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, 2008

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

For the transition period from                      to                     

ACADIA REALTY TRUST

MARYLAND (State or other jurisdiction of incorporation or organization)		23-2715194 (I.R.S. Employer 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, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

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 8, 2008 there were 32,263,740 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, 2008 (unaudited) and December 31, 2007			1
Consolidated Statements of Income for the three months ended March 31, 2008 and 2007 (unaudited)			2
Consolidated Statements of Cash Flows for the three months ended March 31, 2008 and 2007 (unaudited)			3
Notes to Consolidated Financial Statements			5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosure of Market Risk			29
Item 4. Controls and Procedures			29
Part II: Other Information
Item 1. Legal Proceedings			30
Item 1A. Risk Factors			30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults upon Senior Securities			30
Item 4. Submission of Matters to a Vote of Security Holders			30
Item 5. Other Information			30
Item 6. Exhibits			30
Signatures			31
Exhibit Index			32
Real Estate Purchase and Sale Agreement
Real Estate Purchase and Sale Agreement
First Amendment to Real Estate Purchase and Sale Agreement
Certification of Chief Executive Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
Certification of Chief Financial Officer pursuant to rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350

Part I. Financial Information

Item 1. Financial Statements.

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

		March 31,				December 31,
(dollars in thousands)		2008				2007
		(unaudited)
ASSETS
Real estate
Land		$	281,070			$	231,502
Buildings and improvements			605,859				485,177
Construction in progress			101,031				77,608
			987,960				794,287
Less: accumulated depreciation			125,852				122,044
Net real estate			862,108				672,243
Cash and cash equivalents			95,890				123,343
Cash in escrow			7,412				6,637
Investments in and advances to unconsolidated affiliates			58,960				44,654
Rents receivable, net			12,401				11,935
Notes receivable			57,698				57,662
Prepaid expenses and other assets, net			34,419				16,510
Deferred charges, net			21,432				18,879
Acquired lease intangibles, net			15,309				16,103
Assets of discontinued operations			30,926				31,046
		$	1,196,555			$	999,012
LIABILITIES AND SHAREHOLDERS’ EQUITY
Mortgage notes payable		$	551,030			$	402,903
Convertible notes payable			115,000				115,000
Acquired lease and other intangibles, net			5,366				5,651
Accounts payable and accrued expenses			15,752				14,833
Dividends and distributions payable			7,031				14,420
Distributions in excess of income from and investment in unconsolidated affiliates			20,081				20,007
Other liabilities			19,261				13,564
Liabilities of discontinued operations			425				787
Total liabilities			733,946				587,165
Minority interest in operating partnership			4,599				4,595
Minority interests in partially-owned affiliates			216,961				166,516
Total minority interests			221,560				171,111
Shareholders’ equity
Common shares			32				32
Additional paid-in capital			227,136				227,890
Accumulated other comprehensive loss			(1,779	)			(953	)
Retained earnings			15,660				13,767
Total shareholders’ equity			241,049				240,736
		$	1,196,555			$	999,012

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(unaudited)

		Three months ended
		March 31,
(dollars in thousands, except per share amounts)		2008				2007
Revenues
Minimum rents		$	17,596			$	15,431
Percentage rents			161				96
Expense reimbursements			4,002				2,889
Other property income			288				124
Management fee income from related parties			2,029				1,075
Interest income			2,796				2,854
Other			—				165
Total revenues			26,872				22,634
Operating Expenses
Property operating			4,133				3,546
Real estate taxes			2,544				1,982
General and administrative			6,389				5,448
Depreciation and amortization			6,518				5,634
Total operating expenses			19,584				16,610
Operating income			7,288				6,024
Equity in earnings of unconsolidated affiliates			13,235				130
Interest expense			(6,088	)			(5,607	)
Minority interest			(5,185	)			2,309
Income from continuing operations before income taxes			9,250				2,856
Income tax (provision)			(1,857	)			(44	)
Income from continuing operations			7,393				2,812
Discontinued Operations
Operating income from discontinued operations			1,377				1,045
Minority interest			(27	)			(21	)
Income from discontinued operations			1,350				1,024
Income before extraordinary item			8,743				3,836
Extraordinary item
Share of extraordinary gain from investment in unconsolidated affiliate			—				23,690
Minority interest			—				(18,959	)
Income tax provision			—				(1,848	)
Extraordinary gain			—				2,883
Net income		$	8,743			$	6,719
Basic Earnings per Share
Income from continuing operations		$	0.23			$	0.09
Income from discontinued operations			0.04				0.03
Income from extraordinary item			—				0.09
Basic earnings per share		$	0.27			$	0.21
Diluted Earnings per Share
Income from continuing operations		$	0.23			$	0.08
Income from discontinued operations			0.04				0.03
Income from extraordinary item			—				0.09
Diluted earnings per share		$	0.27			$	0.20

