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AKR > SEC Filings for AKR > Form 10-Q on 5-Nov-2013All Recent SEC Filings

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Form 10-Q for ACADIA REALTY TRUST


5-Nov-2013

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, 2013 and 2012 and for each of the three and nine months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto ("Notes to Consolidated Financial Statements").

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, 2012 (our "2012 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 industry asset class.

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, 2013, we operated 106 properties, which we own or have an ownership interest in, within our Core Portfolio and Opportunity Funds. These properties primarily consist of urban/street retail, dense suburban neighborhood and community shopping centers and mixed-use properties with a strong retail component. The properties we operate are located primarily along the East Coast and in Chicago.

Core Portfolio

            Our Core Portfolio consists of those properties we either 100% own,
             or partially own in joint ventures, through the Operating
             Partnership, or subsidiaries thereof, not including those properties
             owned through our Opportunity


Funds. There are 74 properties in our Core Portfolio totaling 4.9 million square feet. As of September 30, 2013, the Core Portfolio physical occupancy was 93.7% and leased occupancy, which includes executed leases for which rent has not yet commenced, was 95.7%.

Opportunity Funds

Fund I has three properties totaling 0.1 million square feet.

            Fund II has four properties totaling 0.3 million square feet, two of
             which are operating, one of which is under construction, and one of
             which is in the design phase.


            Fund III has 17 properties totaling 1.7 million square feet, 12 of
             which are operating and five of which are in various stages of
             redevelopment.


            Fund IV has eight properties totaling 0.6 million square feet, seven
             of which are operating and one of which is in the design phase.

The majority of our operating income is derived from rental revenues from properties, including recoveries of operating expenses 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 2012 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 from period to period, the information in the following
tables is presented without further discussion:

Comparison of the three months ended September 30, 2013 ("2013") to the three
months ended September 30, 2012 ("2012")

(dollars in millions)                           2013                                                     2012
                           Core                                    Notes            Core                                    Notes
Revenues                 Portfolio       Opportunity Funds       Receivable       Portfolio       Opportunity Funds       Receivable
Rental income          $      23.0     $               6.9     $          -     $      14.3     $               7.4     $          -
Interest income                  -                       -              3.0               -                       -              1.9
Expense reimbursements         5.1                     2.2                -             3.2                     1.4                -
Other                            -                     0.1                -             0.3                     0.3                -
Total revenues         $      28.1     $               9.2     $        3.0     $      17.8     $               9.1     $        1.9

Rental income in the Core Portfolio increased $8.7 million primarily as a result of additional rents of (i) $4.0 million following the consolidation of our Brandywine investment formerly presented under the equity method ("Consolidation of Brandywine"), (ii) $2.6 million following the acquisitions of 330 River Street, 340 River Street, 28 Jericho Turnpike, a portfolio of Chicago street retail properties, 930 Rush Street, 83 Spring Street, Rhode Island Place, 181 Main Street, 1739-53 Connecticut Avenue, 1801-03 Connecticut Avenue, and 639 West Diversey ("2012 Core Acquisitions"), and (iii) $1.8 million following the acquisitions of 664 North Michigan, 8-12 East Walton, and 3200-3204 M Street ("2013 Core Acquisitions").


The increase in interest income was primarily due to the origination of two notes during December 2012 partially offset by the repayment of three notes during 2012.

Expense Reimbursements in the Core Portfolio increased $1.9 million primarily as a result of $0.9 million from the 2013 and 2012 Core Acquisitions, and $0.8 million from the Consolidation of Brandywine.

(dollars in
millions)                                     2013                                                       2012
                        Core                                     Notes             Core                                     Notes
Operating Expenses    Portfolio       Opportunity Funds        Receivable        Portfolio       Opportunity Funds        Receivable
Property operating  $       3.5     $               1.6     $            -     $       2.6     $               1.3     $            -
Other operating             0.5                     0.3                  -             0.4                     0.2                  -
Real estate taxes           3.7                     2.1                  -             2.7                     1.6                  -
General and
administrative              4.9                     0.4                  -             4.9                     0.6                  -
Depreciation and
amortization                7.9                     2.6                  -             4.4                     3.0                  -
Total operating
expenses            $      20.5     $               7.0     $            -     $      15.0     $               6.7     $            -

Property operating expenses in the Core Portfolio increased $0.9 million primarily as a result of the Consolidation of Brandywine.

Real estate taxes in the Core Portfolio increased $1.0 million primarily as a result of $0.6 million from the 2013 and 2012 Core Acquisitions and $0.3 million from the Consolidation of Brandywine.

Depreciation and amortization in the Core Portfolio increased $3.5 million primarily as a result of $2.2 million from the 2013 and 2012 Core Acquisitions and $0.9 million from the Consolidation of Brandywine.

