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AKR > SEC Filings for AKR > Form 10-Q on 8-Nov-2012All Recent SEC Filings

Show all filings for ACADIA REALTY TRUST

Form 10-Q for ACADIA REALTY TRUST


8-Nov-2012

Quarterly Report


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

The following discussion is based on our consolidated financial statements as of September 30, 2012 and 2011 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.

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 that may cause our actual results, performance or achievements to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors are set forth under the heading "Item 1A. Risk Factors" in our Form 10-K for the year ended December 31, 2011 (our "2011 Form 10-K") and include, among others, the following: general economic and business conditions, including the current post-recessionary period, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in our real estate markets, including, among other things, competition with other companies; risks of real estate development, acquisition and investment; risks related to our use of leverage; demands placed on our resources due to the growth of our business; risks related to operating through a partnership structure; our limited control over joint venture investments; the risk of loss of key members of management; uninsured losses; REIT distribution requirements and ownership limitations; concentration of ownership by certain institutional investors; governmental actions and initiatives; and environmental/safety requirements. Except as required by law, we do not undertake any obligation to update or revise any forward-looking statements contained in this Form 10-Q.

OVERVIEW
Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective:
Own and operate a Core Portfolio of high-quality retail properties located primarily in high-barrier-to-entry, supply constrained, densely-populated metropolitan areas and create value through accretive redevelopment and re-anchoring activities coupled with the acquisition of high-quality assets that have the long-term potential to outperform the asset class as part of our Core asset acquisition and recycling initiative.

Generate additional external growth through an opportunistic yet disciplined acquisition program through our Opportunity Funds. We target transactions with high inherent opportunity for the creation of additional value through:

?            value-add investments in high-quality urban and/or street retail
             properties with re-tenanting or repositioning opportunities,


?            opportunistic acquisitions of well-located real estate anchored by
             distressed retailers or by motivated sellers and

? opportunistic purchases of debt which may include restructuring.

These may also include joint ventures with private equity investors for the purpose of making investments in operating retailers with significant embedded value in their real estate assets.

Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth.

As of September 30, 2012, we operated 95 properties, which we own or have an ownership interest in, within our Core Portfolio or within our Opportunity Funds. These properties consist of commercial properties, which are primarily neighborhood and community shopping centers, mixed-use properties with a strong retail component and self-storage properties. The properties we operate are located primarily along the East Coast and in Chicago.

Core Portfolio

?            Our Core Portfolio consists of those properties either 100% owned,
             or partially owned through joint venture interests, by the Operating
             Partnership, or subsidiaries thereof, not including those properties
             owned through


our Opportunity Funds. There are 58 properties in our Core Portfolio totaling approximately 5.1 million square feet. As of September 30, 2012, the Core Portfolio physical occupancy was 92.9%; leased occupancy was 94.8% including executed leases.

Opportunity Funds

? Fund I has three remaining properties comprising 97,500 square feet.

?            Fund II has nine properties representing 1.2 million square feet,
             seven of which are currently operating, one of which is under
             construction, and one of which is in the design phase. Three of the
             properties also include self-storage facilities.



?            Fund III has 25 properties totaling approximately 2.8 million square
             feet, of which 11 locations representing 1.1 million net rentable
             square feet are self-storage facilities.

The majority of our operating income is derived from rental revenues from properties, including recoveries from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating companies, we consider these investments to be private-equity style, as opposed to solely real estate, investments. Since these are not generally traditional investments in operating rental real estate but investments in operating businesses, the Operating Partnership principally invests in these through a taxable REIT subsidiary ("TRS").

CRITICAL ACCOUNTING POLICIES

Management's discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. Management bases its estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about 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. We believe there have been no material changes to the items that we disclosed as our critical accounting policies under Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," in our 2011 Form 10-K.

RESULTS OF OPERATIONS
A discussion of the significant variances and primary factors contributing
thereto within the results of operations are addressed below (where there were
no significant variances in the tables, the information is presented without
further discussion):

Comparison of the three months ended September 30, 2012 ("2012") to the three
months ended September 30, 2011 ("2011")