See accompanying notes

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

		March 31,				March 31,
(dollars in thousands)		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	8,743			$	6,719
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization			6,627				6,537
Minority interests			5,212				16,671
Amortization of lease intangibles			175				62
Amortization of mortgage note premium			(20	)			(34	)
Share compensation expense			868				811
Equity in earnings of unconsolidated affiliates			(13,235	)			(23,820	)
Distributions of operating income from unconsolidated affiliates			583				24,005
Amortization of derivative settlement included in interest expense			¾				109
Changes in assets and liabilities
Funding of escrows, net			(775	)			652
Rents receivable			(397	)			2,035
Prepaid expenses and other assets, net			(18,206	)			17,204
Accounts payable and accrued expenses			464				(1,563	)
Other liabilities			4,681				6,099
Net cash (used in) provided by operating activities			(5,280	)			55,487
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in real estate and improvements			(154,868	)			(64,613	)
Deferred acquisition and leasing costs			(903	)			(3,550	)
Investments in and advances to unconsolidated affiliates			(1,567	)			(2,274	)
Return of capital from unconsolidated affiliates			75				20,875
Collections of notes receivable			¾				5,583
Advances of notes receivable			¾				(1,368	)
Net cash used in investing activities			(157,263	)			(45,347	)

ACADIA REALTY TRUST AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

		March 31,				March 31,
(dollars in thousands)		2008				2007
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on mortgage notes		$	(60,616	)		$	(42,607	)
Proceeds received on mortgage notes			168,796				32,764
Proceeds received on convertible notes			¾				15,000
Payment of deferred financing and other costs			(2,719	)			(392	)
Capital contributions from partners and members and from minority interests in partially-owned affiliates			46,014				2,166
Distributions to partners and members and to minority interests in partially-owned affiliates			(519	)			(37,272	)
Dividends paid to Common Shareholders			(14,121	)			(6,519	)
Distributions to minority interests in Operating Partnership			(287	)			(133	)
Distributions on preferred Operating Partnership Units to minority interests			(11	)			(9	)
Repurchase and cancellation of shares			(1,494	)			(1,094	)
Common Shares issued under Employee Share Purchase Plan			41				28
Exercise of options to purchase Common Shares			6				—
Net cash provided by (used in) financing activities			135,090				(38,068	)
Decrease in cash and cash equivalents			(27,453	)			(27,928	)
Cash and cash equivalents, beginning of period			123,343				139,571
Cash and cash equivalents, end of period		$	95,890			$	111,643
Supplemental disclosure of cash flow information
Cash paid during the period for interest, including capitalized interest of $5 and $12, respectively		$	5,165			$	4,950
Cash paid for income taxes		$	2,145			$	205
Supplemental disclosure of non-cash investing and financing activities
Acquisition of real estate through assumption of debt		$	39,967			$	¾

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, 2008, 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 Investors I, LLC (“Mervyns I”), with four institutional investors. The Operating Partnership committed a total of $20.0 million to Fund I and Mervyns I, and the four institutional shareholders committed $70.0 million, for the purpose of acquiring a total of approximately $300.0 million in investments. As of March 31, 2008, the Operating Partnership had 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% equity interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its equity interest percentage based on certain investment return thresholds (“Promote”). Cash flow is distributed pro-rata to the partners and members (including the Operating Partnership) until they receive a 9% cumulative return (“Preferred Return”), and the return of all capital contributions. Thereafter, remaining cash flow (which is net of distributions and fees to the Operating Partnership for management, asset management, leasing, construction and legal services) is distributed 80% to the partners (including the Operating Partnership) and 20% to the Operating Partnership as a Promote. As all contributed capital and accumulated preferred return has been distributed to investors, the Operating Partnership is now entitled to a Promote on all earnings and distributions.

