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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10–Q

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

For the quarterly period ended September 30, 2002

OR

    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)

20 SOUNDVIEW MARKETPLACE, PORT WASHINGTON, NY 11050
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (516) 767–8830

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      NO

As of November 13, 2002, there were 25,090,572 common shares of beneficial interest, par value $.001 per share, outstanding.

INDEX

Part I.      Financial Information
Item 1.     Financial Statements

ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except per share amounts)

See accompanying notes

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ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per share amounts)

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ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands, except per share amounts)

See accompanying notes
3

     ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)

4

     ACADIA REALTY TRUST AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2002 AND 2001
(in thousands)

See accompanying notes
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      ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2002
(in thousands, except per share amounts)

1.     THE COMPANY

Acadia Realty Trust (the “Company”) is a fully integrated and self–managed real estate investment trust (“REIT”) focused primarily on the ownership, acquisition, redevelopment and management of neighborhood and community shopping centers.

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 its majority–owned partnerships. As of September 30, 2002, the Company controlled 88% of the Operating Partnership as the sole general partner.

The Company currently operates 36 properties, which it owns or has an ownership interest in, consisting of 33 neighborhood and community shopping centers and three multi–family properties, all of which are located in the Eastern and Midwestern regions of the United States.

2.     BASIS OF PRESENTATION

The consolidated financial statements include the consolidated accounts of the Company and its majority–owned partnerships, including the Operating Partnership, and 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. Non–controlling investments in partnerships are accounted for under the equity method of accounting as the Company exercises significant influence. 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.

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 nine months ended September 30, 2002 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2002. 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, 2001.

3.     DISCONTINUED OPERATIONS (“Sold Properties”)

A significant component of the Company’s business plan during 2001 and 2002 was the disposition of non–core real estate assets. Under this initiative, the Company sold two apartment complexes and 20 shopping centers during 2001 and 2002. As of September 30, 2002, the Company also had two shopping centers under contract for sale, which were subsequently sold on October 11, 2002.

Consistent with Statement of Financial Accounting Standards (“SFAS”) No. 144, the results of operations of the Sold Properties are reported separately as discontinued operations for the three and nine months ended September 30, 2002 and 2001. Assets and liabilities of the Sold Properties have been classified separately in the Company’s consolidated balance sheet at September 30, 2002 and December 31, 2001 and are summarized in the following table:

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     ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

3.     DISCONTINUED OPERATIONS, Continued

Revenues from discontinued operations for the three months ended September 30, 2002 and 2001 totaled $621 and $5,593, respectively. Revenues from discontinued operations for the nine months ended September 30, 2002 and 2001 totaled $6,083 and $18,693, respectively.

4.     SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS

The following table summarizes the change in the shareholders’ equity and minority interests since December 31, 2001:

(1)  Net income attributable to minority interest in Operating Partnership and distributions do not include a distribution on Preferred OP Units of $149.

Minority interest in Operating Partnership represent the limited partners’ interest of 3,372,080 and 5,625,950 units in the Operating Partnership (“Common OP Units”) at September 30, 2002 and 2001, respectively, and 2,212 units of preferred limited partnership interests (“Preferred OP Units”), with a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribution of $22.50 per unit (9% annually). Minority interests in majority–owned partnerships represent interests held by third parties in three partnerships in which the Company has a majority ownership position.

Certain limited partners converted 251,000 Common OP Units into Common Shares on a one–for–one basis during the three months ended September 30, 2002.

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         ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

5.     INVESTMENT IN PARTNERSHIPS

Crossroads

The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II Joint Venture (collectively “Crossroads”), which collectively own a 311,000 square foot shopping center in White Plains, New York. The Company accounts for its investment in Crossroads using the equity method. Summary financial information of Crossroads and the Company’s investment in and share of income from Crossroads follows:

The unamortized excess of the Company’s investment over its share of the net equity in Crossroads at the date of acquisition was $19,580. The portion of this excess attributable to buildings and improvements is being amortized over the life of the related property.

