses and other assets, net of amortization
     21,671       31,692  
Assets of discontinued operations
     1,155       4,690  
Total assets
   $ 1,397,367     $ 1,291,383  
                 
LIABILITIES AND SHAREHOLDERS’ EQUITY
                
Mortgage notes payable
   $ 759,549     $ 653,543  
Convertible notes payable, net of unamortized discount of $2,354 and $6,597, respectively
     47,661       100,403  
Acquired lease and other intangibles, net of amortization
     7,218       6,506  
Accounts payable and accrued expenses
     18,364       22,179  
Dividends and distributions payable
     7,362       25,514  
Distributions in excess of income from, and investments in, unconsolidated affiliates
     20,666       20,633  
Other liabilities
     18,653       18,896  
Liabilities of discontinued operations
     202       1,481  
Total liabilities
     879,675       849,155  
                 
Equity
                
Common shares
     40       32  
Additional paid-in capital
     299,419       218,527  
Accumulated other comprehensive loss
     (3,418 )     (4,508 )
Retained earnings
     16,921       13,671  
Total Common Shareholders equity
     312,962       227,722  
Noncontrolling interests in subsidiaries
     204,730       214,506  
Total equity
     517,692       442,228  
Total liabilities and equity
   $ 1,397,367     $ 1,291,383  

 
See accompanying notes
 
1
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
(unaudited)
 
   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
                         
Revenues
                        
Minimum rents
   $ 25,877     $ 18,751     $ 70,922     $ 58,075  
Percentage rents
     64       116       392       353  
Expense reimbursements
     4,868       4,172       15,252       12,088  
Lease termination income
     2,500       (523 )     2,726       23,977  
Other property income
     362       393       1,550       791  
Management fee income
     316       496       1,517       2,902  
Interest income
     5,069       4,684       15,240       9,380  
Other
     -       -       1,700       -  
  Total revenues
     39,056       28,089       109,299       107,566  
                                 
Operating Expenses
                                
Property operating
     6,419       5,290       20,965       15,718  
Real estate taxes
     4,552       3,244       12,305       9,080  
General and administrative
     5,226       6,822       16,575       19,132  
Depreciation and amortization
     10,377       7,986       27,412       21,262  
Abandonment of project costs
     53       -       2,484       -  
Reserve for notes receivable
     -       -       1,734       -  
Total operating expenses
     26,627       23,342       81,475       65,192  
Operating income
     12,429       4,747       27,824       42,374  
Equity in (losses) earnings of unconsolidated affiliates
     (3,848 )     6,664       (7,106 )     24,368  
Interest and other finance expense
     (8,329 )     (8,189 )     (23,782 )     (22,163 )
Gain on debt extinguishment
     11       -       7,057       -  
Gain on sale of land
     -       -       -       763  
Income from continuing operations before income taxes
     263       3,222       3,993       45,342  
Income tax benefit (expense)
     273       (191 )     (1,349 )     (2,391 )
Income from continuing operations
     536       3,031       2,644       42,951  
                                 
Discontinued Operations
                                
Operating income from discontinued operations
     32       181       225       1,234  
Gain on sale of property
     -       -       5,637       7,182  
Income from discontinued operations
     32       181       5,862       8,416  
Net income
     568       3,212       8,506       51,367  
                                 
Loss (income) attributable to noncontrolling interests in subsidiaries:
                                
Continuing operations
     6,740       1,386       21,101       (20,660 )
Discontinued operations
     (1 )     (132 )     (4,866 )     (605 )
Net loss (income) attributable to noncontrolling interests in subsidiaries
     6,739       1,254       16,235       (21,265 )
                                 
Net income attributable to Common Shareholders
   $ 7,307     $ 4,466     $ 24,741     $ 30,102  
                                 
Income from continuing operations attributable to
                                
Common Shareholders
   $ 7,276     $ 4,417     $ 23,745     $ 22,291  
Income from discontinued operations attributable to
                                
Common Shareholders
     31       49       996       7,811  
Net Income attributable to Common Shareholders
   $ 7,307     $ 4,466     $ 24,741     $ 30,102  
                                 
Basic Earnings per Share
                                
Income from continuing operations
   $ 0.18     $ 0.13     $ 0.63     $ 0.66  
Income from discontinued operations
     -       -       0.03       0.23  
Basic earnings per share
   $ 0.18     $ 0.13     $ 0.66     $ 0.89  
                                 
Diluted Earnings per Share
                                
Income from continuing operations
   $ 0.18     $ 0.13     $ 0.63     $ 0.65  
Income from discontinued operations
     -       -       0.03       0.23  
Diluted earnings per share
   $ 0.18     $ 0.13     $ 0.66     $ 0.88  
 
 
See accompanying notes
 
2
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
(unaudited)

(dollars in thousands)
  
September 30,
 2009
    
September 30,
 2008
  
         
as adjusted
  
CASH FLOWS FROM OPERATING ACTIVITIES:
      
Net income
   $ 8,506     $ 51,367  
Adjustments to reconcile net income to net cash provided by operating activities
                
