Edgar Filing: ACADIA REALTY TRUST

a6386434.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 June 30, 2010

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	23-2715194
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

1311 MAMARONECK AVENUE, SUITE 260	10605
WHITE PLAINS, NY	(Zip Code)
(Address of principal executive offices)

(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 o	Accelerated Filer x
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 oNo x

As of August 5, 2010 there were 40,147,415 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

Item 1.	Financial Statements

	Consolidated Balance Sheets as of June 30, 2010 (unaudited) and December 31, 2009	1

	Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009 (unaudited)	2

	Consolidated Statements of Shareholders’ Equity and Comprehensive Income for the six months ended June 30, 2010 and 2009 (unaudited)	3

	Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009 (unaudited)	4

	Notes to Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18

Item 3.	Quantitative and Qualitative Disclosure About Market Risk	30

Item 4.	Controls and Procedures	31

Part II:	Other Information

Item 1.	Legal Proceedings	31

Item 1A.	Risk Factors	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	31

Item 3.	Defaults Upon Senior Securities	31

Item 4.	(Removed and Reserved)	31

Item 5.	Other Information	31

Item 6.	Exhibits	31

	Signatures	32

	Exhibit Index	33

Part I. Financial Information

Item 1. Financial Statements.

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)	June 30,			December 31,
	2010			2009
ASSETS	(unaudited)

Operating real estate
Land	$	200,354		$	221,740
Building and improvements		856,070			845,751
Construction in progress		968			2,575
		1,057,392			1,070,066
Less: accumulated depreciation		208,475			193,745
Net operating real estate		848,917			876,321
Real estate under development		293,476			137,340
Notes receivable and preferred equity investment, net		126,048			125,221
Investments in and advances to unconsolidated affiliates		16,037			51,712
Cash and cash equivalents		78,930			93,808
Rents receivable, net		17,213			16,782
Deferred charges, net of amortization		27,341			28,311
Acquired lease intangibles, net of amortization		20,447			22,382
Prepaid expenses and other assets		33,824			30,587
Total assets	$	1,462,233		$	1,382,464

LIABILITIES

Mortgages payable	$	761,041		$	732,287
Notes payable, net of unamortized discount of $1,594 and $2,105, respectively		48,421			47,910
Distributions in excess of income from, and investments in, unconsolidated affiliates		20,782			20,589
Accounts payable and accrued expenses		23,601			17,548
Dividends and distributions payable		7,426			7,377
Acquired lease and other intangibles, net of amortization		6,247			6,753
Other liabilities		18,029			17,523
Total liabilities		885,547			849,987

SHAREHOLDERS’ EQUITY

Common shares, $.001 par value, authorized 100,000,000 shares; issued
and outstanding 40,143,189 and 39,787,018 shares, respectively		40			40
Additional paid-in capital		301,625			299,014
Accumulated other comprehensive loss		(3,371	)		(2,994	)
Retained earnings		19,587			16,125
Total shareholders’ equity		317,881			312,185
Noncontrolling interests		258,805			220,292
Total equity		576,686			532,477
Total liabilities and equity	$	1,462,233		$	1,382,464

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

	Three months ended June 30,						Six months ended June 30,
(dollars in thousands, except per share amounts)	2010			2009			2010			2009

Revenues
Rental income	$	25,826		$	23,925		$	51,693		$	45,375
Mortgage interest income		5,238			4,933			10,231			9,959
Expense reimbursements		4,870			4,921			10,900			10,383
Lease termination income		59			21			65			226
Management fee income		436			444			836			1,200
Other		503			887			934			2,889
Total revenues		36,932			35,131			74,659			70,032

Operating Expenses
Property operating		6,571			7,240			14,416			14,546
Real estate taxes		4,346			4,088			8,873			7,753
General and administrative		5,416			5,208			10,538			11,349
Depreciation and amortization		7,864			8,456			18,205			17,036
Other expense		-			4,149			-			4,165
Total operating expenses		24,197			29,141			52,032			54,849

Operating income		12,735			5,990			22,627			15,183

Other interest income		153			95			287			212
Equity in earnings (losses) of unconsolidated affiliates		80			49			467			(3,258	)
Interest and other finance expense		(8,631	)		(7,631	)		(17,098	)		(15,452	)
Gain on bargain purchase		33,805			-			33,805			-
Gain on debt extinguishment		-			3,895			-			7,045
Income from continuing operations before income taxes		38,142			2,398			40,088			3,730
Income tax provision		(645	)		(1,096	)		(1,084	)		(1,622	)
Income from continuing operations		37,497			1,302			39,004			2,108

