UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2007
		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

MARYLAND		23-2715194
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
1311 MAMARONECK AVENUE, SUITE 260 WHITE PLAINS, NY (Address of principal executive offices)		10605 (Zip Code)

(914) 288-8100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ     NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Exchange Act Rule 12b-2).

Large Accelerated Filer þ     Accelerated Filer o     Non-accelerated Filer o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act) Yes o     No þ

As of May 9, 2007, there were 32,130,608 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 March 31, 2007 (unaudited) and December 31, 2006			1
		Consolidated Statements of Income for the three months ended March 31, 2007 and 2006 (unaudited)			2
		Consolidated Statements of Cash Flows for the three months ended March 31, 2007 and 2006 (unaudited)			3
		Notes to Consolidated Financial Statements			5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			16
Item 3.		Quantitative and Qualitative Disclosure of Market Risk			26
Item 4.		Controls and Procedures			27
Part II:		Other Information
Item 1.		Legal Proceedings			28
Item 1A.		Risk Factors			28
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds			28
Item 3.		Defaults upon Senior Securities			28
Item 4.		Submission of Matters to a Vote of Security Holders			28
Item 5.		Other Information			28
Item 6.		Exhibits			29
		Signatures			30
Loan Agreement
Revolving Credit Agreement
List of Subsidiaries of Acadia Realty Trust
Certification of Chief Executive Officer
Certification of Chief Financial Officer
Certification of Chief Executive Officer, as adopted pursuant to Section 906
Certification of Chief Financial Officer, as adopted pursuant to Section 906

Part I. Financial Information

Item 1. Financial Statements

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
(dollars in thousands)		2007				2006
		(unaudited)
ASSETS
Real estate
Land		$	174,038			$	152,930
Buildings and improvements			541,374				497,638
Construction in progress			23,160				26,670
			738,572				677,238
Less: accumulated depreciation			147,370				142,071
Net real estate			591,202				535,167
Cash and cash equivalents			111,643				139,571
Cash in escrow			6,987				7,639
Restricted cash			2,185				549
Investments in and advances to unconsolidated affiliates			12,157				31,049
Rents receivable, net			10,914				12,949
Notes receivable			34,134				38,322
Prepaid expenses			2,026				1,865
Deferred charges, net			36,326				33,255
Acquired lease intangibles			13,519				11,653
Other assets, net			20,406				39,673
		$	841,499			$	851,692
LIABILITIES AND SHAREHOLDERS’ EQUITY
Mortgage notes payable		$	337,265			$	347,402
Convertible notes payable			115,000				100,000
Acquired leases and other intangibles			3,918				4,919
Accounts payable and accrued expenses			8,984				10,548
Dividends and distributions payable			6,661				6,661
Distributions in excess of income from and investment in unconsolidated affiliates			21,622				21,728
Other liabilities			11,821				5,578
Total liabilities			505,271				496,836
Minority interest in Operating Partnership			4,911				8,673
Minority interests in partially-owned affiliates			86,476				105,064
Total minority interests			91,387				113,737
Shareholders’ equity
Common shares			32				31
Additional paid-in capital			231,074				227,555
Accumulated other comprehensive loss			(232	)			(234	)
Retained earnings			13,967				13,767
Total shareholders’ equity			244,841				241,119
		$	841,499			$	851,692

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(unaudited)

		Three months ended
		March 31,
(dollars in thousands, except per share amounts)		2007				2006
Revenues
Minimum rents		$	18,854			$	17,287
Percentage rents			138				185
Expense reimbursements			3,342				3,877
Other property income			264				209
Management fee income from related parties, net			1,075				1,201
Interest income			2,860				1,746
Other			165				1,141
Total revenues			26,698				25,646
Operating Expenses
Property operating			4,906				3,867
Real estate taxes			2,198				2,700
General and administrative			5,448				5,307
Depreciation and amortization			6,537				6,230
Total operating expenses			19,089				18,104
Operating income			7,609				7,542
Equity in earnings of unconsolidated affiliates			130				2,971
Interest expense			(6,147	)			(5,185	)
Minority interest			2,288				(1,076	)
Income from continuing operations before income taxes			3,880				4,252
Income taxes			(44	)			(449	)
Income from continuing operations			3,836				3,803
Discontinued Operations
Operating income from discontinued operations			—				561
Minority interest			—				(11	)
Income from discontinued operations			—				550
Income before extraordinary item			3,836				4,353
Extraordinary item
Share of extraordinary gain from investment in unconsolidated affiliate			23,690				—
Minority interest			(18,959	)			—
Income taxes			(1,848	)			—
Extraordinary gain			2,883				—
Net income		$	6,719			$	4,353
Basic Earnings per Share
Income from continuing operations		$	0.12			$	0.12
Income from discontinued operations			—				0.01
Income from extraordinary item			0.09				—
Basic earnings per share		$	0.21			$	0.13
Diluted Earnings per Share
Income from continuing operations		$	0.11			$	0.12
Income from discontinued operations			—				0.01
Income from extraordinary item			0.09				—
Diluted earnings per share		$	0.20			$	0.13

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(unaudited)