Depreciation and amortization
     27,437       22,446  
Gain on sale property
     (5,637 )     (7,945 )
Gain on debt extinguishment
     (7,057 )     -  
Amortization of lease intangibles
     4,772       3,447  
Amortization of mortgage note premium
     (27 )     (773 )
Amortization of discount on convertible debt
     1,031       1,580  
Non-cash accretion of notes receivable
     (3,914 )     (1,132 )
Share compensation expense
     3,045       2,581  
Equity in losses (earnings) of unconsolidated affiliates
     7,106       (24,368 )
Distributions of operating income from unconsolidated affiliates
     461       11,753  
Abandonment of project costs
     2,484       -  
Reserve for notes receivable
     1,734       -  
Provision for bad debt
     2,496       652  
Changes in assets and liabilities
                
Cash in escrows
     (2,103 )     (24,595 )
Rents receivable
     (5,818 )     216  
Prepaid expenses and other assets, net
     8,507       (19,768 )
Accounts payable and accrued expenses
     (4,971 )     4,711  
Other liabilities
     1,062       5,261  
                 
Net cash provided by operating activities
     39,114       25,433  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Investment in real estate
     (112,913 )     (222,040 )
Deferred acquisition and leasing costs
     (11,654 )     (3,975 )
Investments in and advances to unconsolidated affiliates
     (5,137 )     (7,065 )
Return of capital from unconsolidated affiliates
     1,798       3,921  
Repayments of notes receivable
     8,831       19,474  
Advances on notes receivable
     (756 )     (49,310 )
Preferred equity investment
     -       (40,000 )
Proceeds from sale of property
     9,481       23,627  
                 
Net cash used in investing activities
     (110,350 )     (275,368 )
 

 
3
ACADIA REALTY TRUST AND SUBSIDIARIES
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
 
(unaudited)

(dollars in thousands)
  
September 30,
 2009
    
September 30,
 2008
  
         
as adjusted
  
CASH FLOWS FROM FINANCING ACTIVITIES:
      
Principal payments on mortgage notes
     (150,357 )     (65,217 )
Proceeds received on mortgage notes
     255,065       252,817  
Purchase of convertible notes
     (46,736 )     -  
Increase in deferred financing and other costs
     (480 )     (2,284 )
Capital contributions from noncontrolling interests in partially-owned affiliates
     7,200       46,014  
Distributions to noncontrolling interests in partially-owned affiliates
     (915 )     (13,708 )
Dividends paid to Common Shareholders
     (22,993 )     (27,841 )
Distributions to noncontrolling interests in Operating Partnership
     (1,035 )     (635 )
Distributions on preferred Operating Partnership Units to noncontrolling interests
     (29 )     (21 )
Proceeds from issuance of Common Shares, net of issuance costs
     65,222       -  
Repurchase and cancellation of Common Shares
     (2,715 )     (2,102 )
Common Shares issued under Employee Share Purchase Plan
     80       204  
Exercise of options to purchase Common Shares
     69       841  
                 
Net cash provided by financing activities
     102,376       188,068  
                 
Increase (decrease) in cash and cash equivalents
     31,140       (61,867 )
Cash and cash equivalents, beginning of period
     86,691       123,343  
                 
Cash and cash equivalents, end of period
   $ 117,831     $ 61,476  
                 
Supplemental disclosure of cash flow information
                
Cash paid during the period for interest, including capitalized interest of $3,005 and $3,246, respectively
   $ 24,597     $ 23,131  
                 
Cash paid for income taxes
   $ 496     $ 2,704  
                 
Supplemental disclosure of non-cash investing and financing activities
                
Acquisition of real estate through assumption of debt
   $ -     $ 39,967  
                 
Dividends paid through the issuance of Common Shares
   $ 16,192     $ -  


See accompanying notes
 
4
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.         THE COMPANY
 
Acadia Realty Trust (the “Trust”) and subsidiaries (collectively, the “Company”) is a fully-integrated, self-managed and self-administered equity real estate investment trust (“REIT”) focused primarily on the ownership, acquisition, redevelopment and management of retail properties, including neighborhood and community shopping centers and mixed-use properties with retail components.

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 a controlling interest. As of September 30, 2009, the Trust controlled 98% 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 who contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common or Preferred OP Units”). 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”). This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.”

During 2001, the Company formed a partnership, Acadia Strategic Opportunity Fund I, LP (“Fund I”), and in 2004 formed a limited liability company, Acadia Mervyn Investors I, LLC (“Mervyns I”), with four institutional investors. The Operating Partnership committed a total of $20.0 million to Fund I and Mervyns I, and the four institutional shareholders committed $70.0 million, for the purpose of acquiring real estate investments. As of September 30, 2009, Fund I was fully invested.