During June of 2004, the Company formed Acadia Strategic Opportunity Fund II, LLC (“Fund II”), and during August 2004 formed Acadia Mervyn Investors 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 or develop 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 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, 2008, the Operating Partnership had contributed $30.8 million to Fund II and $7.6 million to Mervyns II.

During May of 2007, the Company formed Acadia Strategic Opportunity Fund III LLC (“Fund III”) with 14 institutional investors, including a majority of the investors from Fund I and Fund II. With $503 million of committed discretionary capital, Fund III expects to be able to acquire or develop approximately $1.5 billion of assets on a leveraged basis. The Operating Partnership’s share of the invested capital is $100.0 million and it is the managing member with a 19.9% interest in Fund III. The terms and structure of Fund III is substantially the same as the previous Funds, including the Promote structure, with the exception that the Preferred Return is 6%. As of March 31, 2008, the Operating Partnership had contributed $19.2 million to Fund III.

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. 04-05. The consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Investments in entities for which the Company has the ability to exercise significant influence over, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the net earnings (or loss) of these entities are included in consolidated net income under the caption, Equity in Earnings of Unconsolidated Affiliates. The information furnished in the accompanying consolidated financial statements reflects all adjustments that, in the opinion of management, are necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. BASIS OF PRESENTATION, (continued)

Although the Company accounts for its investment in Albertson’s (Note 7), which it has made through the Retailer Controlled Property Venture with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) (“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”.

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, 2008 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2008. 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, 2007.

During September 2006, the Financial Accounting Statements Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157 “Fair Value Measurements.” This SFAS defines fair value, establishes a framework for measuring fair value in GAAP, and expands disclosures about fair value measurements. This statement applies to accounting pronouncements that require or permit fair value measurements, except for share-based payment transactions under SFAS No. 123R. SFAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, except for non-financial assets and liabilities, for which this statement will be effective for fiscal years beginning after November 15, 2008. SFAS No. 157 does not require any new fair value measurements or remeasurements of previously computed fair values. On January 1, 2008, the Company adopted SFAS No. 157 and it did not have a material impact to the Company’s financial statements or results of operations.

On February 15, 2007, the FASB issued 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 adopted SFAS No. 159 on January 1, 2008 with no impact to the Company’s financial statements or results of operations.

On August 31, 2007, the FASB issued a proposed FASB Staff Position 14-a (“FSP 14-a”) that affects the accounting for the Company’s convertible notes payable (Note 10). FSP 14-a requires the proceeds from the sale of convertible debt be allocated between the debt and equity components. The debt component will be measured based on the fair value of similar debt without an equity conversion feature, and the equity component will be determined as the residual of the fair value of the debt deducted from the original proceeds received. The resulting discount on the debt component must be amortized over the period of the debt. FSP 14-a will become effective for fiscal years beginning after December 15, 2008. The Company is currently evaluating the impact that FSP 14-a would have on its consolidated financial statements.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements,” which, among other things, provides guidance and establishes amended accounting and reporting standards for a parent company’s noncontrolling or minority interest in a subsidiary. The Company is currently evaluating the impact of adopting SFAS No. 160, which is effective for fiscal years beginning on or after December 15, 2008.

In December 2007, the FASB issued SFAS No. 141R, “Business Combinations,” which replaces SFAS No. 141 Business Combinations. SFAS No. 141R, among other things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including intangibles), the liabilities assumed and any noncontrolling interest in the acquired entity. The Company is currently evaluating the impact of adopting SFAS No. 141R, which is effective for fiscal years beginning on or after December 15, 2008.