(dollars in
millions)                                   2013                                                      2012
                      Core                                     Notes             Core                                    Notes
Other               Portfolio       Opportunity Funds        Receivable        Portfolio      Opportunity Funds        Receivable
Equity in
earnings (losses)
of unconsolidated
affiliates        $      (0.1 )   $            4.3        $            -     $      (0.1 )   $           (2.6 )     $            -
Interest and
other finance
expense                  (6.7 )               (3.8 )                   -            (4.2 )               (1.9 )                  -
Income tax
benefit
(provision)              (0.1 )               (0.1 )                   -            (0.1 )                0.2                    -
Income from
discontinued
operations                0.2                  2.6                     -             0.1                  8.0                    -
Net (income) loss
attributable to
noncontrolling
interests -
 - Continuing
operations                  -                  2.6                     -               -                  7.2                    -
 - Discontinued
operations               (0.1 )               (2.1 )                   -               -                 (6.3 )                  -

Equity in earnings (losses) of unconsolidated affiliates in the Opportunity Funds increased $6.9 million primarily as a result of (i) $2.8 million from our share of earnings from the acquisitions of Arundel Plaza, Lincoln Road Portfolio, 1701 Belmont Avenue, 2819 Kennedy Boulevard, and Promenade at Manassas ("2012 and 2013 Fund Unconsolidated Acquisitions"), (ii) $1.7 million following the settlement of legal proceedings from our Mervyn's investment during 2012 ("Mervyns"), (iii) $1.3 million from our share of earnings from our investment in the Self-Storage Management company during 2013 ("Self-Storage Management"), and (iv) $0.8 million of distribution in excess of basis from our Shopko investment during 2013 ("Shopko").

Interest expense in the Core Portfolio increased $2.5 million primarily due to the Consolidation of Brandywine. Interest expense in the Opportunity Funds increased $1.9 million, primarily due to an increase of $2.7 million related to higher average outstanding borrowings offset by a decrease of $0.5 million related to lower average interest rates and a $0.7 million increase in capitalized interest in 2013.


Income from discontinued operations represents activity related to properties held for sale in 2013 and a property sold during 2012.

Net (income) loss 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, 2013 ("2013") to the nine months ended September 30, 2012 ("2012")

(dollars in millions)                           2013                                                     2012
                           Core                                    Notes            Core                                    Notes
Revenues                 Portfolio       Opportunity Funds       Receivable       Portfolio       Opportunity Funds       Receivable
Rental income          $      66.8     $              21.3     $          -     $      40.4     $              18.8     $          -
Interest income                  -                       -              9.2               -                       -              6.1
Expense reimbursements        14.6                     6.2                -             8.6                     5.2                -
Other                          0.9                     2.9                -             1.2                     0.7                -
Total revenues         $      82.3     $              30.4     $        9.2     $      50.2     $              24.7     $        6.1

Rental income in the Core Portfolio increased $26.4 million primarily as a result of additional rents of (i) $13.1 million from 2013 and 2012 Core Acquisitions, (ii) $12.3 million from the Consolidation of Brandywine and (iii) $0.9 million as a result of re-anchoring and leasing activities at Branch Plaza ("Core Re-anchoring"). Rental income in the Opportunity Funds increased $2.5 million primarily as a result of additional rents of (i) $1.4 million from acquisitions of 3780-3858 Nostrand Avenue and Paramus Plaza ("2013 Fund Acquisitions"), (ii) $0.7 million from acquisitions of 210 Bowery, 3104 M Street and Lincoln Park Center ("2012 Fund Acquisitions") and (iii) $0.4 million from leases that commenced during 2012 and 2013 at 640 Broadway and Marcus Avenue ("Fund Redevelopment Properties").

The increase in interest income was primarily due to the origination of two notes during December 2012, partially offset by the repayment of three notes during 2012.

Expense Reimbursements in the Core Portfolio increased $6.0 million primarily as a result of (i) $2.2 million from the Consolidation of Brandywine, (ii) $2.3 million from the 2013 and 2012 Core Acquisitions, (iii) $0.3 million from Core Re-anchoring and (iv) an increase in snow related reimbursements and increased real estate tax reimbursements.

Other income in the Opportunity Funds increased $2.2 million primarily as a result of the collection of a note receivable originated in 2010, which had been written off prior to 2013.