The Operating Partnership is the sole general partner of Fund I and sole managing member of Mervyns I, with a 22.2% equity interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its equity interest percentage based on certain investment return thresholds (“Promote”). Cash flow is distributed pro-rata to the partners and members (including the Operating Partnership) until they receive a 9% cumulative return (“Preferred Return”), and the return of all capital contributions. Thereafter, remaining cash flow (which is net of distributions and fees to the Operating Partnership for property management, asset management, leasing, construction and legal services) is distributed 80% to the partners (including the Operating Partnership) and 20% to the Operating Partnership as a Promote. As all contributed capital and accumulated preferred return has been distributed to investors, the Operating Partnership is now entitled to a Promote on all earnings and distributions.

During 2004, the Company, along with the investors from Fund I as well as two additional institutional investors, formed Acadia Strategic Opportunity Fund II, LLC (“Fund II”), and Acadia Mervyn Investors II, LLC (“Mervyns II”) with $300.0 million, in the aggregate, of committed discretionary capital available to acquire or develop real estate investments. The Operating Partnership’s share of committed capital is $60.0 million. The Operating Partnership is the managing member with a 20% interest in both Fund II and Mervyns II. The terms and structure of Fund II and Mervyns II are substantially the same as Fund I and Mervyns I, including the Promote structure, with the exception that the Preferred Return is 8%. As of September 30, 2009, the Operating Partnership had contributed $32.6 million to Fund II and $7.6 million to Mervyns II.

During 2007, the Company formed Acadia Strategic Opportunity Fund III LLC (“Fund III”) with 14 institutional investors, including all of the investors from Fund I and a majority of the investors from Fund II with $503 million of committed discretionary capital available to acquire or develop real estate investments. The Operating Partnership’s share of the committed capital is $100.0 million and it is the managing member with a 19.9% interest in Fund III. The terms and structure of Fund III are substantially the same as the previous Funds, including the Promote structure, with the exception that the Preferred Return is 6%. As of September 30, 2009, the Operating Partnership had contributed $19.2 million to Fund III.

Fund I, Fund II, and Fund III are collectively referred to herein as the “Opportunity Funds.”

2.         BASIS OF PRESENTATION

The consolidated financial statements include the consolidated accounts of the Company and its controlling investments in partnerships and limited liability companies in which the Company is presumed to have control in accordance with Financial Accounting Statements Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 “Consolidation” (formerly Emerging Issues Task Force Issue (“EITF”) No. 04-05) (“ASC Topic 810”). 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 instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings (or loss) of these entities are included in consolidated net income under the caption, Equity in Earnings of Unconsolidated Affiliates. 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.
 
5
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.         BASIS OF PRESENTATION, (continued)
 
Although the Company accounts for its investment in Albertson’s, which it has made through the Retailer Controlled Property Venture (“RCP Venture”) (Note 7), using the equity method of accounting, the Company adopted the policy of not recording its equity in earnings or losses of the unconsolidated affiliate until the Company receives the audited financial statements of Albertson’s to support the equity earnings or losses in accordance with ASC Topic 323 “Investments – Equity Method and Joint Ventures” (formerly Accounting Principles Board (“APB”) Opinion No. 18 “Equity Method of Accounting for Investments in Common Stock.”

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 nine months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2009. For further information, refer to the consolidated financial statements and accompanying footnotes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

The Company has evaluated subsequent events from September 30, 2009 through the time of filing this Form 10-Q with the SEC on November 6, 2009. Material subsequent events that have occurred since September 30, 2009 are discussed in Note 17 to the Consolidated Financial Statements.

In June 2009, the Financial FASB issued ASC Topic 105 “Generally Accepted Accounting Principles” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles”) (“ASC Topic 105”). ASC Topic 105 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements that are presented in conformity with GAAP. It establishes the FASB Accounting Standards Codification (“ASC”) as the single source of authoritative accounting principles recognized by the FASB in the preparation of financial statements in conformity with GAAP. The ASC does not create new accounting and reporting guidance rather it reorganizes GAAP pronouncements into approximately 90 topics within a consistent structure. All guidance contained in the ASC carries an equal level of authority. Relevant portions of authoritative content, issued by the Securities and Exchange Commission (“SEC”), for SEC registrants, have been included in the ASC. ASC Topic 105 was effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company adopted ASC Topic 105 on September 30, 2009.

Effective January 1, 2009, the Company adopted the following FASB pronouncements, which required it to retrospectively restate and reclassify previously disclosed consolidated financial statements. As such, certain prior period amounts have been restated or reclassified in the accompanying unaudited consolidated financial statements to conform to the adoption of these FASB pronouncements.

The Company adopted ASC Topic 810 (formerly SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,). ASC Topic 810, among other things, provides guidance and establishes amended accounting and reporting standards for noncontrolling interests in a consolidated subsidiary and the deconsolidation of a subsidiary. Under ASC Topic 810, the Company now reports noncontrolling interests in subsidiaries as a separate component of equity in the consolidated financial statements and shows both net income attributable to the noncontrolling interests and net income attributable to the controlling interests on the face of the Consolidated Statements of Income.