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

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. EARNINGS PER COMMON SHARE

Basic earnings per share was determined by dividing the applicable net income 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
(dollars in thousands, except per share amounts)		March 31,
		2008				2007
Numerator:
Income from continuing operations — basic		$	7,393			$	2,812
Effect of dilutive securities:
Preferred OP Unit distributions			5				8
Numerator for diluted earnings per share		$	7,398			$	2,820
Denominator:
Weighted average shares for basic earnings per share			32,460				32,155
Effect of dilutive securities:
Employee share options			472				706
Convertible Preferred OP Units			25				179
Dilutive potential Common Shares			497				885
Denominator for diluted earnings per share			32,957				33,040
Basic earnings per share from continuing operations		$	0.23			$	0.09
Diluted earnings per share from continuing operations		$	0.22			$	0.08

The weighted average shares used in the computation of basic earnings per share include unvested Restricted Shares and LTIP Units (Note 14) 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 conversion of the convertible notes payable (Note 10) is not reflected in the table as such conversion would be anti dilutive. The effect of the assumed conversion of 25,067 Series A Preferred OP Units would be dilutive for the three months ended March 31, 2008 and they are included in the above table. The effect of the assumed conversion of 178,993 Series A and B Preferred OP Units for the three months ended March 31, 2007 was dilutive and they are included in the table.

4. COMPREHENSIVE INCOME

The following table sets forth comprehensive income for the three months ended March 31, 2008 and 2007:

		Three months ended
(dollars in thousands)		March 31,
		2008				2007
Net income		$	8,743			$	6,719
Other comprehensive (loss) income			(826	)			2
Comprehensive income		$	7,917			$	6,721

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

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. COMPREHENSIVE INCOME, continued

The following table sets forth the change in accumulated other comprehensive income for the three months ended March 31, 2008:

Accumulated other comprehensive loss

(dollars in thousands)
Balance at December 31, 2007		$	(953	)
Unrealized loss on valuation of derivative instruments and amortization of derivative			(826	)
Balance at March 31, 2008		$	(1,779	)

5. SHAREHOLDERS’ EQUITY AND MINORITY INTERESTS

The following table summarizes the change in the shareholders’ equity and minority interests since December 31, 2007:

						Minority interest				Minority interest in
		Shareholders’				in Operating				partially-owned
(dollars in thousands)		Equity				Partnership				affiliates
Balance at December 31, 2007		$	240,736			$	4,595			$	166,516
Dividends and distributions declared of $0.21 per Common Share and Common OP Unit			(6,851	)			(180	)			¾
Net income for the period January 1 through March 31, 2008			8,743				84				5,128
Distributions paid			¾				¾				(519	)
Other comprehensive income — Unrealized loss on valuation of derivative instruments			(826	)			(16	)			(178	)
Common Shares issued under Employee Share Purchase Plan			41				¾				¾
Minority interest contributions			¾				¾				46,014
Employee exercise of options to purchase Common Shares			6				¾				¾
Employee Restricted Share awards			694				¾				¾
Employee Restricted Shares cancelled			(1,494	)			¾				¾
Employee LTIP Unit awards			¾				116				¾
Balance at March 31, 2008		$	241,049			$	4,599			$	216,961

Minority interest in the Operating Partnership represents (i) the limited partners’ 642,272 Common OP Units at March 31, 2008 and December 31, 2007, (ii) 188 Series A Preferred OP Units at March 31, 2008 and December 31, 2007, with a stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit.

During the three months ended March 31, 2008, 59,214 employee Restricted Shares were cancelled to pay the employees’ income taxes due on the value of the portion of the Restricted Shares that vested during the period. Also during the three months ended March 31, 2008, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling $0.9 million.

Minority interests in partially owned affiliates include third-party interests in Fund I, II and III, and Mervyns I and II and three other entities.

The following table summarizes the minority interest’s contributions and distributions since December 31, 2007:

(dollars in thousands)		Contributions				Distributions
Partially-owned affiliates		$	¾			$	(36	)
Fund I			¾				(483	)
Fund II			8,305				¾
Fund III			37,709				¾
		$	46,014			$	(519	)

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. ACQUISITION AND DISPOSITION OF PROPERTIES AND DISCONTINUED OPERATIONS

Acquisition of Properties

On February 29, 2008, the Company acquired a portfolio of 11 self-storage properties located throughout New York and New Jersey for approximately $174.0 million. The portfolio totals approximately 920,000 net rentable square feet. Ten properties are operating and one is currently under construction. The Company is in the process of completing its purchase price allocation in accordance with SFAS No. 141.

Discontinued Operations

In accordance with SFAS No. 144, which requires discontinued operations presentation for disposals of a “component” of an entity, for all periods presented, the Company reclassified its consolidated statements of income to reflect income and expenses for properties that were sold or became held for sale prior to March 31, 2008, as discontinued operations and reclassified its consolidated balance sheets to reflect assets and liabilities related to such properties as assets and liabilities related to discontinued operations.