		March 31,				March 31,
(dollars in thousands)		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	6,719			$	4,353
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			6,537				6,682
Minority interests			16,671				1,087
Amortization of lease intangibles			62				178
Amortization of mortgage note premium			(34	)			(30	)
Equity in earnings of unconsolidated affiliates			(23,820	)			(2,971	)
Fees received from unconsolidated affiliates			122				145
Distributions recognized as income from unconsolidated affiliates			23,883				3,983
Amortization of derivative included in interest expense			109				109
Changes in assets and liabilities
Restricted cash			(1,636	)			(1	)
Funding of escrows, net			652				(419	)
Rents receivable			2,035				(472	)
Prepaid expenses			(161	)			154
Other assets			19,001				(5,863	)
Accounts payable and accrued expenses			(1,846	)			918
Other liabilities			6,099				4,476
Net cash provided by operating activities			54,393				12,329
CASH FLOWS FROM INVESTING ACTIVITIES:
Expenditures for real estate and improvements			(64,613	)			(26,991	)
Deferred acquisition and leasing costs			(3,550	)			(2,341	)
Investments in and advances to unconsolidated affiliates			(2,274	)			(367	)
Return of capital from unconsolidated affiliates			20,875				6,551
Collections of notes receivable			5,583				—
Advances of notes receivable			(1,368	)			(27,359	)
Net cash used in investing activities			(45,347	)			(50,507	)

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND 2006

(unaudited)

		March 31,				March 31,
(dollars in thousands)		2007				2006
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgages and notes payable			(42,607	)			(28,483	)
Proceeds received on mortgage notes payable			32,764				64,809
Proceeds received on convertible debt issuance			15,000				—
Payment of deferred financing and other costs			(392	)			(69	)
Capital contributions from partners and members			2,166				—
Distributions to partners and members			(35,012	)			(34,053	)
Dividends paid			(6,519	)			(5,905	)
Distributions to minority interests in Operating Partnership			(133	)			(121	)
Distributions on preferred Operating Partnership Units			(9	)			(63	)
Distributions to minority interests in partially-owned affiliates			(2,260	)			(36	)
Contributions from minority interests in partially-owned affiliates			—				2,261
Common Shares issued under Employee Stock Purchase Plan			28				24
Net cash used in financing activities			(36,974	)			(1,636	)
Decreases in cash and cash equivalents			(27,928	)			(39,814	)
Cash and cash equivalents, beginning of period			139,571				90,475
Cash and cash equivalents, end of period		$	111,643			$	50,661
Supplemental disclosure of cash flow information
Cash paid during the period for interest, including capitalized interest of $12 and $11, respectively		$	4,950			$	5,334
Cash paid for income taxes		$	205			$	1,190
Supplemental disclosure of non-cash investing and financing activities
Acquisition of real estate through assumption of debt		$	—			$	12,509
Recapitalization of the Brandywine Portfolio
Real estate, net		$	—			$	124,962
Other assets and liabilities			—				(11,413	)
Mortgage debt			—				(66,984	)
Minority interests			—				(36,504	)
Investment in unconsolidated affiliates			—				(10,428	)
Cash included in investments and advances to unconsolidated affiliates		$	—			$	(367	)

See accompanying notes

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 March 31, 2007, 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 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 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 a total of approximately $300.0 million in investments. As of March 31, 2007, the Operating Partnership has contributed $16.5 million to Fund I and $2.7 million to Mervyns I.

The Operating Partnership is the sole general partner of Fund I and sole managing member of Mervyns I, with a 22.2% interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds (“Promote”). Cash flow is distributed pro-rata to the partners (including the Operating Partnership) until they receive a 9% cumulative return, and the return of all capital contributions. Thereafter, remaining cash flow (which is net of distributions and fees to the Operating Partnership for management, asset management, leasing and construction 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 the institutional investors, the Operating Partnership is now entitled to a Promote on all earnings and distributions.

During June of 2004, the Company formed a limited liability company, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), and during August 2004 formed another limited liability company, Acadia Mervyn II, LLC (“Mervyns II”), with the investors from Fund I as well as two additional institutional investors. With $300.0 million of committed discretionary capital, Fund II and Mervyns II combined expect to be able to acquire up to $900.0 million of investments on a leveraged basis. The Operating Partnership’s share of committed capital is $60.0 million. The Operating Partnership is the sole 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 March 31, 2007, the Operating Partnership has contributed $18.0 million to Fund II and $7.1 million to Mervyns II.

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 Emerging Issues Task Force Issue No. 04-5. 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 thereof, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or loss) of these entities are included in consolidated net income. 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.

Although the Company accounts for its investment in Albertson’s, which it has made through the Retailer Controlled Property Venture (“RCP Venture”), 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 paragraph 19 of Accounting Principles Board (“APB”) 18 “Equity Method of Accounting for Investments in Common Stock”. Cash distributions received during the first quarter of 2007 from Albertson’s in excess of invested capital were recorded as income in the period when the distribution is received.

The preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates. Operating results for the three months ended March 31, 2007 are not necessarily indicative of the results

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2.     BASIS OF PRESENTATION, (continued)

that may be expected for the fiscal year ending December 31, 2007. 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, 2006.

During June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of SFAS No. 109.” (“Interpretation No. 48”), Interpretation No. 48 defines a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Interpretation No. 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. Interpretation No. 48 is effective for fiscal years beginning after December 15, 2006.