Revenues                                                      2012                                                                           2011
                                                                                            Notes                                                                          Notes
                              Core                                   Self- Storage        Receivable         Core                                   Self- Storage        Receivable
(dollars in millions)       Portfolio       Opportunity Funds         Investments         and Other        Portfolio       Opportunity Funds         Investments         and Other
Rental income             $      14.6     $              14.3     $             6.1     $          -     $      11.6     $              10.9     $             5.5     $          -
Interest income                     -                       -                     -              1.9               -                       -                     -              1.6
Expense reimbursements            3.3                     2.7                     -                -             2.6                     2.7                     -                -
Management fee income (1)           -                       -                     -              0.3               -                       -                     -              0.3
Lease termination income            -                     0.2                     -                -             0.1                       -                     -                -
Other                               -                     0.1                   0.6                -               -                       -                   0.6                -
Total revenues            $      17.9     $              17.3     $             6.7     $        2.2     $      14.3     $              13.6     $             6.1     $        1.9

(1) Includes fees earned by us as general partner/managing member of the Opportunity Funds that are eliminated in consolidation and adjusts the loss (income) attributable to noncontrolling interests. The balance reflected in the table represents third party fees that are not eliminated in consolidation. Reference is made to Note 12 to the Notes to Consolidated Financial Statements in Part 1, Item 1 of this Form 10-Q for an overview of our five reportable segments.


Rental income in the Core Portfolio increased $3.0 million primarily as a result of additional rents of (i) $2.0 million following the acquisitions of 330 River Street, 28 Jericho Turnpike, five Chicago street retail properties, 83 Spring Street and Rhode Island Place ("2012 Core Acquisitions"), (ii) $0.3 million following the acquisitions of West Diversey, 4401 White Plains Road and six Chicago street retail properties ("2011 Core Acquisitions") and (iii) $0.4 million as a result of re-anchoring and leasing activities at the Bloomfield Town Square and 2914 Third Avenue ("Core Redevelopment Properties"). Rental income in the Opportunity Funds increased $3.4 million primarily as a result of additional rents of (i) $1.2 million following the acquisitions of 640 Broadway and Lincoln Park Centre ("2012 Fund Acquisitions"), (ii) $0.9 million following the acquisitions of Heritage Shops, 654 Broadway and New Hyde Park Shopping Center ("2011 Fund Acquisitions") and (iii) $1.3 million from leases that commenced during 2011 and 2012 at the Canarsie Plaza, Fordham Place and 161st Street ("Fund Redevelopment Properties").

Operating Expenses                                     2012                                                                         2011
                                                                                     Notes                                                                         Notes
(dollars in             Core                                   Self- Storage       Receivable        Core                                   Self- Storage       Receivable
millions)             Portfolio       Opportunity Funds         Investments        and Other       Portfolio       Opportunity Funds         Investments         and Other
Property operating  $       2.4     $               3.2     $             2.8     $     (0.7 )   $       1.3     $               2.5     $             3.1     $      (0.6 )
Other operating             0.4                     0.2                     -              -             0.5                     0.1                     -               -
Real estate taxes           2.8                     2.4                   0.6              -             2.3                     2.0                   0.6               -
General and
administrative              5.5                     4.9                     -           (3.4 )           6.4                     3.4                     -            (4.0 )
Depreciation and
amortization                4.7                     4.7                   1.2           (0.2 )           3.5                     3.8                   1.1            (0.2 )
Total operating
expenses            $      15.8     $              15.4     $             4.6     $     (4.3 )   $      14.0     $              11.8     $             4.8     $      (4.8 )

Property operating expenses in the Core Portfolio increased $1.1 million as a result of the 2012 Core Acquisitions and an increase in credit loss during 2012.

The increase in general and administrative expense in the Opportunity Funds related to an increase in legal costs incurred during 2012.

Depreciation and amortization in the Core Portfolio increased $1.2 million as a result of the 2012 Core Acquisitions and the Core Redevelopment Projects.

Other                                                      2012                                                                              2011
                                                                                          Notes                                                                            Notes
(dollars in               Core                                  Self- Storage          Receivable          Core                                  Self- Storage          Receivable
millions)              Portfolio       Opportunity Funds         Investments            and Other        Portfolio      Opportunity Funds         Investments            and Other
Equity in (losses)
earnings of
unconsolidated
affiliates           $        -       $           (1.6 )     $         (0.9 )       $          -        $     0.1     $            3.9        $         (0.9 )       $          -
Other interest
income                        -                      -                    -                  0.1                -                    -                     -                  0.1
Loss on debt
extinguishment                -                      -                    -                    -             (0.3 )                  -                     -                    -
Interest and other
finance expense            (4.1 )                 (4.4 )               (0.8 )               (0.2 )           (4.0 )               (4.5 )                (0.9 )               (0.3 )
Income tax (benefit)
provision                   0.1                      -                 (0.2 )                  -             (0.3 )                  -                  (0.2 )                  -
Income from
discontinued
operations                    -                      -                    -                  6.0                -                    -                     -                  0.8
Net loss (income)
attributable to
noncontrolling
interests -
 - Continuing
operations                    -                    5.6                    -                    -                -                    -                     -                    -
 - Discontinued
operations                    -                      -                    -                 (4.7 )              -                    -                     -                 (0.6 )