The Company adopted ASC Topic 470-20 “Debt with Conversion and Other Options” (formerly FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion Including Partial Cash Settlement”), (“ASC Topic 470-20”). ASC Topic 470-20 requires the proceeds from the issuance of convertible debt be allocated between a debt component and an equity component. The debt component is measured based on the fair value of similar debt without an equity conversion feature, and the equity component is determined as the residual of the fair value of the debt deducted from the original proceeds received.  The resulting discount on the debt component is amortized over the period the convertible debt is expected to be outstanding, which is December 11, 2006 to December 20, 2011, as additional non-cash interest expense.  The equity component recorded as additional paid-in capital was $11.3 million, which represented the difference between the proceeds from the issuance of the convertible notes payable and the fair value of the liability at the time of issuance. The additional non-cash interest expense recognized in the Consolidated Statements of Income was $0.2 million and $0.5 million for the quarters ended September 30, 2009 and 2008, respectively and $1.0 million and $1.6 million for the nine months ended September 30, 2009 and 2008, respectively. Accumulated amortization related to the convertible notes payable was $0.7 million and $1.1 million as of September 30, 2009 and December 31, 2008, respectively, after giving effect to repurchases.

The following table shows the effect of the retroactive restatement and reclassification of (i) the consolidated balance sheet accounts for the year ended December 31, 2008 and (ii) the consolidated statement of income for the three and nine months ended September 30, 2008 and consolidated statement of cash flow accounts for the nine months ended September 30, 2008:

6
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
2.         BASIS OF PRESENTATION, (continued)

(dollars in thousands, except per share amounts)
  
December 31, 2008
  
 
Affected Consolidated Balance Sheet accounts
  
 
Before Adjustment
    
 
As Adjusted
    
 
Effect of Change
  
Deferred charges, net of amortization
   $ 22,072     $ 21,899     $ (173 )
Convertible notes payable
   $ 107,000     $ 100,403     $ (6,597 )
Minority interests
   $ 214,506     $ -     $ (214,506 )
Additional paid-in capital
   $ 212,007     $ 218,527     $ 6,520  
Retained earnings
   $ 13,767     $ 13,671     $ (96 )
Noncontrolling interests in subsidiaries
   $ -     $ 214,506     $ 214,506  


   
Three months ended September 30, 2008
  
 
Affected Consolidated Income Statement Accounts
  
 
Before Adjustment
    
 
As Adjusted
    
 
Effect of Change
  
                   
Depreciation and amortization
   $ 8,001     $ 7,986     $ 15  
Interest expense
   $ 7,653     $ 8,189     $ (536 )
Net income attributable to Common Shareholders
   $ 4,987     $ 4,466     $ (521 )
Basic earnings per share
   $ 0.15     $ 0.13     $ (0.02 )
Diluted earnings per share
   $ 0.15     $ 0.13     $ (0.02 )


   
Nine months ended September 30, 2008
  
   
Before Adjustment
    
 
As Adjusted
    
Effect of Change
  
                   
Depreciation and amortization
   $ 21,303     $ 21,262     $ 41  
Interest expense
   $ 20,583     $ 22,163     $ (1,580 )
Net income attributable to Common Shareholders
   $ 31,641     $ 30,102     $ (1,539 )
Basic earnings per share
   $ 0.97     $ 0.89     $ (0.08 )
Diluted earnings per share
   $ 0.96     $ 0.88     $ (0.08 )

   
Nine months ended September 30, 2008
  
 
Affected Consolidated Statement of Cash Flow Accounts
  
Before Adjustment
    
 
As Adjusted
    
Effect of Change
  
                   
Depreciation and amortization
   $ 22,487     $ 22,446     $ (41 )
Amortization of discount on convertible debt
   $ –     $ 1,580     $ 1,580  

During December of 2007, the FASB issued ASC Topic 805 “Business Combinations” (formerly SFAS No. 141R, “Business Combinations”) (“ASC Topic 805”). ASC Topic 805 establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity.  Effective January 1, 2009, the Company adopted ASC Topic 805 and it did not have a material impact to the Company’s financial position or results of operations.

7
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.           BASIS OF PRESENTATION, (continued)

During March of 2008, the FASB issued ASC Topic 815 “Derivatives and Hedging” (formerly SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133”) (“ASC Topic 815”).   ASC Topic 815 amends SFAS No. 133 to provide additional information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. It requires enhanced disclosures about an entity’s derivatives and hedging activities.   ASC Topic 815 was effective for financial statements issued for fiscal years beginning after November 15, 2008.   The adoption of ASC Topic 815 did not have an impact on the Company’s financial condition or results of operations.

During June of 2008, the FASB ratified ASC Topic 815 (formerly EITF Issue 07-5, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock”). Paragraph 11(a) of SFAS 133 specifies that a contract that would otherwise meet the definition of a derivative but is both (a) indexed to the Company’s own stock and (b) classified in stockholders’ equity in the statement of financial position would not be considered a derivative financial instrument. ASC Topic 815 provides a new two-step model to be applied in determining whether a financial instrument or an embedded feature is indexed to an issuer’s own stock and thus able to qualify for the SFAS 133 paragraph 11(a) scope exception. ASC Topic 815 became effective on January 1, 2009. The adoption of ASC Topic 815 did not have an impact on the Company’s financial position and results of operations.