The Company adopted Interpretation No. 48 on January 1, 2007. Based on its evaluation, the Company had no uncertain tax positions and no unrecognized tax benefits as of the adoption date or as of March 31, 2007. The Company has no interest or penalties relating to income taxes recognized in the statement of income for the three months ended March 31, 2007 or in the balance sheet as of March 31, 2007. It is the Company’s accounting policy to classify interest and penalties relating to unrecognized tax benefits as interest expense and tax expense, respectively. As of March 31, 2007, the tax years 2003 through and including 2006 remain open to examination by the Internal Revenue Service. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective returns. There are currently no federal or state tax examinations in progress.

On February 15, 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This Statement permits companies and not-for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair value, even if fair value measurement is not required under GAAP. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect of the adoption of SFAS No. 159.

3.     EARNINGS PER COMMON SHARE

Basic earnings per share was determined by dividing the applicable net income to common shareholders for the period by the weighted average number of Common Shares outstanding during each period consistent with SFAS No. 128. 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
		March 31,
(dollars in thousands, except per share amounts)		2007				2006
Numerator:
Net income — basic		$	6,719			$	4,353
Income allocated to Preferred OP units			8				—
Net income —diluted		$	6,727			$	4,353
Denominator:
Weighted average shares — basic earnings per share			32,753				32,468
Effect of dilutive securities:
Employee stock options			342				298
Convertible Preferred OP Units			179				—
Dilutive Potential Common Shares			521				298
Denominator for diluted earnings per share			33,274				32,766
Basic earnings per share		$	0.21			$	0.13
Diluted earnings per share		$	0.20			$	0.13

The weighted average shares used in the computation of basic earnings per share include unvested restricted shares and Share 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 minority interest 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 effect of the conversion of 178,993 Series A and B Preferred OP Units was dilutive for the three months ended March 31, 2007 and is included in the above table. The effect of the conversion of 337,097 Preferred OP Units for the three months ended March 31, 2006, is not reflected in the above table as such conversion was anti-dilutive.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4.     COMPREHENSIVE INCOME

The following table sets forth comprehensive income for the three months ended March 31, 2007 and 2006:

		Three months ended
		March 31,
(dollars in thousands)		2007				2006
Net income		$	6,719			$	4,353
Other comprehensive income			2				1,098
Comprehensive income		$	6,721			$	5,451

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

The following table sets forth the change in accumulated other comprehensive loss for the three months ended March 31, 2007:

Accumulated other comprehensive loss

(dollars in thousands)
Balance at December 31, 2006		$	(234	)
Unrealized gain on valuation of derivative instruments and amortization of derivative			2
Balance at March 31, 2007		$	(232	)

5.     SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS

The following table summarizes the change in the shareholders’ equity and minority interests since December 31, 2006:

						Minority Interest				Minority Interest in
		Shareholders’				in Operating				partially-owned
(dollars in thousands)		Equity				Partnership				affiliates
Balance at December 31, 2006		$	241,119			$	8,673			$	105,064
Dividends and distributions declared of $0.20 per Common Share and Common OP Unit			(6,519	)			(133	)			—
Net income for the period January 1 through March 31, 2007			6,719				144				16,527
Distributions paid			—				—				(37,281	)
Conversion of Series B Preferred OP Units			3,800				(3,800	)			—
Other comprehensive income — Unrealized loss on valuation of swap agreements			(107	)			—				—
Other comprehensive income — Amortization of derivative			109				—				—
Common shares issued under employee stock purchase plan			28				—				—
Minority interest contributions			—				—				2,166
Employee restricted share awards			785				—				—
Employee cancellation of restricted shares			(1,093	)			—				—
Employee restricted partnership unit awards			—				27				—
Balance at March 31, 2007		$	244,841			$	4,911			$	86,476

Minority interest in the Operating Partnership represents (i) the limited partners’ interest of 642,272 Common OP Units at March 31, 2007 and December 31, 2006, (ii) 188 Series A Preferred OP Units at March 31, 2007 and December 31, 2006, with a nominal 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, and (iii) 200 and 4,000 Series B Preferred OP Units at March 31, 2007 and December 31, 2006, respectively, with a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $13.00 (5.2% annually) per unit or (b) the quarterly distribution attributable to a Series B Preferred OP Unit if such unit were converted into a Common OP Unit.

During January 2007, 43,865 employee restricted shares were cancelled to pay taxes. During the quarter ended March 31, 2007, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling $0.8 million. (Note 13)

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5.     SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS, (continued)

During February 2007, Klaff (Note 7) converted 3,800 Series B Preferred Units into 296,412 Common OP Units and ultimately into the same number of Common Shares.

Minority interests in partially-owned affiliates include third-party interests in three partnerships in which the Company has a majority ownership position and non-managing members’ interests in Funds I and II, and Mervyns I and II which the Company consolidates in accordance with EITF 04-5.

The following table summarizes the minority interest contributions and distributions since December 31, 2006:

(dollars in thousands)		Contributions				Distributions
Minority interest in majority-owned affiliates		$	—			$	(2,260	)
Fund I			—				(109	)
Fund II			2,130				—
Mervyns II			36				(34,912	)
		$	2,166			$	(37,281	)

6.     ACQUISITION AND DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Acquisition of Properties

On March 20, 2007, the Company purchased a retail commercial condominium at 200 West 54^th Street in Manhattan, New York. The 10,000 square feet property was acquired for $36.4 million.

Additionally, on March 20, 2007, the Company purchased a single tenant building at 1545 East Service Road in Staten Island, New York for $17.0 million. The 52,000 square foot building is currently being renovated and is leased to a single tenant.