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     ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

5.     INVESTMENT IN PARTNERSHIPS, Continued

Acadia Strategic Opportunity Fund, LP (“ASOF”)

In 2001, the Company formed a joint venture, ASOF, with four of its institutional investors for the purpose of acquiring real estate assets. The Company is the sole general partner with a 22% interest in the joint venture and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds. The Company also earns market–rate fees for asset management as well as for property management, construction and leasing services. On September 19, 2002, ASOF acquired three supermarket–anchored shopping centers. The Company accounts for its investment in ASOF using the equity method. Summary financial information of ASOF and the Company’s investment in and share of income from ASOF is as follows:

6.     INTEREST RATE HEDGES

On January 1, 2001, the Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities. In connection with the adoption of SFAS No. 133, the Company recorded a transition adjustment of $149 related to the January 1, 2001 valuation of two LIBOR interest rate caps that hedged $23,203 of variable–rate mortgage debt. This adjustment is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statement of income.

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ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

6.     INTEREST RATE HEDGES (continued)

The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of September 30, 2002. The notional value does not represent exposure to credit, interest rate or market risks.

(1)   Relates to the Company’s investments in unconsolidated partnerships. These swaps effectively fix the interest rate on the Company’s pro rata share of mortgage debt.

As of September 30, 2002, the derivative instruments were reported at their fair value as interest rate swap payable of $5,255 and as a component of investments in unconsolidated partnerships of $(2,322). As of September 30, 2002, unrealized losses of $7,407 representing the fair value of the aforementioned swaps were reflected in accumulated other comprehensive loss and as a component of minority interest in Operating Partnership. For the three and nine months ended September 30, 2002, the Company recorded an unrealized loss of $82 and $116, respectively, due to partial ineffectiveness on one of the swaps. The ineffectiveness resulted from differences between the swap notional and the principal amount of the hedged variable rate debt.

The Company’s interest rate hedges are designated as cash flow hedges and hedge the future cash outflows on mortgage debt. Interest rate swaps that convert variable payments to fixed payments, such as those held by the Company, as well as interest rate caps, floors, collars, and forwards are cash flow hedges. The unrealized gains and losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or earnings depending on the type of hedging relationship. For cash flow hedges, offsetting gains and losses are reported in accumulated other comprehensive income. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification occurs over the same time period in which the hedged items affect earnings. Within the next twelve months, the Company expects to reclassify to earnings as interest expense approximately $2,000 of the current balance held in accumulated other comprehensive loss.

On July 10, 2002, the Company entered into an interest rate swap agreement to hedge its exposure to changes in interest rates with respect to $12,288 of LIBOR based variable rate mortgage debt. The swap agreement, which matures January 1, 2007, provides for a fixed interest rate of 4.11%.

7.     MORTGAGE LOANS

On September 26, 2002, the Company refinanced a maturing $9,485 loan with a life insurance company. The loan, which is secured by one of the Company’s properties, requires monthly payment of interest at the rate of LIBOR plus 173 basis points and principal amortized over 25 years and matures October 1, 2005.

On September 27, 2002, the Company repaid a $4,049 loan with a life insurance company in connection with the sale of a property subsequent to September 30, 2002 (note 13).

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     ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

8.     RELATED PARTY TRANSACTIONS

The Company currently manages one property in which a shareholder of the Company has an ownership interest for which the Company earns a management fee of 3% of tenant collections. In 2001, the Company terminated a contract to manage a property owned by a related party that earned fees of 3.25% of tenant collections. Management fees earned by the Company under these contracts aggregated $50 and $163 for the three and nine months ended September 30, 2002, respectively, and $131 and $345 for the three and nine months ended September 30, 2001, respectively.

The Company also earns certain management and service fees in connection with its investment in ASOF (note 5). Such fees earned by the Company aggregated $338 and $1,013 for the three and nine months ended September 30, 2002.