Discontinued Operations
Operating income from discontinued operations		-			19			-			193
Gain on sale of property		-			-			-			5,637
Income from discontinued operations		-			19			-			5,830

Net income		37,497			1,321			39,004			7,938

(Income) loss attributable to noncontrolling interests:
Continuing operations		(24,699	)		5,814			(21,076	)		14,360
Discontinued operations		-			-			-			(4,864	)
Net (income) loss attributable to noncontrolling interests		(24,699	)		5,814			(21,076	)		9,496

Net income attributable to Common Shareholders	$	12,798		$	7,135		$	17,928		$	17,434

Basic Earnings per Share
Income from continuing operations	$	0.32		$	0.18		$	0.45		$	0.45
Income from discontinued operations		-			-			-			0.03
Basic earnings per share	$	0.32		$	0.18		$	0.45		$	0.48

Diluted Earnings per Share
Income from continuing operations	$	0.32		$	0.18		$	0.45		$	0.45
Income from discontinued operations		-			-			-			0.03
Diluted earnings per share	$	0.32		$	0.18		$	0.45		$	0.48

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

				Acc-
				umulated
				Other		Total
			Additional	Comp-		Share-	Non-
	Common Shares		Paid-in	rehensive	Retained	holders’	controlling	Total
(dollars in thousands, except per share amounts)	Shares	Amount	Capital	Loss	Earnings	Equity	Interests	Equity

Balance at December 31, 2009	39,787		$	40	$	299,014		$	(2,994	)	$	16,125		$	312,185		$	220,292		$	532,477

Conversion of 256,967 OP Units to Common Shares by limited partners of the Operating Partnership	257					2,174			-			-			2,174			(2,174	)		-
Dividends declared ($0.36 per Common Share)	-			-		-			-			(14,466	)		(14,466	)		(381	)		(14,847	)
Employee Restricted Share awards	133			-		1,062			-			-			1,062			888			1,950
Common Shares issued under Employee Share
Purchase Plan	3			-		50			-			-			50			-			50
Issuance of Common Shares to Trustees	13			-		190			-			-			190			-			190
Exercise of Trustees options	7			-		101			-			-			101			-			101
Employee Restricted Shares cancelled	(57	)		-		(966	)		-			-			(966	)		-			(966	)
Noncontrolling interest contributions (distributions)	-			-		-			-			-			-			18,953			18,953

Net income	-			-					-			17,928			17,928			21,076			39,004
Unrealized loss on valuation of swap agreements	-			-		-			(1,701	)		-			(1,701	)		(26	)		(1,727	)
Reclassification of realized interest on swap agreements	-			-		-			1,324			-			1,324			177			1,501
Total comprehensive income	-			-		-			-			-			17,551			21,227			38,778

Balance at June 30, 2010	40,143		$	40	$	301,625		$	(3,371	)	$	19,587		$	317,881		$	258,805		$	576,686

Balance at December 31, 2008	32,357		$	32	$	218,527		$	(4,508	)	$	13,671		$	227,722		$	214,506		$	442,228

Dividends declared ($0.39 per Common Share)	-			-		-			-			(14,321	)		(14,321	)		(415	)		(14,736	)
Issuance of Common Shares	5,750			6		65,237			-			-			65,243			-			65,243
Issuance of Common Shares through special dividend	1,287			2		16,190			-			-			16,192			-			16,192
Employee Restricted Share awards	442			-		1,678			-			-			1,678			452			2,130
Common Shares issued under Employee Share
Purchase Plan	5			-		57			-			-			57			-			57
Issuance of Common Shares to Trustees	25			-		570			-			-			570			-			570
Employee Restricted Shares cancelled	(191	)				(2,715	)		-			-			(2,715	)		-			(2,715	)
Conversion options on Convertible Notes purchased	-			-		(838	)		-			-			(838	)		-			(838	)
Noncontrolling interest distributions	-			-		-			-			-			-			(454	)		(454	)

Net income (loss)	-			-					-			17,434			17,434			(9,496	)		7,938
Unrealized loss on valuation of swap agreements	-			-		-			(26	)		-			(26	)		(27	)		(53	)
Reclassification of realized interest on swap agreements	-			-		-			1,307			-			1,307			140			1,447
Total comprehensive income (loss)	-			-		-			-			-			18,715			(9,383	)		9,332

Balance at June 30, 2009	39,675		$	40	$	298,706		$	(3,227	)	$	16,784		$	312,303		$	204,706		$	517,009