The combined assets and liabilities of properties held for sale for the period ended March 31, 2008 and December 31, 2007 and the combined results of operations for the three months ended March 31, 2008 and March 31, 2007 are reported separately as discontinued operations. Discontinued operations for 2008 include Ledgewood Mall located in Ledgewood, New Jersey and a residential complex located in Winston-Salem, North Carolina. In addition, 2007 discontinued operations included Amherst Market Place, Sheffield Crossing and a residential complex located in Missouri, all of which the Company sold during the fourth quarter of 2007.

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

		March 31,				December 31,
(dollars in thousands)		2008				2007
ASSETS
Net real estate		$	26,401			$	26,351
Rents, receivable, net			1,445				1,514
Prepaid expenses			84				166
Deferred charges, net			2,980				2,946
Other assets			16				69
Total assets of discontinued operations		$	30,926			$	31,046
LIABILITIES
Accounts payable and accrued expenses		$	89			$	456
Other liabilities			336				331
Total liabilities of discontinued operations		$	425			$	787

		For the three months ended
		March 31,
(dollars in thousands)		2008				2007
Total revenues		$	2,811			$	4,063
Total expenses			1,434				3,018
Operating income			1,377				1,045
Impairment of real estate			¾				¾
Loss on sale of property			¾				¾
Minority interest			(27	)			(21	)
Income from discontinued operations		$	1,350			$	1,024

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVESTMENTS

Investments In and Advances to Unconsolidated Partnerships

Retailer Controlled Property Venture (“RCP Venture”)

During January of 2004, the Company commenced the RCP Venture with Klaff Realty, LP (“Klaff”) and Lubert-Adler Management, Inc. for the purpose of making investments in surplus or underutilized properties owned by retailers. As of March 31, 2008, the Company has invested $56.1 million through the RCP Venture on a non-recourse basis. The expected size of the RCP Venture is approximately $300 million, of which the Company’s share is $60 million. Cash flow from any investment in which the RCP Venture participants elect to invest, is to be distributed to the participants until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to Klaff and 80% to the partners (including Klaff).

Mervyns Department Stores

During September of 2004, the RCP Venture invested in a consortium to acquire the Mervyns Department Store chain (“Mervyns”) from Target Corporation. The gross acquisition price of $1.2 billion was financed with $800 million of debt and $400 million of equity. As of March 31, 2008, the Company’s share of this investment was $26.8 million.

During 2005, the Company made add-on investments in Mervyns totaling $1.3 million. The Company accounts for these add-on investments using the cost method due to the minor ownership interest and the inability to exert influence over the partnership’s operating and financial policies.

Albertson’s

During June of 2006, the RCP Venture made its second investment as part of an investment consortium, acquiring Albertson’s and Cub Foods, of which the Company’s share was $20.7 million. Through March 31, 2008, the Company had received aggregate cash distributions of $53.7 million from this investment, which was primarily sourced from the disposition of certain operating stores and a refinancing of the remaining assets held by Albertson’s. The extraordinary gain of $30.2 million recognized during 2007 represents the Company’s share of the gain reported by Albertson’s, which reflected the excess of fair value of net assets acquired over the purchase price in accordance with SFAS No. 141.

During 2007, Company made add-on investments in Albertson’s totaling $2.8 million and received distributions totaling $0.8 million. The Company accounts for these add-on investments using the cost method due to the minor ownership interest and the inability to exert influence over the partnership’s operating and financial policies.

Other Investments

During 2006, the Company made investments of $1.1 million in Shopko, a regional multi-department retailer that had 358 stores located throughout the Midwest, Mountain and Pacific Northwest, and $0.7 million in Marsh, a regional supermarket chain operating 271 stores in central Indiana, Illinois and western Ohio, through the RCP Venture. During 2007, the Company received a $1.1 million cash distribution from the Shopko investment representing 100% of its invested capital.

During July of 2007, the RCP Venture acquired a portfolio of 87 retail properties from Rex Stores Corporation, which was comprised of electronic retail stores located in 27 states. The Company’s share of this investment was $2.7 million.