9.     DIVIDENDS AND DISTRIBUTIONS PAYABLE

On September 18, 2002, the Board of Trustees of the Company approved and declared a cash quarterly dividend for the quarter ended September 30, 2002 of $0.13 per Common Share and Common OP Unit. The dividend was paid on October 15, 2002 to shareholders of record as of September 30, 2002. The Board of Trustees also approved a distribution of $22.50 per Preferred OP Unit, which was paid on October 15, 2002.

10.     PER SHARE DATA

For the three and nine months ended September 30, 2002 and 2001, basic earnings per share was determined by dividing the net income applicable to common shareholders for each period by the weighted average number of common shares of beneficial interest (“Common Shares”) outstanding during each period. The weighted average number of Common Shares outstanding for the three months ended September 30, 2002 and 2001 were 24,974,176 and 28,488,712, respectively. The weighted average number of Common Shares outstanding for the nine months ended September 30, 2002 and 2001 were 25,370,088 and 28,224,716, respectively.

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. For the three and nine months ended September 30, 2002 and 2001 no additional Common Shares were reflected as the impact would be anti–dilutive in such periods.

11.     COMPREHENSIVE LOSS

Comprehensive (loss) for the three months ended September 30, 2002 and 2001 totaled $(2,269) and $(11,380), respectively, and was comprised of net income (loss) of $1,881 and $(9,269), respectively, and other comprehensive (loss) related to the changes in the fair value of derivative instruments of $(4,150) and $(2,111), respectively. Comprehensive income (loss) for the nine months ended September 30, 2002 and 2001 totaled $6,867 and $(2,265), respectively, and was comprised of net income of $12,169 and $114, respectively, and other comprehensive (loss) related to the changes in the fair value of derivative instruments of $(5,302) and $(2,379), respectively. The following table sets forth the change in accumulated other comprehensive loss for the period since December 31, 2001:

As of September 30, 2002, the balance in accumulated other comprehensive loss was comprised entirely of unrealized losses on the valuation of swap agreements.

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     ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share amounts)

12.     SEGMENT REPORTING

Prior to the sale of two major apartment complexes during 2001, the Company had two reportable segments: retail properties and multi–family properties as both the Company’s multi–family properties and retail properties contributed in excess of 10% of the Company’s revenues, respectively. As a result of discontinued operations (note 3), the Company currently operates in predominantly one industry segment. The Company’s current focus is on the ownership, acquisition, redevelopment and management of neighborhood and community shopping centers. The Company currently operates 36 properties, of which 33 are shopping centers located in the Eastern and Midwestern regions of the United States. Management does not group its operations on a geographic basis and measures performance and evaluates each property on an individual basis and allocates resources based thereon, independent of the other properties within the portfolio. Accordingly, the Company believes it has a single reportable segment for disclosure purposes in accordance with GAAP. Furthermore, no single tenant comprises more than 10% of the total revenues for the Company and none of the Company’s shopping centers are located in a foreign country.

13.     SUBSEQUENT EVENTS

On October 11, 2002, the Company sold the Manahawkin Village Shopping Center and Valmont Plaza for $16,825 to a single unaffiliated buyer. The Company received two purchase money notes in connection with the sale. The first for $11,000 was repaid in full on November 8, 2002. The second for $1,600, matures October 11, 2003, requires monthly interest of 5% to February 1, 2003, and 10% thereafter. As part of the transaction, the Company repaid $3,084 of mortgage debt secured by the Valmont Plaza. The $4,049 of mortgage debt secured by the Manahawkin Village Shopping Center was repaid in full on September 27, 2002, prior to the sale.

On November 8, 2002, the Company and an unaffiliated joint venture partner completed the sale of a contract to purchase land in Bethel, Connecticut to the Target Corporation for $1,581 after closing and other related costs. The joint venture received a $1,632 note receivable for the net purchase price and additional reimbursements due from the buyer, which matures January 9, 2003.

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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 September 30, 2002 and 2001 and for the three and nine months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Operating results for all periods presented reflect the results of the Sold Properties on a discontinued basis for financial reporting purposes and, as such, the amounts reflected in the following discussion exclude the Sold Properties except where noted. Certain amounts for the three and nine months ended September 30, 2001 have been reclassified to conform to the current presentation.