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

(dollars in thousands)	Six months ended June 30
	2010			2009

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	39,004		$	7,938
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		18,205			17,060
Gain on bargain purchase		(33,805	)		-
Gain on sale of property		-			(5,637	)
Gain on debt extinguishment		-			(7,045	)
Non-cash accretion of notes receivable		(2,961	)		(2,570	)
Share compensation expense		2,141			2,187
Equity in (earnings) losses of unconsolidated affiliates		(467	)		3,258
Other, net		2,107			11,529
Changes in assets and liabilities
Cash in escrow		484			(550	)
Rents receivable, net		(1,441	)		(3,083	)
Prepaid expenses and other assets, net		(1,094	)		4,266
Accounts payable and accrued expenses		(2,216	)		1,409
Other liabilities		280			(372	)

Net cash provided by operating activities		20,237			28,390

CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate		(36,934	)		(107,804	)
Deferred acquisition and leasing costs		(1,802	)		(6,160	)
Investments in and advances to unconsolidated affiliates		(2,182	)		(2,985	)
Return of capital from unconsolidated affiliates		617			1,879
Repayments of notes receivable		2,011			1,728
Advances on notes receivable		-			(696	)
Proceeds from sale of property		-			9,481

Net cash used in investing activities		(38,290	)		(104,557	)

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009

(unaudited)

(dollars in thousands)	Six months ended June 30,
	2010			2009

CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage notes		(26,254	)		(67,843	)
Proceeds received on mortgage notes		29,035			166,262
Purchase of convertible notes		-			(46,611	)
Increase in deferred financing and other costs		(2,945	)		(27	)
Capital contributions from noncontrolling interests		19,476			-
Distributions to noncontrolling interests		(903	)		(1,326	)
Dividends paid to Common Shareholders		(14,419	)		(15,824	)
Proceeds from issuance of Common Shares, net of issuance costs		-			65,243
Repurchase and cancellation of Common Shares		(966	)		(2,715	)
Common Shares issued under Employee Share Purchase Plan		50			56
Exercise of options to purchase Common Shares		101			-

Net cash provided by financing activities		3,175			97,215

(Decrease) increase in cash and cash equivalents		(14,878	)		21,048
Cash and cash equivalents, beginning of period		93,808			86,691

Cash and cash equivalents, end of period	$	78,930		$	107,739

Supplemental disclosure of cash flow information
Cash paid during the period for interest, including capitalized interest of $876 and $2,126, respectively	$	16,473		$	16,746

Cash paid for income taxes	$	1,095		$	153

Dividends paid through the issuance of Common Shares	$	-		$	16,192

Acquisition of interest in unconsolidated affiliate:

Real estate, net	$	(108,000	)	$	-
Assumption of mortgage debt		25,990			-
Gain on bargain purchase		33,805			-
Other assets and liabilities		7,532			-
Investment in unconsolidated affiliates		37,824			-
Cash included in investment in real estate	$	(2,849	)	$	-

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION

Business and Organization

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 June 30, 2010, the Trust controlled approximately 99% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners primarily represent entities or individuals that contributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common 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”).

As of June 30, 2010, the Company has ownership interests in 34 properties within its core portfolio (“Core Portfolio”) and 44 properties within its three opportunity funds, Acadia Strategic Opportunity Fund I, L.P. (“Fund I”), Acadia Strategic Opportunity Fund II, LLC (“Fund II”) and Acadia Strategic Opportunity Fund III, LLC (“Fund III” and together with Fund I and Fund II, the “Opportunity Funds”). The 78 properties consist of commercial properties, primarily neighborhood and community shopping centers, self-storage and mixed-use properties with a retail component. In addition, the Company also invests in operating companies through Acadia Mervyn Investors I, LLC (“Mervyns I”) and Acadia Mervyn Investors II, LLC (“Mervyns II”) or Fund II, all on a non-recourse basis. These investments comprise the Company’s Retailer Controlled Property initiative (“RCP Venture”). The Operating Partnership has the following equity interests in the Opportunity Funds, Mervyns I and Mervyns II:

	Entity	Equity Interest Held By Operating Partnership
	Fund I and Mervyns I	22.2%
	Fund II and Mervyns II	20.0%
	Fund III	19.9%

In addition, with respect to each of the Opportunity Funds, Mervyns I and Mervyns II, the Operating Partnership is entitled to a profit participation in excess of its equity interest percentage based on certain investment return thresholds (“Promote”).

Basis of Presentation

The consolidated financial statements include the consolidated accounts of the Company and its investments in partnerships and limited liability companies in which the Company is presumed to have control in accordance with the consolidation guidance of the Financial Accounting Statements 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 these entities are included in consolidated net income under the caption, Equity in Earnings (Losses) of Unconsolidated Affiliates.