Discontinued Operations

SFAS No. 144 requires discontinued operations presentation for disposals of a “component” of an entity. In accordance with SFAS No. 144, for all periods presented, the Company reclassified its consolidated statements of income to reflect income and expenses for properties which were sold or became held for sale subsequent to March 31, 2006, 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 results of operations of properties held for sale are reported separately as discontinued operations for the three months ended March 31, 2006. These are related to the Soundview Marketplace, Bradford Towne Centre, Greenridge Plaza, Luzerne Street Shopping Center and the Pittston Plaza, all of which the Company sold during the fourth quarter of 2006. There were no discontinued operations for the three months ended March 31, 2007.

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

		For the three
		months ended
(dollars in thousands)		March 31, 2006
Total revenues		$	2,373
Total expenses			1,812
Operating income from discontinued operations			561
Minority interest			(11	)
Income from discontinued operations		$	550

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     INVESTMENTS

Investments In and Advances to Unconsolidated Partnerships

Retailer Controlled Property Venture

On January 27, 2004, the Company entered into the RCP Venture with Klaff Realty, L.P. (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) for the purpose of making investments in surplus or underutilized properties owned by retailers. On September 2, 2004, affiliates of Fund I and Fund II, through separately organized, newly formed limited liability companies on a non-recourse basis, invested in the acquisition of the Mervyns department store chain through the RCP Venture, which, as part of an investment consortium of Sun Capital and Cerberus acquired Mervyns from Target Corporation. The total acquisition price was $1.2 billion, with such affiliates’ combined $24.6 million share of the investment divided equally between them. The Operating Partnership’s share of the Mervyns investment totaled $5.2 million. Since inception, Mervyns I and II received distributions totaling $47.3 million.

During June of 2006, the RCP Venture made its second investment with its participation in the acquisition of Albertson’s and Cub Foods. Affiliates of Fund II, through the same limited liability companies which were formed for the investment in Mervyns, invested $20.7 million in the acquisition of Albertson’s through the RCP Venture, along with others as part of an investment consortium. The Operating Partnership’s share of the invested capital was $4.2 million.

During 2006, Fund II made additional investments of $1.8 million in Shopko and Marsh. It also made investments of $2.3 million, through the RCP Venture, in three Albertson’s add-on investments, Camellia, Newkirk, and Colorado Springs. The Operating Partnership’s share of the additional investments totaled $0.7 million. The Company accounts for these investments using the cost method due to the minor ownership percent interest and the inability to exert influence over the entity’s operating and financial policies.

During the first quarter of 2007, the Company received a cash distribution of $44.4 million from its ownership position in Albertson’s. The distribution resulted from cash proceeds obtained by Albertson’s in connection with its disposition of certain operating stores and a refinancing of the remaining assets held by the entity. The Operating Partnership’s share of this distribution, after allocation to minority interests, was $8.9 million. The distribution in excess of invested capital has been reflected as an extraordinary gain of $23.7 million to the Company of which the Operating Partnership’s share, net of minority interests and income taxes, amounted to $2.9 million. This gain is characterized as extraordinary in the Company’s financial statements as a result of the expected nature of the income to be passed through from Albertson’s. The extraordinary gain is expected to result from the allocation of purchase price in accordance with SFAS No. 141 “Business Combinations” to the Albertson’s assets.

Brandywine Portfolio

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

Other Investments

Fund I Investments

Fund I has joint ventures with third-party investors in the ownership and operation of the following shopping centers which are accounted for using the equity method of accounting.

Shopping Center

Location

Year Acquired

Gross Leasable Area

Hitchcock/Pine Log Plaza

Aiken, SC

2004

256,093

Haygood Shopping Center

Virginia Beach, VA

2004

178,497

Sterling Heights Shopping Center

Detroit, MI

2004

154,835

Total

589,425

Fund II Investments

Fund II acquired for $1.0 million, a 50% equity interest from Klaff and other parties in an entity which has a leasehold interest in a former Levitz Furniture store located in Rockville, Maryland. The investment in this property is accounted for using the equity method of accounting.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     INVESTMENTS, (continued)

The following tables summarize the Company’s investment in unconsolidated subsidiaries as of March 31, 2007 and December 31, 2006.

		March 31, 2007
		RCP				Brandywine								Other
(dollars in thousands)		Venture				Portfolio				Crossroads				Investments				Total
Balance Sheets
Assets:
Rental property, net		$	—			$	129,366			$	5,901			$	40,350			$	175,617
Investment in unconsolidated affiliates			40,240				—				—				—				40,240
Other assets			—				6,858				4,948				6,725				18,531
Total assets		$	40,240			$	136,224			$	10,849			$	47,075			$	234,388
Liabilities and partners’ equity
Mortgage note payable		$	—			$	167,568			$	64,000			$	30,444			$	262,012
Other liabilities			—				11,687				850				4,546				17,083
Partners equity (deficit)			40,240				(43,031	)			(54,001	)			12,085				(44,707	)
Total liabilities and partners’ equity		$	40,240			$	136,224			$	10,849			$	47,075			$	234,388
Company’s investment in unconsolidated affiliates		$	2,455			$	—			$	—			$	9,702			$	12,157
Distributions in excess of income from and investment in unconsolidated affiliates		$	—			$	(10,313	)		$	(11,309	)		$	—			$	(21,622	)