During October of 2008, the FASB issued ASC Topic 820 “Fair Value Measurements and Disclosures” (formerly FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”) (“ASC Topic 820”).  ASC Topic 820 provides guidance in determining the fair value of a financial asset when there is not an active market for that financial asset.  The adoption of ASC Topic 820 did not have an impact on the Company’s financial position and results of operations.

In April 2009, the FASB issued ASC Topic 825 “Financial Instruments” (formerly FSP SFAS 107-1 and APB 28-1, “Interim Disclosures About Fair Value of Financial Instruments”) (“ASC Topic 825”). ASC Topic 825 amends SFAS No. 107, “Disclosures about Fair Values of Financial Instruments” and Accounting Principles Board Opinion No. 28, “Interim Financial Reporting,” to require disclosures about fair value of financial instruments in interim financial statements. ASC Topic 825 is effective for interim periods ending after June 15, 2009. The Company adopted ASC Topic 825 and has provided the disclosures in Note 12 to the Consolidated Financial Statements. The adoption did not have an impact on the Company’s financial position and results of operations.

In May 2009, the FASB issued ASC Topic 855 “Subsequent Events” (formerly SFAS No. 165 “Subsequent Events”) (“ASC Topic 855”). ASC Topic 855 establishes general standards of accounting and disclosure for events that occur after the balance sheet date but before the financial statements are issued and was effective for interim or annual periods ending after June 15, 2009.  The Company adopted ASC Topic 855 and has provided the new disclosures as required. The adoption did not have an impact on the Company’s financial position and results of operations.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R),” (“SFAS No. 167”) which changes the approach to determining the primary beneficiary of a variable interest entity and requires companies to more frequently assess whether they must consolidate a variable interest entity. SFAS No. 167 is effective on the first annual reporting period that begins after November 15, 2009. The FASB has not incorporated SFAS 167 into the ASC. The Company is currently assessing the potential impact of SFAS No. 167 on its financial position and results of operations.

8
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.           EARNINGS PER COMMON SHARE

Basic earnings per share was determined by dividing the applicable net income attributable to Common Shareholders for the period by the weighted average number of Common Shares outstanding during each period consistent with ASC Topic 260, “Earnings per Share.” Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company.

The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated.
 
   
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Numerator:
                        
Income from continuing operations attributable to Common Shareholders
   $ 7,276     $ 4,417     $ 23,745     $ 22,291  
Effect of dilutive securities:
                                
Preferred OP Unit distributions
     5       6       15       16  
Numerator for diluted earnings per Common Share
   $ 7,281     $ 4,423     $ 23,760     $ 22,307  
                                 
Denominator:
                                
Weighted average shares for basic earnings per share
     39,686       33,845       37,415       33,800  
Effect of dilutive securities:
                                
   Employee share options
     257       521       189       512  
   Convertible Preferred OP Units
     25       -       25       25  
Dilutive potential Common Shares
     282       521       214       537  
Denominator for diluted earnings per share
     39,968       34,366       37,629       34,337  
Basic earnings per Common Share from continuing operations attributable to Common Shareholders
   $ 0.18     $ 0.13     $ 0.63     $ 0.66  
Diluted earnings per Common Share from continuing operations attributable to Common Shareholders
   $ 0.18     $ 0.13     $ 0.63     $ 0.65  

The weighted average shares used in the computation of basic earnings per share include unvested restricted Common Shares (“Restricted Shares”) and restricted OP units (“LTIP Units”) (Note 15) that are entitled to receive dividend equivalent payments. The effect of the conversion of Common OP Units is not reflected in the above table, 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 subsidiaries in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share. The conversion of the convertible notes payable to Common Shares (Note 11) is not reflected in the table as such conversion would be anti-dilutive. The effect of the assumed conversion of 25,067 Series A Preferred OP Units to Common Shares would be dilutive for the three months ended September 30, 2009 and for the nine months ended September 30, 2009 and 2008, respectively, and accordingly, they are included in the table.

9
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.           COMPREHENSIVE INCOME

The following table sets forth comprehensive income for the three and nine months ended September 30, 2009 and 2008:

(dollars in thousands) 
  
Three months ended
September 30,
    
Nine months ended
September 30,
  
   
2009
    
2008
    
2009
    
2008
  
Net income attributable to Common Shareholders
   $ 7,307     $ 4,466     $ 24,741     $ 30,102  
Other comprehensive (loss) income
     (191 )     (36 )     1,090       (8 )
Comprehensive income attributable to Common Shareholders
   $ 7,116     $ 4,430     $ 25,831     $ 30,094  

Other comprehensive income relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges and the amortization, which is included in interest expense, of a derivative instrument.