The Company accounts for the two above investments using the cost method due to its minor ownership interest and the inability to exert influence over the partnership’s operating and financial policies.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVESTMENTS (continued)

Investments In and Advances to Unconsolidated Partnerships (continued)

The following table summarizes the RCP Venture investments from inception through March 31, 2008:

(dollars in thousands)																Operating Partnership Share
				Year				Invested								Invested
Investor		Investment		acquired				capital				Distributions				capital				Distributions
Mervyns I and Mervyns II		Mervyns			2004			$	26,773			$	45,966			$	4,901			$	11,251
Mervyns I and Mervyns II		Mervyns add-on investments			2005				1,342				1,342				283				283
Mervyns II		Albertson’s			2006				20,717				53,660				4,239				9,847
Mervyns II		Albertson’s add-on investments			2006/2007				2,765				833				386				93
Fund II		Shopko			2006				1,100				1,100				220				220
Fund II		Marsh			2006				667			—					133			—
Mervyns II		Rex			2007				2,701			—					535			—
Total								$	56,065			$	102,901			$	10,697			$	21,694

Brandywine Portfolio

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

Crossroads

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

Other Investments

Fund I Investments

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

Year

Gross Leasable

Shopping Center

Location

Acquired

Area

Haygood Shopping Center

Virginia Beach, VA

2004

178,533

Sterling Heights Shopping Center

Detroit, MI

2004

154,835

Total

333,368

Fund II Investments

Fund II has invested $1.2 million as a 50% owner in an entity, which has a leasehold interest in a former Levitz Furniture store located in Rockville, Maryland, that is accounted for using the equity method.

Fund II’s approximately 25% investment in CityPoint is accounted for using the equity method. CityPoint was determined to be a variable interest entity and the Company was determined not to be the primary beneficiary. The Company’s maximum exposure is its current investment balance of $30.3 million.

In addition to these investments, the Company had made advances to unconsolidated affiliates totaling $4.0 million as of March 31, 2008.

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVESTMENTS, (continued)
Summary of Investments in Unconsolidated Affiliates

The following tables summarize the Company’s investments in unconsolidated affiliates as of March 31, 2008 and December 31, 2007.

		March 31, 2008
		RCP								Brandywine								Other
(dollars in thousands)		Venture				CityPoint				Portfolio				Crossroads				Investments				Total
Balance Sheets
Assets:
Rental property, net		$	¾			$	149,670			$	131,702			$	5,426			$	26,681			$	313,479
Investment in unconsolidated affiliates			318,262				¾				¾				¾				¾				318,262
Other assets			¾				1,723				8,982				4,514				5,907				21,126
Total assets		$	318,262			$	151,393			$	140,684			$	9,940			$	32,588			$	652,867
Liabilities and partners’ equity
Mortgage note payable		$	¾			$	34,000			$	166,200			$	63,793			$	16,837			$	280,830
Other liabilities			¾				668				8,548				1,208				2,226				12,650
Partners equity (deficit)			318,262				116,725				(34,064	)			(55,061	)			13,525				359,387
Total liabilities and partners’ equity		$	318,262			$	151,393			$	140,684			$	9,940			$	32,588			$	652,867
Company’s investment in and advances to unconsolidated affiliates		$	22,685			$	30,310			$	¾			$	¾			$	5,965			$	58,960
Share of distributions in excess of share of income and investment in unconsolidated affiliates		$	¾			$	¾			$	(7,860	)		$	(12,221	)		$	¾			$	(20,081	)

 

		December 31, 2007
		RCP								Brandywine								Other
		Venture				CityPoint				Portfolio				Crossroads				Investments				Total
(dollars in thousands)
Balance Sheets
Assets
Rental property, net		$	—			$	145,775			$	136,942			$	5,552			$	38,137			$	326,406
Investment in unconsolidated affiliates			195,672				—				—				—				—				195,672
Other assets			—				3,046				10,631				4,372				6,650				24,699
Total assets		$	195,672			$	148,821			$	147,573			$	9,924			$	44,787			$	546,777
Liabilities and partners’ equity
Mortgage note payable		$	—			$	34,000			$	166,200			$	64,000			$	33,084			$	297,284
Other liabilities			—				2,213				9,629				1,112				2,307				15,261
Partners equity (deficit)			195,672				112,608				(28,256	)			(55,188	)			9,396				234,232
Total liabilities and partners’ equity		$	195,672			$	148,821			$	147,573			$	9,924			$	44,787			$	546,777
Company’s investment in and advances to unconsolidated affiliates		$	9,813			$	28,890			$	—			$	—			$	5,951			$	44,654
Share of distributions in excess of share of income and investment in unconsolidated affiliates		$	—			$	—			$	(7,822	)		$	(12,185	)		$	—			$	(20,007	)