Equity in (losses) earnings of unconsolidated affiliates in the Opportunity Funds decreased primarily as a result of the Mervyns legal settlement expenses of $1.7 million during 2012 following the settlement of certain legal proceedings (reference is made to Legal Proceedings in Part II, Item 1 in this Form 10-Q) and a decrease of $4.5 million in distributions in excess of basis from our


Albertson's investment in 2011.

Income from discontinued operations represents activity related to a property sale during 2012. Reference is made to Note 4 in the Notes to Consolidated Financial Statements in Part 1, Item 1 in this Form 10-Q for a discussion of the Company's 2012 and 2011 dispositions.

Net loss (income) attributable to noncontrolling interests - Continuing operations and Discontinued operations primarily represents the noncontrolling interests' share of all the Opportunity Funds variances discussed above.

Comparison of the nine months ended September 30, 2012 ("2012") to the nine months ended September 30, 2011 ("2011")

Revenues                                                     2012                                                                        2011
                                                                                          Notes                                                                        Notes
                              Core                                  Self- Storage       Receivable         Core                                  Self- Storage      Receivable
(dollars in millions)       Portfolio       Opportunity Funds        Investments        and Other        Portfolio       Opportunity Funds        Investments        and Other
Rental income             $      41.2     $              38.6     $          17.4     $          -     $      34.0     $              32.0     $          15.7     $         -
Interest income                     -                       -                   -              6.0               -                       -                   -             9.5
Expense reimbursements            8.9                     9.1                   -                -             8.4                     7.7                   -               -
Management fee income (1)           -                       -                   -              1.2               -                       -                   -             1.2
Lease termination income            -                     0.2                   -                -             0.1                       -                   -               -
Other                               -                     0.4                 1.7                -             0.3                       -                 1.4               -
Total revenues            $      50.1     $              48.3     $          19.1     $        7.2     $      42.8     $              39.7     $          17.1     $      10.7

See Note (1) on page 28.

Rental income in the Core Portfolio increased $7.2 million primarily as a result of additional rents of (i) $3.5 million following the 2012 Core Acquisitions,
(ii) $2.4 million following the 2011 Core Acquisitions and (iii) $0.8 million from the Core Redevelopment Properties. Rental income in the Opportunity Funds increased from additional rents of (i) $2.0 million following the 2012 Fund Acquisitions, (ii) $2.3 million following the 2011 Fund Acquisitions and (iii) $2.4 million from the Fund Redevelopment Properties. Rental income in the Self Storage Investments increased $1.7 million primarily as a result of increased occupancy throughout the Storage Portfolio.

Interest income in Notes Receivable and Other decreased primarily as a result of the full repayment of two notes during 2011. This was partially offset by new notes originated during 2012.

Expense reimbursements in the Opportunity Funds increased for both real estate taxes and common area maintenance ("CAM") as a result of the Fund Redevelopment Properties and the 2012 and 2011 Fund Acquisitions.

Operating Expenses                                    2012                                                                        2011
                                                                                    Notes                                                                       Notes
(dollars in             Core                                  Self- Storage      Receivable         Core                                  Self- Storage      Receivable
millions)             Portfolio       Opportunity Funds        Investments        and Other       Portfolio       Opportunity Funds        Investments        and Other
Property operating  $       5.9     $               9.1     $           8.5     $      (2.2 )   $       5.7     $               8.5     $           8.4     $      (1.7 )
Other operating             1.2                     1.9                   -               -             0.6                     0.1                   -               -
Real estate taxes           7.4                     7.0                 1.5               -             6.4                     5.3                 2.0               -
General and
administrative             17.6                    12.4                   -           (11.8 )          18.3                     9.4                   -           (10.6 )
Depreciation and
amortization               12.9                    13.7                 3.4            (0.7 )          10.5                    11.0                 3.1            (0.6 )
Total operating
expenses            $      45.0     $              44.1     $          13.4     $     (14.7 )   $      41.5     $              34.3     $          13.5     $     (12.9 )

Other operating expense in the Opportunity Funds increased as a result of acquisition costs related to the 2012 Fund Acquisitions.