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 the actual results, performance or achievements of the Company to be materially different from any future results performance or achievements expressed or implied by such forward–looking statements. Such factors 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 the Company’s 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.

CRITICAL ACCOUNTING POLICIES

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

Valuation of Property Held for Use and Sale

On a quarterly basis, the Company reviews both the carrying value of properties held for use and for sale. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. For the three and nine months ended September 30, 2002, an impairment loss of $197,000 was recognized related to a property sold subsequent to September 30, 2002. Management does not believe that the value of the remaining properties held for sale or properties in use are impaired as of September 30, 2002.

Bad Debts

The Company maintains 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 September 30, 2002, the Company had recorded an allowance for doubtful accounts of $2.2 million. If the financial condition of the Company’s 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 September 30, 2002 (“2002”) to the three months ended September 30, 2001 (“2001”)

Total revenues increased $1.3 million, or 9%, to $16.2 million for 2002 compared to $14.9 million for 2001.

Minimum rents increased $493,000, or 4%, to $12.2 million for 2002 compared to $11.7 million for 2001. This increase was attributable to increases in rents from re–tenanting activities and contractual rent increases for existing tenants offset by a decrease in rents following certain tenant bankruptcies.

In total, expense reimbursements increased $233,000, or 9%, from $2.6 million to $2.8 million for 2002. Common area maintenance (“CAM”) expense reimbursements, which comprise the majority of the variance between years, increased $187,000, or 22%, from $849,000 in 2001 to $1.0 million in 2002. This resulted primarily from tenant reimbursement of higher insurance costs experienced throughout the portfolio for 2002.

Other income increased $548,000 to $933,000 in 2002 compared to $385,000 for 2001. This was primarily due to an increase of $265,000 in asset and property management fees earned from ASOF in 2002 and $299,000 in interest earned on purchase money notes from the sale of properties in 2002.

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RESULTS OF OPERATIONS, Continued

Total operating expenses increased $903,000, or 9%, to $11.2 million for 2002, from $10.3 million for 2001.

Property operating expenses increased $89,000, or 3%, to $2.8 million for 2002 compared to $2.7 million for 2001. This was a result primarily of an increase in property and liability insurance costs across the portfolio for 2002 offset by a decrease in bad debt expense in 2002.

General and administrative expense increased $200,000, or 10%, from $2.0 million for 2001 to $2.2 million for 2002. This increase was primarily attributable to an increase in third–party professional fees in 2002 as well as an increase in leasing related salary expense as a result of the Company’s current accounting policy to expense all internal leasing costs commencing in 2002.

Depreciation and amortization increased $303,000, or 9%, from $3.4 million for 2001 to $3.7 million for 2002. Depreciation expense increased $31,000. This was principally a result of increased depreciation expense related to capitalized tenant installation costs during 2001 and 2002. Amortization expense increased $272,000, which was primarily attributable to the write–off of deferred leasing costs related to certain tenant leases and increased loan amortization expense related to financing activity in 2002.

Interest expense of $2.8 million for 2002 decreased $151,000, or 5%, from $2.9 million for 2001. This variance was attributable to a $261,000 decrease resulting from a lower average interest rate on the portfolio mortgage debt and $183,000 of additional capitalized interest in 2002. These decreases were offset by a $293,000 increase in interest expense for 2002 as a result of higher average outstanding borrowings during 2002.

Operating income from discontinued operations decreased $623,000 due to the timing of property sales in 2001 and 2002.

Comparison of the nine months ended September 30, 2002 (“2002”) to the nine months ended September 30, 2001 (“2001”)

Total revenues increased $6.3 million, or 14%, to $51.7 million for 2002 compared to $45.4 million for 2001.

Minimum rents increased $730,000, or 2%, from $35.2 million in 2001 to $35.9 million in 2002. This increase was attributable to contractual rent increases for existing tenants offset by a decrease in rents following certain tenant bankruptcies.