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. INVESTMENTS, (continued)

		Three Months Ended March 31, 2008
		RCP				Brandywine								Other
(dollars in thousands)		Venture				Portfolio				Crossroads				Investments				Total
Statements of Operations
Total revenue		$	¾			$	5,156			$	2,063			$	1,241			$	8,460
Operating and other expenses			¾				1,617				798				1,278				3,693
Interest expense			¾				2,519				867				244				3,630
Equity in earnings of affiliates			138,487				¾				¾				¾				138,487
Depreciation and amortization			¾				1,067				271				226				1,564
Net income (loss)		$	138,487			$	(47	)		$	127			$	(507	)		$	138,060
Company’s share of net income (loss)		$	13,326			$	(11	)		$	(36	)		$	(44	)		$	13,235

 

		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 (loss) before extraordinary gain		$	—			$	31			$	123			$	(24	)		$	130
Company’s share of extraordinary gain		$	23,690			$	—			$	—			$	—			$	23,690

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, 2008. The notional value does not represent exposure to credit, interest rate or market risks.

(dollars in thousands)

Derivative Instrument		Notional Value				Interest Rate				Maturity				Fair Value
LIBOR Swap		$	4,640				4.71	%			1/1/10			$	(188	)
LIBOR Swap			11,410				4.90	%			10/1/11				(756	)
LIBOR Swap			8,434				5.14	%			3/1/12				(661	)
LIBOR Swap			9,800				4.47	%			10/29/10				(481	)
Total Interest Rate Swaps		$	34,284												(2,086	)
Interest Rate Cap
LIBOR Cap		$	30,000				6.0	%			4/1/08				(28	)
Net derivative instrument liability														$	(2,114	)

9. MORTGAGE LOANS

During the first three months of 2008, the Company borrowed $30.1 million on three existing construction loans.

During February 2008, in conjunction with the purchase of a portfolio of properties, the Company assumed loans of $34.9 million, which bears interest at a fixed rate of 5.9% and matures on June 11, 2009, and $5.0 million, which bears interest at a fixed rate of 5.4% and matures on December 1, 2009.

During the first quarter of 2008, the Company closed on a $41.5 million loan, which bears interest at a fixed rate of 5.3% and matures on March 16, 2011.

During the first quarter of 2008, the Company borrowed $14.2 million on an existing credit facility. This money was repaid during the first quarter.

During the first quarter of 2008, the Company borrowed $83.0 million on an existing credit facility of which $41.0 million
was repaid during the first quarter.

10. CONVERTIBLE NOTES PAYABLE

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

11. F AIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157 for its financial assets and liabilities. SFAS No. 157 establishes a new framework for measuring fair value and expands disclosure requirements. SFAS No. 157 defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants.

SFAS No. 157’s valuation techniques are based on observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s market assumptions. These two types of inputs have created the following fair value hierarchy:

ACADIA REALTY TRUST AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. FAIR VALUE MEASUREMENTS, continued

	•		Level 1 — Quoted prices for identical instruments in active markets.
	•		Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which significant value drivers are observable.
	•		Level 3 — Valuations derived from valuation techniques in which significant value drivers are unobservable.

The following describes the valuation methodologies the Company uses to measure financial assets and liabilities at fair value:

Notes Receivable —The Company’s notes receivable are valued using Level 3 inputs. Given the short-term nature of the notes and the fact that several of the notes are demand notes, the Company has determined that the carrying value of the notes receivable approximates fair value.

Derivative Instruments — The Company’s derivative financial liabilities primarily represent interest rate swaps and a cap and are valued using Level 2 inputs. The fair value of these instruments is based upon the estimated amounts the Company would receive or pay to terminate the contracts as of March 31, 2008 and is determined using interest rate market pricing models. With the adoption of SFAS No. 157, the Company has amended the techniques used in measuring the fair value of its derivative positions. This enhancement includes the impact of credit valuation adjustments on derivatives measured at fair value. The implementation of this enhancement did not have a material impact on the Company’s consolidated financial position or results of operations.