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. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods. These consolidated financial statements should be read in conjunction with the Company’s 2009 Annual Report on Form 10-K, as filed with the SEC on March 1, 2010.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND BASIS OF PRESENTATION (continued)

Recent Accounting Pronouncements

In June 2009, the FASB issued a new accounting standard, which provided certain changes to the evaluation of a variable interest entity (“VIE”) including requiring a qualitative rather than a quantitative analysis to determine the primary beneficiary of a VIE, continuous assessments of whether an enterprise is the primary beneficiary of a VIE and enhanced disclosures about an enterprise’s involvement with a VIE. Under the new standard, the primary beneficiary has both the power to direct the activities that most significantly impact economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. The adoption of the standard on January 1, 2010 did not have a material impact on the Company’s consolidated financial statements.

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06 “Improving Disclosures about Fair Value Measurements,” which provides for new disclosures, as well as clarification of existing disclosures on fair value measurements. The adoption of the standard on January 1, 2010 did not have a material impact on the Company’s financial position and results of operations.

In February 2010, the FASB issued ASU No. 2010-09 “Subsequent Events (ASC Topic 855) Amendments to Certain Recognition and Disclosure Requirements,” which requires an entity that is an SEC filer to evaluate subsequent events through the date that the financial statements are issued and removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated. The adoption did not have an impact on the Company’s financial position and results of operations.

2. EARNINGS PER COMMON SHARE

Basic earnings per Common Share is computed using net income attributable to common shareholders and the weighted average Common Shares outstanding. Diluted earnings per Common Share reflect the conversion of obligations and the assumed exercises of securities including the effects of awards issuable under the Company’s Share Incentive Plans. The computation of basic and diluted earnings per Common Share from continuing operations for the periods indicated are as follows:

	Three months ended June 30,				Six months ended June 30,
(dollars in thousands, except per share amounts)	2010		2009		2010		2009
Numerator:
Income from continuing operations attributable to Common Shareholders	$	12,798	$	7,116	$	17,928	$	16,468
Effect of dilutive securities:	─		─		─		─
Preferred OP Unit distributions		5		5		9		10
Numerator for diluted earnings per Common Share	$	12,803	$	7,121	$	17,937	$	16,478

Denominator:
Weighted average shares for basic earnings per share		40,135		38,592		40,058		36,261
Effect of dilutive securities:
Employee share options		212		187		191		154
Convertible Preferred OP Units		25		25		25		25
Dilutive potential Common Shares		237		212		216		179
Denominator for diluted earnings per share		40,372		38,804		40,274		36,440
Basic earnings per Common Share from continuing operations attributable to Common Shareholders	$	0.32	$	0.18	$	0.45	$	0.45
Diluted earnings per Common Share from continuing operations attributable to Common Shareholders	$	0.32	$	0.18	$	0.45	$	0.45

The weighted average shares used in the computation of diluted earnings per share include unvested restricted Common Shares (“Restricted Shares”) and restricted OP units (“LTIP Units”) (Note 13) 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 (Note 9) is not reflected in the table above as such conversion based on the current market price of the Common Shares would be settled with cash. The effect of the assumed conversion of 188 Series A Preferred OP Units into 25,067 Common Shares is dilutive for the three and six months ended June 30, 2010 and June 30, 2009 as reflected above.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. NONCONTROLLING INTERESTS

Noncontrolling interests represent the portion of equity that the Company does not own in entities that it consolidates. Such noncontrolling interests are reported on the Consolidated Balance Sheets within equity, separately from the Company’s equity.

Noncontrolling interests include third party interests in the Company’s Opportunity Funds and other entities. It also include interests in the Operating Partnership which represent (i) the limited partners’ 369,639 and 626,606 Common OP Units at June 30, 2010 and December 31, 2009, respectively, and (ii) 188 Series A Preferred OP Units at June 30, 2010 and December 31, 2009.

4. ACQUISITIONS AND DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Acquisitions

Prior to June 30, 2010, the Company, through Fund II, and an unaffiliated joint venture partner, California Urban Investment Partners, LLC (“CUIP”) owned a leasehold interest in CityPoint, a mixed-use, redevelopment project located in downtown Brooklyn, New York. Fund II owned a 75% interest in the retail component, a 50% interest in the office component and no interest in the residential component of CityPoint. CUIP owned the remaining interests in the retail and office components and 100% of the residential component of the project. Accordingly, Fund II’s investment represented 24.75% of the overall original acquisition cost and subsequent carry and pre-development costs and was accounted for using the equity method.