In total, expense reimbursements of $8.1 million were essentially unchanged from 2001. CAM expense reimbursements decreased $106,000, or 3%, from $3.1 million in 2001 to $3.0 million in 2002. This resulted from a decrease in snow removal costs following a mild winter in 2002.

Lease termination income of $3.9 million in 2002 was primarily the result of the settlement of the Company’s claim against a former tenant.

Other income increased $1.8 million to $2.8 million in 2002 compared to $1.0 million for 2001. This was primarily due to an increase of $795,000 in asset and property management fees earned in 2002 from ASOF, $596,000 in interest earned on purchase money notes from the sale of properties in 2002 and an increase in interest income due to higher interest earning assets in 2002.

Total operating expenses increased $1.2 million, or 4%, to $33.0 million for 2002 from $31.8 million for 2001.

Property operating expenses decreased $615,000, or 7%, to $8.2 million for 2002 compared to $8.8 million for 2001. This decrease was the result of lower CAM expenses (primarily snow removal costs) throughout the portfolio, lower utility expenses following the redevelopment of the Elmwood Park Shopping Center and a decrease in bad debt expense in 2002. These decreases were offset by a reduction in 2001, of estimated property liability insurance claims related to prior year policies based on actual claims filed under these policies and a general increase during 2002 in property and liability insurance costs across the portfolio.

General and administrative expense increased $802,000, or 12%, from $6.5 million for 2001 to $7.3 million for 2002. This increase was primarily attributable to an increase in third–party professional fees in 2002 related to the Company’s tender offer (see discussion under “Liquidity and Capital Resources – Share Repurchase”) as well as those factors discussed for the three months ended September 30, 2002.

Depreciation and amortization increased $808,000, or 8%, from $10.2 million for 2001 to $11.0 million for 2002. Depreciation expense increased $239,000 and amortization expense increased $569,000. The increases were attributable to those factors previously discussed for the three months ended September 30, 2002.

Interest expense of $8.2 million for 2002 decreased $1.5 million, or 15%, from $9.7 million for 2001. Of this decrease, $1.8 million was the result of a lower average interest rate on the portfolio mortgage debt and $528,000 was due to higher capitalized interest in 2002. These decreases were offset by a $861,000 increase in interest expense for 2002 due to higher average outstanding borrowings during 2002.

The $140,000 extraordinary loss in 2001 was a result of the write–off of deferred financing fees as a result of the early repayment of debt.

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RESULTS OF OPERATIONS, Continued

The $149,000 cumulative effect of a change in accounting principle in 2001 was a transition adjustment related to the valuation of LIBOR rate caps recognized in connection with the January 1, 2001 adoption of SFAS No. 133.

Operating income from discontinued operations decreased $2.0 million due to the timing of property sales in 2001 and 2002.

Funds from Operations

The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing the performance of the Company. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by GAAP and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s performance or to cash flows as a measure of liquidity.

NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Effective January 1, 2000, NAREIT clarified the definition of FFO to include non–recurring events except those that are defined as “extraordinary items” under GAAP. The reconciliation of net income to FFO for the three and nine months ended September 30, 2002 and 2001 is as follows:

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LIQUIDITY AND CAPITAL RESOURCES

Uses of Liquidity

The Company’s principal uses of its liquidity are expected to be for distributions to its shareholders and OP unitholders, debt service and loan repayments, and property investment which includes funding of its joint venture commitments, acquisition, redevelopment, expansion and re–tenanting activities. In order to qualify as a REIT for Federal income tax purposes, the Company must currently distribute at least 90% of its taxable income to its shareholders. On September 18, 2002, the Board of Trustees of the Company approved and declared a cash quarterly dividend for the quarter ended September 30, 2002 of $0.13 per Common Share and Common OP Unit. The dividend was paid on October 15, 2002 to shareholders of record as of September 30, 2002. The Board of Trustees also approved a distribution of $22.50 per Preferred OP Unit, which was paid on October 15, 2002.