Mortgage Notes Payable and Convertible Notes Payable — The value of the Company’s mortgage and convertible notes payable are valued using Level 3 inputs. The Company determines the estimated fair value of its mortgage and convertible notes payable through the use of valuation methodologies using current market interest rate data.

The following table presents the Company’s assets and liabilities measured at fair value based on level of inputs at March 31, 2008:

March 31, 2008		Level 1				Level 2				Level 3				Total
(dollars in thousands)
Assets
Notes receivable		$	—			$	—			$	57,698			$	57,698
Total assets		$	—			$	—			$	57,698			$	57,698
Liabilities
Derivatives		$	—			$	2,114			$	—			$	2,114
Mortgage and convertible notes payable			—				—				663,850				663,850
Total liabilities		$	—			$	2,114			$	663,850			$	665,964

The following table reflects the changes in the Company’s Level 3 financial assets and liabilities measured on a recurring basis for the three months ended March 31, 2008:

(dollars in thousands)

						Net realized/				Net				Purchases,
		Balance at				unrealized gains (losses)				unrealized				issuances and				Balance at
		January 1, 2008				included in earnings				gains (losses)				settlements				March 31, 2008
Notes receivable		$	57,662			$	—			$	—			$	36			$	57,698
Mortgage and convertible notes payable		$	519,371			$	—			$	(3,667	)		$	148,146			$	663,850

ACADIA REALTY TRUST AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. RELATED PARTY TRANSACTIONS The Company earns asset management, leasing, disposition, development and construction fees for providing services to an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Fees earned by the Company in connection with this portfolio were $0.4 million and $0.7 million for the three months ended March 31, 2008 and 2007, respectively.

Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $25,000 for each of the three months ended March 31, 2008 and 2007.

13. SEGMENT REPORTING

The Company has three reportable segments: Core Portfolio, Opportunity Funds and Other, which primarily consists of management fee and interest income. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. Investments in the Core Portfolio are typically held long-term. Given the finite life of the Opportunity Funds, these investments are typically held for shorter terms. Fees earned by the Company as general partner/member of the Opportunity Funds are eliminated in consolidation and recognized through a reduction in minority interest expense in the Company’s consolidated financial statements in accordance with GAAP. The Company previously reported two reportable segments, retail properties and multi-family properties. During December of 2007, the Company sold a residential complex and held its remaining residential complex for sale. Subsequent to March 31, 2008, the Company sold this last residential complex. Also during 2007, the Company expanded its Opportunity Fund platform with the formation of Fund III. Accordingly, it has realigned its segments to reflect the current business orientation of the Company. The following table sets forth certain segment information for the Company, reclassified for discontinued operations, as of and for the three months ended March 31, 2008 and 2007 (does not include unconsolidated affiliates):

Three Months Ended March 31, 2008

		Core				Opportunity
(dollars in thousands)		Portfolio				Funds				Other				Elimination				Total
Revenues		$	15,446			$	6,593			$	11,991			$	(7,158	)		$	26,872
Property operating expenses and real estate taxes			4,691				3,335				¾				(1,349	)			6,677
Other expenses			6,713				3,493				¾				(3,817	)			6,389
Net income before depreciation and amortization		$	4,042			$	(235	)		$	11,991			$	(1,992	)		$	13,806
Depreciation and amortization		$	3,831			$	2,687			$	¾			$	¾			$	6,518
Interest expense		$	4,244			$	1,844			$	¾			$	¾			$	6,088
Real estate at cost		$	443,465			$	546,311			$	¾			$	(1,816	)		$	987,960
Total assets		$	560,756			$	637,791			$	¾			$	(1,992	)		$	1,196,555
Expenditures for real estate and improvements		$	791			$	154,077			$	¾			$	¾			$	154,868
Reconciliation to net income
Net property income before depreciation and amortization																		$	13,806
Depreciation and amortization																			(6,518	)
Equity in earnings of unconsolidated affiliates																			13,235
Interest expense																			(6,088	)
Income tax provision																			(1,857	)
Minority interest																			(5,185	)
Income from discontinued operations																			1,350
Net income																		$	8,743