		December 31, 2006
		RCP				Brandywine								Other
(dollars in thousands)		Venture				Portfolio				Crossroads				Investments				Total
Balance Sheets
Assets:
Rental property, net		$	—			$	127,146			$	6,017			$	43,660			$	176,823
Investment in unconsolidated affiliates			385,444				—				—				—				385,444
Other assets			—				6,747				4,511				6,632				17,890
Total assets		$	385,444			$	133,893			$	10,528			$	50,292			$	580,157
Liabilities and partners’ equity
Mortgage note payable		$	—			$	166,200			$	64,000			$	28,558			$	258,758
Other liabilities			—				12,709				1,858				8,862				23,429
Partners equity (deficit)			385,444				(45,016	)			(55,330	)			12,872				297,970
Total liabilities and partners’ equity		$	385,444			$	133,893			$	10,528			$	50,292			$	580,157
Company’s investment in unconsolidated affiliates		$	23,539			$	—			$	—			$	7,510			$	31,049
Distributions in excess of income from and investment in unconsolidated affiliates		$	—			$	(10,541	)		$	(11,187	)		$	—			$	(21,728	)

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7.     INVESTMENTS, (continued)

Other Investments (continued)

		Three Months Ended March 31, 2007
		RCP				Brandywine								Other
(dollars in thousands)		Venture				Portfolio				Crossroads				Investments				Total
Statements of Operations
Total revenue		$	—			$	4,869			$	2,066			$	1,465			$	8,400
Operating and other expenses			—				1,482				650				621				2,753
Interest expense			—				2,491				859				521				3,871
Equity in earnings of unconsolidated affiliates			20,747				—				—				—				20,747
Equity in earnings of unconsolidated affiliates — extraordinary gain			125,264				—				—				—				125,264
Depreciation and amortization			—				763				107				581				1,451
Net income (loss)		$	146,011			$	133			$	450			$	(258	)		$	146,336
Company’s share of net income before extraordinary gain		$	—			$	31			$	123			$	(24	)		$	130
Company’s share of extraordinary gain		$	23,690			$	—			$	—			$	—			$	23,690

		Three Months Ended March 31, 2006
		RCP				Brandywine								Other
(dollars in thousands)		Venture				Portfolio				Crossroads				Investments				Total
Statements of Operations
Total revenue		$	—			$	4,514			$	2,163			$	925			$	7,602
Operating and other expenses			—				1,214				644				683				2,541
Interest expense			—				5,009				859				245				6,113
Equity in earnings of affiliates			31,562				—				—				—				31,562
Depreciation and amortization			—				724				143				281				1,148
Net income (loss)		$	31,562			$	(2,433	)		$	517			$	(284	)		$	29,362
Company’s share of net income		$	3,316			$	(419	)		$	154			$	(80	)		$	2,971

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

8.     DERIVATIVE FINANCIAL INSTRUMENTS

The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of March 31, 2007. The notional value does not represent exposure to credit, interest rate or market risks.

		Notional				Interest				Forward Start
Hedge Type		Value				Rate				Date				Maturity				Fair Value
(dollars in thousands)
Current Interest Rate Swaps
LIBOR Swap		$	4,607				4.71	%			n/a				1/1/10			$	(26	)
LIBOR Swap			11,322				4.90	%			n/a				10/1/11				15
Total Interest Rate Swaps			15,929																(11	)
Forward — Starting Interest Rate Swaps
LIBOR Swap		$	8,434				5.14	%			6/1/07				3/1/12				(106	)
Interest Rate Caps
LIBOR Cap		$	30,000				6.00	%			n/a				4/1/08				(27	)
Net Interest Rate Swap Liability																		$	(144	)

The interest rate swap liability is included in other liabilities on the Consolidated Balance Sheets.

9.     MORTGAGE LOANS

During the first quarter of 2007, the Company drew an additional $6.7 million on existing construction loans. As of March 31, 2007, the outstanding balance on these construction loans was $18.5 million.

During the first quarter of 2007, the Company paid off a variable-rate loan balance of $21.5 million.

On January 25, 2007, the Company obtained a new $26.0 million loan secured by a property. The loan bears interest at a fixed rate of 5.4% and matures on February 11, 2017. A portion of the proceeds was used to pay down the existing $15.7 million loan.

On March 29, 2007, the Company closed on a $30.0 million revolving credit facility that bears interest at LIBOR plus 125 basis points and matures on March 29, 2010. As of March 31, 2007, this line of credit was fully available.

10.     CONVERTIBLE NOTES PAYABLE

In connection with the underwriter’s over-allotment option related to the $100.0 million issuance of 3.75% convertible notes payable in December 2006, the Company issued an additional $15.0 million of these notes in January 2007, resulting in proceeds of $14.7 million.

11.     RELATED PARTY TRANSACTIONS

During February of 2005, the Operating Partnership issued 4,000 Restricted Preferred OP Units to Klaff for certain management contract rights and the rights to certain potential future revenue streams. During February of 2007, Klaff converted 3,800 of these units into 296,412 Common Shares (Note 5).