The following table sets forth the change in accumulated other comprehensive income for the nine months ended September 30, 2009:

Accumulated other comprehensive loss

(dollars in thousands)
      
Balance at December 31, 2008
   $ (4,508 )
Unrealized income on valuation of derivative instruments and amortization of derivative instrument
     1,090  
Balance at September 30, 2009
   $ (3,418 )

5.         SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES
 
The following table summarizes the change in the shareholders’ equity and noncontrolling interest since December 31, 2008:

(dollars in thousands)
  
Common Shareholders’
 Equity
    
Noncontrolling interests
    
Total
  
Balance at December 31, 2008 (as adjusted, Note 2)
   $ 227,722     $ 214,506     $ 442,228  
Dividends and distributions declared of $0.57 per Common Share and
                        
Common OP Unit
     (21,492 )     (607 )     (22,099 )
Net income (loss) for the period January 1 through September 30, 2009
     24,741       (16,235 )     8,506  
Distributions paid
     -       (915 )     (915 )
Other comprehensive income – Unrealized gain on valuation of
  derivative instruments
     1,090       114       1,204  
Conversion options on Convertible Notes purchased (Note 11)
     (840 )     -       (840 )
Common Shares issued under Employee Share Purchase Plan
     80       -       80  
Issuance of Common Shares to Trustees
     604       -       604  
Issuance of Common Shares through special dividend
     16,192       -       16,192  
Employee Restricted Share awards
     2,289       -       2,289  
Employee Restricted Shares cancelled
     (2,715 )     -       (2,715 )
Employee LTIP Unit awards
     -       667       667  
Issuance of 5,750,000 Common Shares, net of issuance costs
     65,222       -       65,222  
Employee Exercise of Options
     69       -       69  
Noncontrolling interest contributions
     -       7,200       7,200  
                         
Balance at September 30, 2009
   $ 312,962     $ 204,730     $ 517,692  

Noncontrolling interests includes interests in the Operating Partnership which represent (i) the limited partners’ 642,272 Common OP Units at September 30, 2009 and December 31, 2008, (ii) 188 Series A Preferred OP Units at September 30, 2009 and December 31, 2008, with a stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit. Noncontrolling interests also include outside interests in partially owned affiliates and third-party interests in Fund I, II and III, and Mervyns I and II and three other entities.

10
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
5.         SHAREHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS IN SUBSIDIARIES, (continued)

For the nine months ended September 30, 2009, 107,331 employee Restricted Shares were cancelled to pay the employees’ income taxes due on the value of the portion of the Restricted Shares that vested during the period. During the three and nine months ended September 30, 2009, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling 0.8 million and $2.9 million, respectively.

6.         ACQUISITION AND DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Acquisition of Properties

On January 29, 2009, the Company purchased Cortlandt Towne Center for $78.0 million.

Discontinued Operations

In accordance with ASC 205-20 “Presentation of Financial Statements, Discontinued Operations”, which requires discontinued operations presentation for disposals of a “component” of an entity, for all periods presented, the Company reclassified its consolidated statements of income to reflect income and expenses for properties that were sold or became held for sale prior to September 30, 2009, as discontinued operations and reclassified its consolidated balance sheets to reflect assets and liabilities related to such properties as assets and liabilities related to discontinued operations.

The combined assets and liabilities of properties held for sale for the periods ended September 30, 2009 and December 31, 2008 and the combined results of operations for these properties for the three and nine months ended September 30, 2009 and September 30, 2008 are reported separately as discontinued operations. Discontinued operations include Blackman Plaza located in Wilkes-Barre, Pennsylvania and six Kroger supermarket locations.  The Kroger locations were sold in February of 2009.  Blackman Plaza was under contract for sale as of September 30, 2009.  In addition, 2008 discontinued operations included a residential complex located in North Carolina.  The Company sold this complex in April 2008.

The combined assets and liabilities and results of operations of the properties classified as discontinued operations are summarized as follows:

(dollars in thousands)
  
September 30,
2009
    
December 31,
2008
  
ASSETS
            
Net real estate
   $ 958     $ 4,635  
Accounts Receivable and Prepaid Expenses
     197       55  
Total assets of discontinued operations
   $ 1,155     $ 4,690  
LIABILITIES
                
Accounts payable and accrued expenses
   $ 2     $ 1,382  
Other liabilities
     200       99  
Total liabilities of discontinued operations
   $ 202     $ 1,481  

STATEMENTS OF OPERATIONS
  
Three months ended
September 30,
    
Nine months ended
September 30,
  
(dollars in thousands) 
  
2009
    
2008
    
2009
    
2008
  
Total revenues
   $ 120     $ 651     $ 494     $ 3,388  
Total expenses
     88       470       269       2,154  
Operating income
     32       181       225       1,234  
Gain on sale of property
     -       -       5,637       7,182  
Income from discontinued operations
     32       181       5,862       8,416  
Income from discontinued operations attributable to noncontrolling interests in subsidiaries
   $ (1 )   $ (132 )   $ (4,866 )   $ (605 )
Income from discontinued operations attributable to
                                
Common Shareholders
   $ 31     $ 49     $ 996     $ 7,811  
 
11
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.           INVESTMENTS
 
A. Investments In and Advances to Unconsolidated Affiliates

Retailer Controlled Property Venture (“RCP Venture”)

During January of 2004, the Company commenced the RCP Venture with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc., through a limited liability company (“KLA”), for the purpose of making investments in surplus or underutilized properties owned by retailers. As of September 30, 2009, the Company had invested $60.5 million through the RCP Venture on a non-recourse basis. Cash flow from any investment in which the RCP Venture participants elect to invest, is to be distributed to the participants until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to Klaff and 80% to the partners (including Klaff).