(dollars in
millions)                                     2013                                                       2012
                        Core                                     Notes             Core                                     Notes
Operating Expenses    Portfolio       Opportunity Funds        Receivable        Portfolio       Opportunity Funds        Receivable
Property operating  $       9.6     $               3.8     $            -     $       6.7     $               3.4     $            -
Other operating             1.4                     1.3                  -             1.0                     1.9                  -
Real estate taxes          10.1                     5.6                  -             7.2                     4.8                  -
General and
administrative             16.1                     1.2                  -            15.2                     1.4                  -
Depreciation and
amortization               21.1                     8.2                  -            12.0                     8.7                  -
Total operating
expenses            $      58.3     $              20.1     $            -     $      42.1     $              20.2     $            -

Property operating expenses in the Core Portfolio increased $2.9 million primarily as a result of $2.0 million from the Consolidation of Brandywine, $0.7 million from the 2013 and 2012 Core Acquisitions, and $0.4 million from additional snow related expenses.

Real estate taxes in the Core Portfolio increased $2.9 million primarily as a result of $1.6 million from the 2013 and 2012 Core Acquisitions, $1.0 million from the Consolidation of Brandywine, and $0.4 million from general tax increases across the portfolio.


Depreciation and amortization in the Core Portfolio increased $9.1 million primarily as a result of $5.5 million from the 2013 and 2012 Core Acquisitions, $2.7 million from the Consolidation of Brandywine, and $0.3 million from Core Re-anchoring.

(dollars in
millions)                                   2013                                                       2012
                      Core                                     Notes             Core                                     Notes
Other               Portfolio       Opportunity Funds        Receivable        Portfolio       Opportunity Funds        Receivable
Equity in
earnings (losses)
of unconsolidated
affiliates        $      (0.1 )   $            7.4        $            -     $       0.2     $            1.8        $            -
Impairment of
asset                    (1.5 )                  -                     -               -                    -                     -
Interest and
other finance
expense                 (19.2 )              (10.4 )                   -           (11.4 )               (5.2 )                   -
Income tax
benefit
(provision)               0.2                 (0.2 )                   -            (1.9 )                0.8                     -
Income from
discontinued
operations                0.4                  9.9                     -             0.2                 17.4                     -
Net (income) loss
attributable to
noncontrolling
interests -
 - Continuing
operations                  -                  6.4                     -               -                 11.8                     -
 - Discontinued
operations               (0.2 )               (8.3 )                   -            (0.1 )              (13.9 )                   -

Equity in earnings (losses) of unconsolidated affiliates in the Opportunity Funds increased $5.6 million primarily as a result of (i) $3.3 million increase from Self-Storage Management, (ii) $3.0 million from our share of earnings from 2012 and 2013 Fund Unconsolidated Acquisitions, (iii) $1.7 million from Mervyns, and (iv) $0.8 million from Shopko. These increases were partially offset by our share of a $3.4 million gain on sale of an unconsolidated Opportunity Fund investment during 2012.

Impairment of asset in the Core Portfolio represents an impairment charge on Walnut Hill Plaza during 2013. See Note 1 in the Notes to Consolidated Financial Statements for a discussion of the impairment charge.

Interest expense in the Core Portfolio increased $7.8 million primarily due to the Consolidation of Brandywine. Interest expense in the Opportunity Funds increased $5.2 million primarily due to an increase of $7.2 million related to higher average outstanding borrowings offset by a decrease of $1.2 million related to lower average interest rates and a $1.3 million increase in capitalized interest during 2013.

The variance in the income tax provision in the Core Portfolio of $2.1 million relates to the amendment of Opportunity Fund agreements to re-characterize certain fee income as priority distributions during 2013. The variance in the income tax provision in the Opportunity Funds of $1.0 million relates to an increase in taxable income from Self-Storage Management.

Income from discontinued operations represents activity related to properties held for sale in 2013 and properties sold during 2013 and 2012. See Note 4 in the Notes to Consolidated Financial Statements for a discussion of our 2013 disposition.

Net (income) loss 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 PERFORMANCE

The following discussion of net property operating income ("NOI"), same-store NOI and rent spreads on new and renewal leases includes both our consolidated and pro-rata share of unconsolidated properties within our Core Portfolio. In contrast, our Opportunity Funds invest primarily in properties that typically require significant leasing and redevelopment. Given that our Opportunity Funds are finite-life investment vehicles, these assets are typically sold following the completion of these activities. Accordingly, we believe these measures are not meaningful for our Opportunity Fund investments.

NOI represents property-related revenues less expenses. We consider NOI, same-store NOI and rent spreads on new and renewal leases for our Core Portfolio to be appropriate supplemental disclosures of portfolio operating performance metrics due to their widespread acceptance and use within the REIT investor and analyst communities. These metrics are presented to assist investors


in analyzing our property performance. However, our method of calculating these metrics may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs.

NOI for our Core Portfolio is determined as follows:

(dollars in millions)
Reconciliation of Consolidated Operating Income to NOI - Core

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