Acadia Strategic Opportunity Fund, LP (“ASOF”)

As announced in 2001, the Company has committed $20 million to a joint venture formed with four of its institutional shareholders, for the purpose of acquiring additional community and neighborhood shopping centers. On September 19, 2002, ASOF acquired three supermarket–anchored shopping centers located in Ohio for a total purchase price of $26.7 million. ASOF assumed $12.6 million of fixed rate debt on two of the properties at a blended rate of 8.1%. A new $6.0 million loan was obtained on the third property at a floating rate of LIBOR plus 200 basis points. The balance of the purchase price was funded by the joint venture, of which the Company’s share was $1.8 million.

ASOF has also entered into two separate contracts with two unaffiliated parties to purchase property for an aggregate initial purchase price of approximately $128.0 million (includes estimated closing costs). As part of the transactions, it is anticipated ASOF will assume a total $72.8 million of debt as well as place $30 million of additional mortgage debt on one of the properties simultaneous with the projected closing. The balance of the aggregate purchase price will require approximately $25.2 million of equity of which $5.3 million is anticipated to be the Company’s pro rata share. The closings are contingent upon several factors including receiving lenders’ consent permitting the assumption of debt and other closing conditions. As such, the completion of these transactions cannot be assured.

In addition, the Company has funded $1.3 million as of November 13, 2002 to ASOF for working capital purposes.

Property Redevelopment and Expansion

The Company’s redevelopment program focuses on selecting well–located neighborhood and community shopping centers and creating significant value through re–tenanting and property redevelopment. The Company currently has two redevelopment projects in progress as follows:

Elmwood Park Shopping Center – This shopping center located in Elmwood Park, New Jersey, is approximately ten miles west of New York City. The redevelopment consists of re–anchoring, renovating and expanding the existing 125,000 square foot shopping center by 30,000 square feet. The first phase included the relocation and expansion of a Walgreen’s into a 15,000 square foot, state–of–the–art drugstore that includes a drive–through pharmacy. Construction was recently completed on the second phase, which consisted of building a 49,000 square foot freestanding Pathmark Supermarket replacing the former undersized (28,000 square feet) in–line Grand Union supermarket. The Pathmark Supermarket opened on November 10, 2002. As of September 30, 2002, costs incurred on this project totaled $9.5 million (this excludes $3.8 million in reimbursements). The Company expects remaining redevelopment costs of approximately $2.5 million to complete this project. In conjunction with the supermarket rent commencement, the Operating Partnership is also obligated to issue OP Units of up to $2.8 million to the original owners who contributed the property to the Company in connection with the RDC Transaction in August 1998.

Gateway Shopping Center – The redevelopment of the Gateway Shopping Center, formerly a partially enclosed mall located in South Burlington, Vermont, includes the demolition of 90% of the property and the construction of a new anchor supermarket. Following the bankruptcy of the former anchor supermarket, Grand Union, the lease was assigned to and assumed by Shaw’s Supermarkets. The Company has executed a new lease with Shaw’s Supermarkets for the construction of a new 72,000 square foot anchor supermarket. This will replace the 32,000 square foot store formerly occupied by Grand Union. Total costs through September 30, 2002 for this project, including the original acquisition costs, were $10.1 million. The Company expects remaining redevelopment costs of approximately $7.8 million to complete this project, which it anticipates completing in the second half of 2003.

Additionally, for the balance of 2002, the Company currently estimates that capital outlays of approximately $1.0 to $2.0 million will be required for tenant improvements, related renovations and other property improvements related to executed leases.

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LIQUIDITY AND CAPITAL RESOURCES, Continued

Share Repurchase

The Company’s repurchase of its Common Shares is an additional use of liquidity. Upon completion of a tender offer in February 2002, the Company purchased a total of 5,523,974 Common Shares and Common OP Units (collectively, “Shares”), comprised of 4,136,321 Common Shares and 1,387,653 Common OP Units (which were converted to Common Shares upon tender), at a Purchase Price of $6.05 per Share. The aggregate purchase price paid for the 5,523,974 Shares was $33.4 million. In addition to the tender offer, the Company has an existing share repurchase program that authorizes management, at its discretion, to repurchase up to $20.0 million of the Company’s outstanding Common Shares. Through November 13, 2002, the Company had repurchased 1,931,682 Common Shares (net of 123,173 shares reissued) at a total cost of $11.6 million. The program may be discontinued or extended at any time and there is no assurance that the Company will purchase the full amount authorized.