The Company also 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 $0.7 million and $1.0 million for the three months ended March 31, 2007 and 2006, respectively.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $0.03 million for both the three months ended March 31, 2007 and 2006, respectively.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.     SEGMENT REPORTING

The Company has two reportable segments: retail properties and multi-family properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. The reportable segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. The following tables set forth certain segment information for the Company for continuing operations as of and for the three months ended March 31, 2007 and 2006 and does not include activity related to unconsolidated partnerships:

		Three months ended March 31, 2007
		Retail				Multi-Family				All
(dollars in thousands)		Properties				Properties				Other				Total
Revenues		$	20,675			$	1,923			$	4,100			$	26,698
Property operating expenses and real estate taxes			6,141				963				—				7,104
Other expenses			4,219				392				837				5,448
Net property income before depreciation, amortization and certain nonrecurring items		$	10,315			$	568			$	3,263			$	14,146
Depreciation and amortization		$	5,993			$	380			$	164			$	6,537
Interest expense		$	5,852			$	295			$	—			$	6,147
Real estate at cost		$	696,139			$	42,433			$	—			$	738,572
Total assets		$	770,571			$	35,068			$	35,860			$	841,499
Expenditures for real estate and improvements		$	64,603			$	10			$	—			$	64,613
Reconciliation to net income
Net property income before depreciation and amortization		$	14,146
Depreciation and amortization			(6,537	)
Equity in earnings of unconsolidated partnerships			130
Interest expense			(6,147	)
Minority interest			2,288
Income taxes			(44	)
Income from extraordinary item			2,883
Net income		$	6,719

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12.     SEGMENT REPORTING (continued)

		Three months ended March 31, 2006
		Retail				Multi-Family				All
(dollars in thousands)		Properties				Properties				Other				Total
Revenues		$	19,522			$	2,036			$	4,088			$	25,646
Property operating expenses and real estate taxes			5,512				1,055				—				6,567
Other expenses			4,258				429				620				5,307
Net property income before depreciation, amortization and certain nonrecurring items		$	9,752			$	552			$	3,468			$	13,772
Depreciation and amortization		$	5,737			$	376			$	117			$	6,230
Interest expense		$	4,831			$	354			$	—			$	5,185
Real estate at cost		$	585,436			$	41,772			$	—			$	627,208
Total assets		$	647,843			$	38,832			$	46,037			$	732,712
Expenditures for real estate and improvements		$	768			$	139			$	—			$	907
Reconciliation to net income
Net property income before depreciation and amortization		$	13,772
Depreciation and amortization			(6,230	)
Equity in earnings of unconsolidated partnerships			2,971
Interest expense			(5,185	)
Minority interest			(1,076	)
Income taxes			(449	)
Income from discontinued operations			550
Net income		$	4,353

13.     STOCK-BASED COMPENSATION

The Company has adopted the fair value method of recording stock-based compensation contained in SFAS No. 123R, “Accounting for Stock-Based Compensation”. On January 15, 2007 (the “Grant Date”), the Company issued 108,823 Restricted Common Shares (“Restricted Shares”) to officers and 20,735 Restricted Shares to employees of the Company. The Restricted Shares do not carry the rights of Common Shares, including voting rights, until vesting and may not be transferred, assigned or pledged until the recipients have a vested non-forfeitable right to such shares. The dividend will not be paid until the Restricted Shares have vested but there will be a catch-up payment upon vesting from the Grant Date to the applicable vesting date. All Restricted Shares are subject to the recipients’ continued employment with the Company through the applicable vesting dates. Vesting with respect to 61,940 of the Restricted Shares issued to officers, is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on 50% of the unvested Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares. Vesting with respect to 46,883 of the Restricted Shares issued to officers is over three years with 30% vesting on the first anniversary and 35% vesting on the following two anniversaries of the Grant Date. Vesting with respect to the Restricted Shares issued to employees, is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on 25% of the unvested Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares.

On the Grant Date, the Company also issued 50,000 Restricted Shares to an officer in connection with his promotion to Executive Vice President. Vesting with respect to these Restricted Shares, is over five years with 20% vesting on each of the next five anniversaries of the Grant Date.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.     STOCK-BASED COMPENSATION (continued)

The total value of the above Restricted Share awards on the date of grant was $4.5 million. Compensation expense of $0.3 million has been recognized in the accompanying consolidated financial statements related to these Restricted Shares for the three months ended March 31, 2007.

On the Grant Date, the Company also issued 20,322 Restricted Partnership Units (“LTIP Units”) to officers and 1,214 LTIP Units to employees of the Company. LTIP Units are similar to Restricted Shares but provide for a quarterly partnership distribution in a like amount as paid to Common Partnership Units. This distribution is paid on both unvested and vested LTIP Units. The LTIP Units are convertible into Common Partnership Units and Common Shares upon vesting and a revaluation of the book capital accounts. Vesting with respect to the LTIP Units is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on 50% of the officers unvested LTIP Units and 25% of the employees unvested LTIP Units are also subject to certain total shareholder returns on the Company’s Common Shares.

The total value of these LTIP Units on the date of the grant was $0.5 million. Compensation expense of $27,000 has been recognized in the accompanying financial statements related to these LTIP Units for the three months ended March 31, 2007.

14.     DIVIDENDS AND DISTRIBUTIONS PAYABLE

On March 22, 2007, the Board of Trustees of the Company approved and declared a cash dividend for the quarter ended March 31, 2007 of $0.20 per Common Share and Common OP Unit. The dividend was paid on April 13, 2007 to shareholders of record as of March 31, 2007.

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

The following discussion is based on the consolidated financial statements of the Company as of March 31, 2007 and 2006 and for the three months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto.

FORWARD-LOOKING STATEMENTS

Certain statements contained in this report constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors are set forth under the heading “Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2006 and include, among others, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in our real estate markets, including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environmental/safety requirements.