On June 30, 2010, Fund II acquired all of CUIP’s interest in CityPoint for $9.2 million (the “Transaction”), consisting of a current payment of $2.0 million and deferred payments, potentially through 2020, aggregating $7.2 million. Fund II also assumed CUIP’s share of the first mortgage debt, $19.6 million.

The Transaction was a business combination achieved in stages, and as a result, Fund II was required to report its entire investment in CityPoint at fair market value. A June 30, 2010 third-party appraisal valued CityPoint at $108 million which resulted in Fund II recording a non-cash gain of approximately $33.8 million for the three and six months ended June 30, 2010. The Operating Partnership’s share of this gain, net of the noncontrolling interests’ share, totaled $6.3 million.

As a result of the Transaction, the Company changed its method of accounting for CityPoint from the equity method and now consolidates CityPoint in its consolidated financial statements as of June 30, 2010. As CityPoint is currently in the redevelopment stage, there are no revenues or earnings from CityPoint included in the Company’s Consolidated Statements of Income for the three and six months ended June 30, 2010 and 2009.

Discontinued Operations

The Company reports properties held-for-sale and properties sold during the periods as discontinued operations. The results of operations, assets and liabilities of discontinued operations are reflected as a separate component within the accompanying Consolidated Financial Statements for all periods presented.

There were no properties sold during the six months ended June 30, 2010. During 2009, the Company sold Blackman Plaza and six of the remaining Fund I investments in 24 Kroger and Safeway supermarket locations. The combined results of operations of the properties classified as discontinued operations are summarized as follows:

Statements Of Operations	Three months ended June 30,		Six months ended June 30,
(dollars in thousands)	2009		2009

Total revenues	$	93	$	375
Total expenses		74		182
Operating income		19		193
Gain on sale of property	─			5,637
Income from discontinued operations		19		5,830
Income from discontinued operations attributable to noncontrolling interests in subsidiaries	─			(4,864	)
Income from discontinued operations attributable to Common Shareholders	$	19	$	966

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES

Core Portfolio

Brandywine Portfolio

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

Crossroads

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

Opportunity Funds

RCP Venture

During January of 2004, the Company formed 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. The Company has invested in the RCP Venture through Mervyns I and Mervyns II or Fund II, all on a non-recourse basis. Through June 30, 2010, the Company has made investments in Mervyns Department Stores (“Mervyns”) and Albertson’s including additional investments in locations that are separate from these original investments (“Add-On Investments”). Additionally, the Company has invested in Shopko, Marsh and Rex Stores Corporation (collectively “Other RCP Investments”).

The Company accounts for the original investments in Mervyns and Albertson’s under the equity method of accounting as the Company has the ability to exercise significant influence over, but does not have financial or operating control. The Company accounts for the Add-On Investments and Other RCP Investments under the cost method due to its minor ownership interest and the inability to exert influence over KLA’s operating and financial policies.

The following table summarized the Company’s RCP Venture investments from inception through June 30, 2010:


(dollars in thousands)							Operating Partnership Share
			Invested				Invested
			Capital				Capital
		Year	and				and
Investor	Investment	Acquired	Advances		Distributions		Advances		Distributions
Mervyns I and Mervyns II	Mervyns	2004	$	26,058	$	45,966	$	4,901	$	11,251
	Mervyns add-on
Mervyns I and Mervyns II	investments	2005/2008		6,517		1,703		1,046		283
Mervyns II	Albertson’s	2006		20,717		65,969		4,239		13,193
	Albertson’s add-on
Mervyns II	investments	2006/2007		2,412		1,215		387		243
Fund II	Shopko	2006		1,108		1,100		222		220
Fund II	Marsh/Marsh Add-on investments	2006/2008		2,667		2,639		533		528
Mervyns II	Rex Stores	2007		2,701		400		535		80
Total			$	62,180	$	118,992	$	11,863	$	25,798

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Other Opportunity Fund Investments

Fund I Investments

Fund I owned a 50% interest in the Sterling Heights Shopping Center, which was accounted for under the equity method of accounting. On March 25, 2010, the Sterling Heights Shopping Center was sold for $2.3 million. The proceeds from this sale together with the balance of Fund I’s recourse obligation of $0.6 million were used to fully liquidate the outstanding mortgage loan obligation.

Fund II Investments

Fund II had a 24.75% interest in CityPoint, a redevelopment project located in downtown Brooklyn, NY, which was accounted for under the equity method. On June 30, 2010, Fund II acquired the remaining interests in the project from its unaffiliated partner, as discussed in Note 4 and, as a result, now consolidates the CityPoint entity.