The table below summarizes the Company’s invested capital and distributions received from its RCP Venture investments.

Mervyns Department Stores

During September of 2004, the RCP Venture invested in a consortium to acquire the Mervyns Department Store chain (“Mervyns”) consisting of 262 stores (“REALCO”) and its retail operation (“OPCO”) from Target Corporation. The gross acquisition price of $1.2 billion was financed with $800 million of debt and $400 million of equity. The Company, through Mervyns I and Mervyns II, contributed $23.2 million of equity and received an approximate 5.2% interest in REALCO and an approximate 2.5% interest in OPCO (which the Company sold in 2007). Subsequent to the initial acquisition, the Company, through Mervyns I and Mervyns II, made additional investments of $4.3 million. To date, REALCO has disposed of a significant portion of the portfolio.

During the nine months ended September 30, 2009, REALCO recorded an impairment charge on its investment in certain Mervyns Department Store locations and leasehold interests. Mervyns I and II share of this impairment aggregated $3.1 million and the Operating Partnership’s share amounted to $0.6 million, net of taxes.

Through September 30, 2009, the Company, through Mervyns I and Mervyns II, made additional investments in locations that are separate from the original investment (“Add-On Investments”) in Mervyns totaling $3.4 million.  The Company accounts for these Add-On Investments using the cost method due to the minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.

Albertson’s

During June of 2006, the RCP Venture made its second investment as part of an investment consortium, acquiring Albertson’s and Cub Foods, of which the Mervyns II share was $20.7 million. Through September 30, 2009, Mervyns II has received distributions from this investment totaling $63.8 million.

During 2007, the Company, through Mervyns II, made Add-On Investments totaling $2.4 million and received distributions totaling $0.5 million. The Company accounts for these Add-On Investments using the cost method due to the minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.

Other RCP Venture Investments

During 2006, the Company, through Fund II, made investments of $1.1 million in Shopko, a regional multi-department retailer, and $0.7 million in Marsh, a regional supermarket chain. During 2007, Fund II received a $1.1 million cash distribution from the Shopko investment representing 100% of its invested capital. The Company, through Fund II, made investments of $2.0 million in additional investments in Marsh and Fund II received distributions of $1.0 million from Marsh during 2008. During 2009, Fund II received additional distributions of $1.6 million from Marsh.

During July of 2007, the RCP Venture acquired a portfolio of 87 retail properties from Rex Stores Corporation, which the Company invested in through Mervyns II. Mervyns II’s share of this investment was $2.7 million.

The Company accounts for these other investments using the cost method due to its minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.
 
12
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.           INVESTMENTS (continued)
 
A. Investments In and Advances to Unconsolidated Affiliates (continued)
 
The following table summarizes the Company’s RCP Venture investments from inception through September 30, 2009:
 
 (dollars in thousands)
                      
Operating Partnership’s Share
  
           
Invested
          
Invested
        
           
Capital
          
Capital
        
Investor
Investment
  
Year Acquired
    
and Advances
    
Distributions
    
and Advances
    
Distributions
  
Mervyns I and Mervyns II
Mervyns
  
2004
     $ 27,503     $ 45,966     $ 4,901     $ 11,251  
Mervyns I and Mervyns II 
Mervyns Add-On
                                      
 
Investments
   2005/2008       3,445       1,703       283       283  
Mervyns II
Albertson’s
   2006       20,717       63,833       4,239       11,847  
Mervyns II 
Albertson’s Add-On
                                        
 
Investments
     2006/2007       2,409       466       386       93  
Fund II
Shopko
   2006       1,100       1,100       220       220  
Fund II
Marsh
   2006       2,667       2,639       533       528  
Mervyns II
Rex Stores
   2007       2,701       -       535       -  
Total
             $ 60,542     $ 115,707     $ 11,097     $ 24,222  

Brandywine Portfolio

The Company owns a 22.2% interest in a one million square foot retail portfolio located in Wilmington, Delaware (the “Brandywine Portfolio”) that is accounted for using the equity method.

Crossroads

The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II (collectively, “Crossroads”), which collectively own a 311,000 square foot shopping center located in White Plains, New York that is accounted for using the equity method.

Other Investments

Fund I Investments

Fund I owns a 50% interest in the Sterling Heights Shopping Center which is accounted for using the equity method of accounting.  During the three months ended September 30, 2009, Fund I recorded an impairment reserve of $3.7 million related to this investment.

Fund II Investments

Fund II’s approximately 25% investment in CityPoint is accounted for using the equity method. The Company has determined that CityPoint is a variable interest entity, and the Company is not the primary beneficiary. The Company’s maximum exposure is the carrying value of its investment of $37.1 million. During May 2009, the Company and Target Corporation (“Target”), as the retail anchor tenant, mutually agreed to terminate a purchase and sale agreement for certain contemplated space.