OVERVIEW

We currently operate 75 properties, which we own or have an ownership interest in, within our core portfolio or within our Funds I & II. These properties consist of 73 commercial properties, primarily neighborhood and community shopping centers, and two multi-family properties, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States. Our core portfolio consists of 34 properties comprising approximately five million square feet. Fund I has 32 properties comprising approximately two million square feet and Fund II has seven properties comprising approximately one million square feet. We consider our investments in the RCP Venture to be private equity investments and, therefore, not real estate investments. We receive income primarily from the rental revenue from our real estate properties, including recoveries from tenants, offset by operating and overhead expenses.

Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective:

		-		Own and operate a portfolio of community and neighborhood shopping centers and mixed-use properties with a retail component located in markets with strong demographics.
		-		Generate internal growth within the portfolio through aggressive redevelopment, re-anchoring and leasing activities.
		-		Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelopment and leasing and/or transactions requiring creative capital structuring to facilitate the transactions.
		-		Partner with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.
		-		Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth.

CRITICAL ACCOUNTING POLICIES

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the significant judgments and estimates used by us in the preparation of our consolidated financial statements.

Valuation of Property Held for Use and Sale

On a quarterly basis, we review both properties held for use and for sale for indicators of impairment. We record impairment losses and reduce the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where we do not expect to recover our carrying costs on properties held for use, we reduce our carrying cost to fair value, and for properties held for sale, we reduce our carrying value to the fair value less costs to sell. Management does not believe that the value of any properties in our portfolio was impaired as of March 31, 2007.

Bad Debts

We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likelihood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of March 31, 2007, we have recorded an allowance for doubtful accounts of $3.4 million. If the financial condition of our tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

RESULTS OF OPERATIONS

Comparison of the three months ended March 31, 2007 (“2007”) to the three months ended March 31, 2006 (“2006”)

										Change
(in millions)		2007				2006				$				%
Revenues:
Minimum rents		$	18.8				17.3			$	1.5				9	%
Percentage rents			0.1				0.2				(0.1	)			(50	)%
Expense reimbursements			3.3				3.9				(0.6	)			(15	)%
Other property income			0.3				0.2				0.1				50	%
Management fee income			1.1				1.2				(0.1	)			(8	)%
Interest income			2.9				1.7				1.2				71	%
Other			0.2				1.1				(0.9	)			(82	)%
Total revenues		$	26.7			$	25.6			$	1.1				4	%

The increase in minimum rents was attributable to additional rents following our acquisition of 200 W. 54^th Street, 145 East Service Road, Chestnut Hill and 2914 Third Avenue (“2006/2007 Acquisitions”) as well as Liberty Avenue (Fund II) being placed in service January 1, 2007. In addition, minimum rents increased as a result of re-tenanting activities across our portfolio.

Common area maintenance (“CAM”) expense reimbursement decreased $0.1 million primarily as a result of the impact of the 2006 year-end CAM reconciliation billings and related adjustments completed during the first quarter of 2007. This decrease was partially offset by higher CAM recovery following increased snow removal costs in 2007. Real estate tax reimbursements decreased $0.5 million, primarily as a result of lower real estate tax expense in 2007.

The increase in interest income was attributable to interest income on notes and other advances receivable originated in 2006 as well as higher balances in interest earning assets in 2007.

The decrease in other income was primarily attributable to a $1.1 million reimbursement of certain fees by the institutional investors of Fund I for the Brandywine Portfolio in 2006.

										Change
(in millions)		2007				2006				$				%
Operating Expenses:
Property operating		$	4.9			$	3.9			$	1.0				26	%
Real estate taxes			2.2				2.7				(0.5	)			(19	%)
General and administrative			5.5				5.3				0.2				4	%
Depreciation and amortization			6.5				6.2				0.3				5	%
Total operating expenses		$	19.1			$	18.1			$	1.0				6	%

The increase in property operating expenses was primarily the result of increased snow removal costs during 2007 and increased property operating expenses following the 2006/2007 Acquisitions.

The decrease in real estate taxes was due to a tax refund of $0.2 million and adjustments of prior years estimated taxes of $0.3 million recorded in 2007 and $0.2 million related to the capitalization of construction period real estate taxes at a property that was operating in 2006. These decreases were partially offset by increased real estate tax expense following the 2006/2007 Acquisitions.

The increase in general and administrative expense was attributable to increased compensation expense of $0.5 million related to additional personnel hired in 2006 and 2007 as well as increases in existing employee salaries. These increases were offset by a decrease in stock-based compensation in 2007 of $0.3 million related to timing differences in vesting between 2006 and 2007 Restricted Share grants.

Depreciation expense increased $0.2 million in 2007. This was principally a result of increased depreciation expense following the 2006/2007 Acquisitions. Amortization expense increased $0.1 million, which was primarily the result of increased amortization of loan costs following our convertible note issuances in December 2006 and January 2007.

										Change
(in millions)		2007				2006				$				%
Other:
Equity in earnings of unconsolidated affiliates		$	0.1			$	3.0			$	(2.9	)			(97	)%
Interest expense			(6.1	)			(5.2	)			(0.9	)			(17	)%
Minority interest			2.3				(1.1	)			3.4				309	%
Income taxes			—				(0.4	)			0.4				100	%
Income from discontinued operations			—				0.6				(0.6	)			(100	)%
Extraordinary item			2.9				—				2.9				100	%

Equity in earnings of unconsolidated affiliates decreased as a result of our pro rata share of earnings and gains on sale from our Mervyns investments in 2006.