Fund III Investments

Fund III, together with an unaffiliated partner, has invested in an entity for the purpose of providing management services to owners of self-storage properties, including the 14 locations currently owned through Fund II and Fund III. This entity was determined to be a variable interest entity of which the Company was determined not to be the primary beneficiary. As such, the Company accounts for this investment under the equity method.

The following tables summarize the combined/condensed financial information of the Company’s investments in unconsolidated affiliates as of June 30, 2010 and December 31, 2009.

(dollars in thousands)	June 30, 2010			December 31, 2009
Combined/Condensed Balance Sheets
Assets:
Rental property, net	$	134,448		$	142,690
Real estate under development	─				100,346
Investment in unconsolidated affiliates		210,337			209,407
Other assets		15,711			20,951

Total assets	$	360,496		$	473,394

Liabilities and partners’ equity
Mortgage note payable	$	228,032		$	258,685
Other liabilities		8,032			12,085
Partners’ equity		124,432			202,624

Total liabilities and partners’ equity	$	360,496		$	473,394
Company’s investment in and advances to unconsolidated affiliates	$	16,037		$	51,712
Share of distributions in excess of share of income and investments in unconsolidated affiliates	$	(20,782	)	$	(20,589	)

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Summary of Investments in Unconsolidated Affiliates

	Three Months Ended						Six Months Ended
(dollars in thousands)	June 30, 2010			June 30, 2009			June 30, 2010			June 30, 2009
Combined/Condensed Statements of Operations
Total revenue	$	7,401		$	7,460		$	14,470		$	14,945
Operating and other expenses		2,074			2,223			4,611			4,864
Interest expense		3,359			3,450			6,714			6,852
Equity in (losses) earnings of unconsolidated affiliates		(159	)		(2,070	)		2,764			(34,264	)
Depreciation and amortization		1,589			1,109			2,687			2,232
Loss on sale of property, net	─			─				(2,957	)		(390	)
Net income (loss)	$	220		$	(1,392	)	$	265		$	(33,657	)

Company’s share of net income (loss)	$	177		$	146		$	661		$	(3,064	)
Amortization of excess investment		(97	)		(97	)		(194	)		(194	)
Company’s share of net income (loss)	$	80		$	49		$	467		$	(3,258	)

6. NOTES RECEIVABLE AND PREFERRED EQUITY INVESTMENT

At June 30, 2010, the Company’s notes receivable and preferred equity investment, net, consisted of the following:

Description

Effective

interest Rate

Maturity date

First Priority liens

Net carrying amount of notes receivable and preferred equity

Extension options

(dollars in thousands)

72nd Street

20.9%

7/2011

185,000

43,727

1 x 1 year

Georgetown A

10.2%

11/2010

9,630

8,000

2 x 1 year

Georgetown B

13.5%

6/2011

115,981

40,000

2 x 1 year

Other Loan

14.5%

12/2010

─

8,585

1 x 6 months

First Mortgage Loan

12.8%

9/2010

─

10,000

1 x 1 year

Individually less

10% to

Demand note

than 3%

24.0%

to 1/2017

272,433

15,736

─

Total

126,048

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. DERIVATIVE FINANCIAL INSTRUMENTS

As of June 30, 2010, the Company’s derivative financial instruments consisted of seven interest rate LIBOR swaps with an aggregate notional value of $78.8 million, which fix interest at rates from 0.9% to 5.1% and mature between July 2010 and November 2012. The fair value of the net derivative liability of these instruments, which is included in other liabilities in the Consolidated Balance Sheets, totals $3.5 million at June 30, 2010. 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 on mortgage debt. Such instruments are reported at the fair value reflected above. As of June 30, 2010 and 2009, unrealized losses totaling $3.5 and $3.7 million, respectively were reflected in accumulated other comprehensive loss.

As of June 30, 2010 and 2009, no derivatives were designated as fair value hedges, hedges of net investments in foreign operations or considered to be ineffective. Additionally, the Company does not use derivatives for trading or speculative purposes.