13
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 

 
7.           INVESTMENTS, (continued)
 
A. Investments In and Advances to Unconsolidated Affiliates (continued)

Summary of Investments in Unconsolidated Affiliates

The following tables summarize the Company’s investments in unconsolidated affiliates as of September 30, 2009 and December 31, 2008. CityPoint is not reflected in the below Statements of Operations as there are no current operations at this redevelopment project.
 
   
September 30, 2009
  
(dollars in thousands)
  
RCP Venture
    
CityPoint
    
Brandywine
Portfolio
    
Crossroads
    
Other
Investments
    
Total
  
Balance Sheets
                                    
Assets:
                                    
Rental property, net
   $ -     $ -     $ 127,498     $ 5,087     $ 10,728     $ 143,313  
Real estate under development
     -       165,206       -       -       -       165,206  
Investment in unconsolidated affiliates
     222,975       -       -       -       -       222,975  
Other assets
     -       3,981       9,975       5,151       2,021       21,128  
                                                 
Total assets
   $ 222,975     $ 169,187     $ 137,473     $ 10,238     $ 12,749     $ 552,622  
                                                 
Liabilities and partners’ equity
                                                
Mortgage note payable
   $ -     $ 25,990     $ 166,200     $ 62,522     $ 4,961     $ 259,673  
Other liabilities
     -       1,600       7,506       1,729       1,174       12,009  
Partners’ equity (deficit)
     222,975       141,597       (36,233 )     (54,013 )     6,614       280,940  
                                                 
Total liabilities and partners’ equity
   $ 222,975     $ 169,187     $ 137,473     $ 10,238     $ 12,749     $ 552,622  
Company’s investment in and advances to unconsolidated affiliates
   $ 14,095     $ 37,099     $ -     $ -     $ 1,533     $ 52,727  
Share of distributions in excess of share of income and investment in unconsolidated affiliates
   $ -     $ -     $ (8,372 )   $ (12,294 )   $ -     $ (20,666 )
 
 
   
December 31, 2008
        
   
RCP Venture
    
CityPoint
    
Brandywine
Portfolio
    
Crossroads
    
Other
Investments
    
Total
  
(dollars in thousands)
                                    
Balance Sheets
                                    
Assets
                                    
Rental property, net
   $ -     $ -     $ 129,679     $ 5,143     $ 11,481     $ 146,303  
Real estate under development
     -       159,922       -       -       -       159,922  
Investment in unconsolidated affiliates
     295,168       -       -       -       -       295,168  
Other assets
     -       3,983       8,769       5,283       2,770       20,805  
                                                 
Total assets
   $ 295,168     $ 163,905     $ 138,448     $ 10,426     $ 14,251     $ 622,198  
                                                 
Liabilities and partners’ equity
                                                
Mortgage note payable
   $ -     $ 34,000     $ 166,200     $ 63,176     $ 5,173     $ 268,549  
Other liabilities
     -       2,307       7,895       2,072       1,083       13,357  
Partners equity (deficit)
     295,168       127,598       (35,647 )     (54,822 )     7,995       340,292  
                                                 
Total liabilities and partners’ equity
   $ 295,168     $ 163,905     $ 138,448     $ 10,426     $ 14,251     $ 622,198  
                                                 
Company’s investment in and advances to unconsolidated affiliates
   $ 18,066     $ 33,445     $ -     $ -     $ 3,467     $ 54,978  
                                                 
Share of distributions in excess of share of income and investment in unconsolidated affiliates
   $ -     $ -     $ (8,236 )   $ (12,397 )   $ -     $ (20,633 )
 
14
ACADIA REALTY TRUST AND SUBSIDIARIES
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
7.           INVESTMENTS, (continued)
 
A. Investments In and Advances to Unconsolidated Affiliates (continued)

Summary of Investments in Unconsolidated Affiliates (continued)
 
   
Three Months Ended September 30, 2009
  
(dollars in thousands)
  
RCP Venture
    
Brandywine
Portfolio
    
Crossroads
    
Other Investments
    
Total
  
Statements of Operations
                              
Total revenue
   $ -     $ 4,886     $ 1,903     $ 341     $ 7,130  
Operating and other expenses
     -       1,238       568       213       2,019  
Interest expense
     -       2,547       869       64       3,480  
Equity in losses of affiliates
     (2,263 )     -       -       -       (2,263 )
Depreciation and amortization
     -       848       145       739       1,732  
Loss on sale of property, net
     -       -       -       -       -  
Net (loss) income
   $ (2,263 )   $ 253     $ 321     $ (675 )   $ (2,364 )
                                         
Company’s share of net (loss) income
   $ (214 )   $ 93     $ 156     $ (131 )   $ (96 )
Impairment reserve
     -       -       -       (3,655 )     (3,655 )
Amortization of excess investment
     -       -       (97 )     -       (97 )
Company’s share of net (loss) income
   $ (214 )   $ 93     $ 59     $ (3,786 )   $ (3,848 )
 

   
Three Months Ended September 30, 2008
  
(dollars in thousands)
  
RCP Venture
    
Brandywine
Portfolio