Interest expense increased $0.9 million in 2007. This was the result of a $1.1 million increase attributable to higher average outstanding borrowings in 2007 and an increase of $0.4 million related to defeasance costs associated with a loan payoff in 2007. These increases were offset by a $0.6 million decrease resulting from a lower average interest rate on the portfolio mortgage debt in 2007.

The variance in minority interest is attributable to the minority partners’ share of earnings and gains from the sale of Mervyns assets in 2006.

Income taxes in 2006 relate to taxes at the taxable REIT subsidiary (“TRS”) level on our share of gains from the sale of Mervyns locations in 2006.

Income from discontinued operations represents activity related to properties sold during 2006.

The extraordinary gain in 2007 relates to our share of income, net of income taxes and minority interest, from our Albertson’s investment.

Funds from Operations

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

In addition to presenting FFO in accordance with the NAREIT definition, we also disclose FFO for the quarter ended March 31, 2007 as adjusted to include the extraordinary gain from our RCP investment in Albertson’s. As discussed in Note 7 in the Notes to the Consolidated Financial Statements in Part 1, Item 1 in this Form 10-Q, this gain is a result of distributions we received in excess of our invested capital of which the Operating Partnership’s share, net of minority interests and income taxes, amounted to $2.9 million. This gain is characterized as extraordinary in our GAAP financial statements as a result of the expected nature of the income to be passed through from Albertson’s. The extraordinary gain is expected to result from the allocation of purchase price to the Albertson’s assets. We believe that income or gains derived from our RCP investments, including our investment in Albertson’s, are private-equity type investments and, as such, should be treated as operating income and therefore FFO. The character of this income in our underlying accounting does not impact this conclusion. Accordingly, we believe that this supplemental adjustment more appropriately reflects the results of our operations.

We consider FFO to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO and FFO, as adjusted, are presented to assist investors in analyzing our performance. They are helpful as they exclude various items included in net income that are not indicative of the operating performance, such as gains (or losses) from sales of property and depreciation and amortization. However, our method of calculating FFO and FFO, as adjusted, may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO and FFO, as adjusted, do not represent cash generated from operations as defined by GAAP and are not indicative of cash available to fund all cash needs, including distributions. They should not be considered as an alternative to net income for the purpose of evaluating our performance or to cash flows as measures of liquidity.

The reconciliation of net income to FFO for the three months ended March 31, 2007 and 2006 is as follows:

		Three months ended
		March 31,
(in millions)		2007				2006
Net income		$	6.7			$	4.4
Depreciation of real estate and amortization of leasing costs (net of minority interests):
Wholly-owned and consolidated affiliates			4.8				5.0
Unconsolidated affiliates			0.4				0.4
Income attributable to Minority interest in Operating Partnership (1)			0.2				0.1
Distributions — Preferred OP Units			—				0.1
Gain on sale (net of minority interests’ share and income taxes)			—				(0.4	)
Extraordinary item (net of minority interests’ share and income taxes)			(2.9	)			—
Funds from operations			9.2				9.6
Extraordinary item, net (2)			2.9				—
Funds from operations, adjusted for extraordinary item		$	12.1			$	9.6
Cash flows provided by (used in):
Operating activities		$	54.4			$	12.3
Investing activities		$	(45.3	)		$	(50.5	)
Financing activities		$	(37.0	)		$	(1.6	)

Notes:

(1) Does not include distributions paid to Series A and B Preferred OP Unit holders.

(2) The extraordinary item represents the Company’s share of estimated extraordinary gain related to its investment in Albertson’s. The Albertson’s entity has recorded an extraordinary gain in connection with the allocation of purchase price to assets acquired. The Company considers this an investment in an operating business as opposed to real estate. Accordingly, all gains and losses from this investment are included in FFO.

USES OF LIQUIDITY

Our principal uses of liquidity are expected to be for (i) distributions to our shareholders and OP unit holders, (ii) investments which include the funding of our joint venture commitments, property acquisitions and redevelopment/re-tenanting activities within our existing portfolio and (iii) debt service and loan repayments.

Distributions

In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. Through March 31, 2007, we paid quarterly dividends and distributions on our Common Shares and Common OP Units totaling $6.7 million.

Investments

Fund I and Mervyns I

Reference is made to Note 1 to the Notes to Consolidated Financial Statements in Part 1, Item 1 in this Form 10-Q for an overview of Fund I and Mervyns I. The institutional investors have received of all of their invested capital and accumulated preferred return in Fund I, thus triggering our Promote distribution in all future Fund I distributions. There are currently 32 assets comprising approximately two million square feet remaining in Fund I as follows:

Shopping Center

Location

Year acquired

GLA

New York Region

New York

Tarrytown Shopping Center

Westchester

2004

35,291

Mid-Atlantic Region

South Carolina

Hitchcock/Pine Log Plaza

Aiken

2004

256,093

Virginia

Haygood Shopping Center

Virginia Beach

2004

178,497

Midwest Region

Ohio

Amherst Marketplace

Cleveland

2002

79,945

Granville Centre

Columbus

2002

134,997

Sheffield Crossing

Cleveland

2002

112,534

Michigan

Sterling Heights Shopping Center

Detroit

2004

154,835

Various Regions

Kroger/Safeway Portfolio

Various

2003

1,018,100

Total

1,970,292