8. MORTGAGE LOANS

The Company completed the following transactions related to mortgage loans and credit facilities during the six months ended June 30, 2010:

i) Closed on a $48.0 million construction loan that bears interest at the greater of (a) LIBOR plus 400 basis points or (b) an interest rate floor of 6.50% which matures on January 12, 2012. As of June 30, 2010, $10.0 million was drawn on this facility.

ii) Extended the Fund II subscription line of credit, which is collateralized by a pledge of investors’ unfunded capital commitments, that was scheduled to mature on March 1, 2010, to March 1, 2011 and adjusted the interest rate from LIBOR plus 250 basis points to LIBOR plus 325 basis points. In connection with the extension, the Company made an $8.2 million payment on the outstanding $48.2 million line of credit. The line of credit’s maximum capacity was reduced to $40.0 million and will decrease to $30.0 million in September 2010.

iii) During February of 2010, the Company paid off the outstanding Ledgewood line of credit balance of $2.0 million, which was scheduled to mature on March 29, 2010 and terminated the line of credit.

iv) Also during February of 2010, the Company made a $15.0 million payment on an outstanding $30.0 million credit facility collateralized by six properties.

v) During May of 2010, the Company made a $17.0 million draw on the Fund III subscription line of credit. As of June 30, 2010, the total outstanding amount on this line of credit was $156.5 million.

vi) Also during May of 2010, the Company borrowed an additional $2.0 million on an existing mortgage loan collateralized by a property.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8. MORTGAGE LOANS (continued)

In June 2009, the servicer of two of the Company’s loans alleged that non-monetary defaults had occurred on construction loans for $31.7 million and $11.5 million collateralized by the Pelham Manor Shopping Center and Atlantic Avenue, respectively. The servicer contends that the Company did not substantially complete the improvements in accordance with the required completion dates as defined in the loan agreements and, accordingly, did not meet the requirements for the final draws. The Company does not believe the loans are in default and will vigorously defend its position and is currently in discussions with the servicer to resolve these issues. The Company and the servicer on behalf of the lender have reached an agreement in principle to amend the two loans. As part of the agreement the servicer on behalf of the lender has agreed to waive all alleged events of default. Consequently the Company believes that the ultimate resolution of this matter will not have a material adverse effect on the Company’s financial condition or results of operations.

On April 1, 2010, a $30.0 million loan, collateralized by a Fund II property located on 161st Street in the Bronx, NY, matured. The lender disputed the Company’s notice of the exercise of its one year extension option and refused to grant the extension request and issued a Notice of Event of Default and Demand for Payment with which the Company disagreed. Subsequent to June 30, 2010, the Company successfully negotiated an amendment and extension of the loan. The agreement required a $1.1 million payment on the outstanding principal balance and extended the maturity date to April 1, 2013. The interest rate has been adjusted retroactively to LIBOR plus 400 basis points for the period April 1, 2010 through March 31, 2011, LIBOR plus 550 basis points for the period April 1, 2011 through March 31, 2012, and LIBOR plus 600 basis points for the period April 1, 2012 through March 31, 2013.

9. CONVERTIBLE NOTES PAYABLE

In December 2006 and January 2007, the Company issued $115.0 million of convertible notes with a fixed interest rate of 3.75% due 2026 (the “Convertible Notes”). The Convertible Notes were issued at par and require interest payments semi-annually in arrears on June 15th and December 15th of each year. The Convertible Notes are unsecured obligations and rank equally with all other unsecured and unsubordinated indebtedness.

Through June 30, 2010, the Company has purchased $65.0 million in face amount of its convertible debt at an average discount of approximately 19%. The outstanding Convertible Notes face amount as of June 30, 2010 was $50.0 million.

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 participant 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 participant 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 June 30, 2010:

(dollars in thousands)	Level 1		Level 2		Level 3
Liabilities
Derivative financial instruments (Note 7)	$	—	$	3,494	$	—

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. FAIR VALUE MEASUREMENTS (continued)

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 approximates their fair value.

The Company has determined the estimated fair values of the following financial instruments by discounting future cash flows utilizing a discount rate equivalent to the rate at which similar financial instruments would be originated at the reporting date:

	June 30, 2010				December 31, 2009
			Estimated				Estimated
	Carrying		Fair		Carrying		Fair
(dollars in thousands)	Amount		Value		Amount		Value

Notes Receivable and Preferred Equity Investments	$	126,048	$	124,165	$	125,221	$	126,403

Mortgage Notes Payable and Convertible Notes Payable	$	809,462	$	808,829	$	780,197	$	751,043

11. RELATED PARTY TRANSACTIONS

During February 2010, Klaff converted all 250,000 of its Restricted Common OP Units into 250,000 Common Shares.

The Company earns asset management, leasing, disposition, development and construction fees for providing services to an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Fees earned by the Company in connection with this portfolio were $0.1 million for each of the three months ended June 30, 2010 and 2009, respectively, and $0.1 million and $0.3 million for the six months ended June 30, 2010 and 2009, respectively.

The Company earned property management fees, legal and leasing fees from the Brandywine portfolio totaling $0.2 million for each of the three months ended June 30, 2010 and June 30, 2009, and $0.4 million for each the six months ended June 30, 2010 and 2009, respectively.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended June 30, 2010 and 2009, and $50,000 for each of the six months ended June 30, 2010 and 2009.

12. SEGMENT REPORTING

The Company has five reportable segments: Core Portfolio, Opportunity Funds, Self-Storage Portfolio, Notes Receivable and Other. “Notes Receivable” consists of the Company’s notes receivable and preferred equity investment and related interest income. “Other” consists primarily of management fees and interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. Investments in the Core Portfolio are typically held long-term. Given the contemplated finite life of the Opportunity Funds, these investments are typically held for shorter terms. Fees earned by the Company as the general partner/member of the Opportunity Funds are eliminated in the Company’s consolidated financial statements. The following tables set forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three and six months ended June 30, 2010 and 2009 (does not include unconsolidated affiliates):

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SEGMENT REPORTING (continued)

Three Months Ended June 30, 2010

(dollars in thousands)	Core Portfolio		Opportunity Funds		Self- Storage Portfolio		Notes Receivable		Other		Amounts Eliminated in Consolidation			Total
Revenues	$	14,863	$	11,622	$	4,773	$	5,238	$	5,204	$	(4,768	)	$	36,932
Property operating expenses and real estate taxes		3,942		4,098		3,298	─		─			(421	)		10,917
Other expenses		5,347		3,543	─		─		─			(3,474	)		5,416
Income before depreciation and amortization	$	5,574	$	3,981	$	1,475	$	5,238	$	5,204	$	(873	)	$	20,599
Depreciation and amortization	$	3,960	$	2,775	$	1,129	$	─	$	─	$	─		$	7,864
Interest and other finance expense	$	4,290	$	2,242	$	2,099	$	─	$	─	$	─		$	8,631
Real estate at cost	$	478,904	$	674,383	$	209,733	$	─	$	─	$	(12,152	)	$	1,350,868
Total assets	$	547,065	$	704,037	$	196,223	$	126,048	$	─	$	(111,140	)	$	1,462,233
Expenditures in real estate	$	2,348	$	23,871	$	551	$	─	$	─	$	(918	)	$	25,852

Reconciliation to net income and net income attributable to Common Shareholders
Net property income before depreciation and amortization	$	20,599
Other interest income		153
Depreciation and amortization		(7,864	)
Equity in earnings of unconsolidated affiliates		80
Interest and other finance expense		(8,631	)
Income tax expense		(645	)
Gain on bargain purchase		33,805
Net income		37,497
Net (income) attributable to noncontrolling interests in subsidiaries		(24,699	)
Net income attributable to Common Shareholders	$	12,798

Three Months Ended June 30, 2009

(dollars in thousands)	Core Portfolio		Opportunity Funds		Self- Storage Portfolio		Notes Receivable		Other		Amounts Eliminated in Consolidation			Total
Revenues	$	15,745	$	11,646	$	2,362	$	4,933	$	6,461	$	(6,016	)	$	35,131
Property operating expenses and real estate taxes		5,408		3,946		2,357	─		─			(383	)		11,328
Other expenses		5,520		6,013	─			1,734	─			(3,910	)		9,357
Income (loss) before depreciation and amortization	$	4,817	$	1,687	$	5	$	3,199	$	6,461	$	(1,723	)	$	14,446
Depreciation and amortization	$	4,074	$	3,284	$	1,098	$	─	$	─	$	─		$	8,456
Interest and other finance expense	$	4,725	$	1,304	$	1,602	$	─	$	─	$	─		$	7,631
Real estate at cost	$	475,196	$	517,102	$	206,744	$	─	$	─	$	(11,190	)	$	1,187,852
Total assets	$	562,887	$	607,876	$	200,785	$	124,500	$	─	$	(102,758	)	$	1,393,290
Expenditures in real estate	$	745	$	10,951	$	1,737	$	─	$	─	$	(1,681	)	$	11,752

Reconciliation to net income and net income attributable to Common Shareholders
Net property income before depreciation and amortization	$	14,446
Other interest income		95
Depreciation and amortization		(8,456	)
Equity in losses of unconsolidated affiliates		49
Interest and other finance expense		(7,631	)
Gain on debt extinguishment		3,895
Income tax expense		(1,096	)
Income from discontinued operations		19
Net income		1,321
Net loss attributable to noncontrolling interests in subsidiaries		5,814
Net income attributable to Common Shareholders	$	7,135

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SEGMENT REPORTING (continued)

Six Months Ended June 30, 2010

(dollars in thousands)

Core

Portfolio

Opportunity

Funds

Self-

Storage

Portfolio

Notes

Receivable

Other

Amounts

Eliminated in

Consolidation