Real estate tax expense in the Core Portfolio increased as a result of the 2012 and 2011 Core Acquisitions. Real estate tax expense in the Opportunity Funds increased as a result of the Fund Redevelopment Properties and the 2012 and 2011 Fund Acquisitions.


The increase in general and administrative expense in the Opportunity Funds related to the variances discussed for the three months ended September 30, 2012 and 2011 as well as an increase in promote expense attributable to Fund I during 2012. The decrease in general and administrative expense in Notes Receivable and Other related to the increase in Fund I Promote expense eliminated for financial presentation purposes.

Core Portfolio depreciation and amortization increased $2.4 million primarily as a result of the 2012 and 2011 Core Acquisitions. Depreciation and amortization expense in the Opportunity Funds increased $2.7 million due to the Fund Redevelopment Properties and the 2012 and 2011 Fund Acquisitions.

Other                                                     2012                                                                             2011
                                                                                        Notes                                                                            Notes
(dollars in             Core                                  Self- Storage          Receivable          Core                                  Self- Storage          Receivable
millions)             Portfolio      Opportunity Funds         Investments            and Other        Portfolio      Opportunity Funds         Investments            and Other
Equity in earnings
(losses) of
unconsolidated
affiliates           $     0.2     $            4.2        $         (2.4 )       $          -        $     0.5     $            4.9        $         (2.4 )       $          -
Other interest
income                       -                    -                     -                  0.1                -                    -                     -                  0.2
Gain on debt
extinguishment               -                    -                     -                    -              1.3                    -                     -                    -
Interest and other
finance expense          (11.2 )              (12.7 )                (2.6 )               (0.5 )          (12.3 )              (11.6 )                (2.8 )               (0.7 )
Income tax (benefit)
provision                  1.9                    -                  (0.8 )                  -              0.6                    -                  (0.6 )                  -
Income from
discontinued
operations                   -                    -                     -                  9.4                -                    -                     -                 28.3
Net loss (income)
attributable to
noncontrolling
interests -
 - Continuing
operations                 0.1                  5.3                     -                    -             (0.5 )                5.5                     -                    -
 - Discontinued
operations                   -                    -                     -                 (7.6 )              -                    -                     -                 (0.7 )

Equity in earnings (losses) of unconsolidated affiliates in the Opportunity Funds decreased primarily from those factors as discussed for the three months ended September 30, 2012 and 2011. These were partially offset by our share of the $3.4 million gain on the sale of an unconsolidated Opportunity Fund investment during 2012.

The $1.3 million gain on extinguishment of debt in the Core Portfolio was attributable to the purchase of mortgage debt at a discount during 2011.

Interest expense in the Core Portfolio decreased $1.1 million in 2012 primarily as a result of the purchase of the Company's Convertible Notes in 2011 and an increase in capitalized interest in 2012. Interest expense in the Opportunity Funds increased $1.1 million in 2012 which was primarily attributable to higher average interest rates in 2012 resulting in an increase of $2.6 million. This was partially offset by a decrease of $1.2 million due to a decrease in average outstanding borrowings in 2012.

The variance in the income tax provision in the Core Portfolio was attributable to an overaccrual of the 2010 tax liability recorded in 2011 at the TRS level.

Income from discontinued operations represents activity related to property sales in 2012 and 2011. Reference is made to Note 4 in the Notes to Consolidated Financial Statements in Part 1, Item 1 in this Form 10-Q for a discussion of the Company's 2012 and 2011 dispositions.

Net loss (income) attributable to noncontrolling interests - Continuing Operations and Discontinued Operations primarily represents the noncontrolling interests' share of all the Opportunity Funds variances discussed above.

CORE PORTFOLIO

The following discussion of net property operating income ("NOI") and rent spreads on new and renewal leases includes both consolidated and our pro-rata share of unconsolidated properties within our Core Portfolio. Our Opportunity Funds invest primarily in properties that typically require significant leasing and redevelopment. Given that the Opportunity Funds are finite-life investment


vehicles, these properties are sold following stabilization. As a result, we believe NOI and rent spreads are not meaningful measures for our Opportunity Fund investments.

NOI represents property-related revenues less property expenses. We consider NOI and rent spreads on new and renewal leases for our Core Portfolio to be appropriate supplemental disclosures of portfolio operating performance due to their widespread acceptance and use within the REIT investor and analyst communities. NOI and rent spreads on new and renewal leases are presented to assist investors in analyzing our property performance, however, our method of calculating these may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

Net Property Operating Income

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