The Company intends on using ASOF as the primary vehicle for future acquisitions. Sources of capital for funding the Company’s joint venture commitment, other property acquisitions, redevelopment, expansion and re–tenanting, as well as future repurchases of Common Shares are expected to be obtained primarily from cash on hand, additional debt financings and future sales of existing properties. As of September 30, 2002, the Company had a total of approximately $31.1 million of additional capacity with four lenders, of which the Company is required to draw $17.7 million by December 2002, or forego the ability to draw these funds at any time during the remaining term of the loans. Of the remaining capacity, approximately $6.0 million is subject to additional leasing requirements at the collateral properties and certain lender requirements, which the Company has not yet satisfied. The Company also had cash and cash equivalents on hand of $27.8 million at September 30, 2002 as well as seven properties that are currently unencumbered and therefore available as potential collateral for future borrowings. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements.

Financing and Debt

At September 30, 2002, mortgage notes payable aggregated $203.2 million and were collateralized by 25 properties and related tenant leases. Interest on the Company’s outstanding mortgage indebtedness ranged from 3.3% to 8.1% with maturities that ranged from August 2003 to January 2011. Taking into effect $87.3 million of notional principal under variable to fixed–rate swap agreements, $145.7 million of the portfolio, or 72%, was fixed at a 6.8% weighted average interest rate and $57.5 million, or 28% was floating at a 3.7% weighted average interest rate. Of the total outstanding debt, $19.5 million will become due by 2004, with scheduled maturities of $16.1 million with a weighted average interest rate of 3.7% in 2003, and $3.4 million with a weighted average interest rate of 7.9% in 2004. As the Company does not anticipate having sufficient cash on hand to repay such indebtedness, it will need to refinance this indebtedness or select other alternatives based on market conditions at that time.

The Company owns a 49% interest in Crossroads. The Company accounts for its investment in Crossroads using the equity method of accounting as it has a non–controlling investment in Crossroads, but exercises significant influence. As such, the Company’s financial statements reflect its share of income from, but not the assets and liabilities of, Crossroads. The Company’s effective pro rata share of Crossroads mortgage debt as of September 30, 2002 was $16.5 million. Interest on the debt, which matures in October 2007, has been effectively fixed at 7.2% through variable to fixed–rate swap agreements.

The Company owns a 22% interest in ASOF for which it also uses the equity method of accounting. The Company’s effective pro rata share of ASOF fixed–rate mortgage debt as of September 30, 2002 was $2.8 million at a weighted average interest rate of 8.1%. The Company’s effective pro rata share of ASOF variable–rate mortgage debt as of September 30, 2002 was $1.3 million at an interest rate of 3.8%. Maturities on these loans range from October 2007 to June 2023.

The Company currently has one outstanding letter of credit for $2.0 million, from which no amounts have been drawn against, related to the completion of certain work at one of its properties currently under redevelopment. The following summarizes the financing and refinancing transactions since June 30, 2002:

On July 10, 2002, the Company entered into an interest rate swap agreement to hedge its exposure to changes in interest rates with respect to $12.3 million of LIBOR based variable–rate debt. The swap agreement, which matures January 1, 2007, provides for a fixed all–in interest rate of 4.11%.

On September 26, 2002, the Company refinanced a maturing $9.5 million loan with a life insurance company. The loan, which is secured by one of the Company’s properties, requires monthly payment of interest at the rate of LIBOR plus 173 basis points and principal amortized over 25 years and matures October 1, 2005.

On September 27, 2002, the Company repaid a $4.0 million loan with a life insurance company in connection with the sale of a property subsequent to September 30, 2002.

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The following table summarizes the Company’s mortgage indebtedness as of September 30, 2002 and December 31, 2001: