AKR

ACADIA REALTY TRUST - 10-Q Summary (Period Ended June 30, 2009)

Business Context and Reporting Period

This filing covers the quarterly period ended June 30, 2009. Acadia Realty Trust is a fully-integrated, self-managed equity REIT focused on retail properties, including neighborhood shopping centers, mixed-use properties, and self-storage facilities. The company operates through an umbrella partnership REIT (UPREIT) structure. As of June 30, 2009, the Trust controlled 98% of the Operating Partnership. The portfolio consists of 78 properties across the Northeast, Mid-Atlantic, and Midwestern United States, categorized into a Core Portfolio, three Opportunity Funds (Fund I, II, and III), and a Storage Portfolio.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased by approximately 11.6% year-over-year. This was primarily due to the absence of a $24.5 million lease termination income from Home Depot recorded in 2008 and a decrease in management fee income from the CityPoint development project.
• Net Income Volatility: Consolidated net income dropped significantly from $48.2 million to $7.9 million. However, Net Income Attributable to Common Shareholders decreased less severely (from $25.6M to $17.4M) due to a large noncontrolling interest loss in 2009 ($9.5M) compared to income in 2008 ($22.5M).
• Unconsolidated Affiliate Losses: Equity in earnings of unconsolidated affiliates swung from a $17.7 million gain in 2008 to a $3.3 million loss in 2009. This was driven by impairment charges on Mervyns Department Store locations and the absence of gains from property sales recorded in the prior year.
• One-Time Gains: The company recorded a $7.0 million gain on debt extinguishment in 2009 from repurchasing convertible notes at a discount, compared to no such gain in 2008.
• Acquisitions: In January 2009, the company acquired Cortlandt Towne Center for $78.0 million. This acquisition contributed to increased minimum rents and operating expenses in the Opportunity Funds segment.

Guidance, Outlook, Risks, and Unusual Items

• Economic Outlook: Management notes the U.S. economy is in a recession, leading to reduced consumer spending and potential tenant bankruptcies. While occupancy and NOI have not been materially adversely affected through June 30, 2009, future performance is at risk if retailer sales continue to deteriorate.
• Financing Risks: The credit markets remain severely curtailed. Management warns that refinancing debt maturing in 2009 and 2010 will be difficult. There is $136.9 million of debt maturing in 2009; while extension options exist for $97.5 million, the remaining $33.1 million may require repayment via existing liquidity or unfunded capital commitments.
• Unusual Items:
  • Abandonment Costs: $2.4 million in project abandonment costs were recorded due to the decision not to participate in a future development project.
  • Reserve for Notes Receivable: A $1.7 million reserve was established for a mezzanine loan receivable following the loss of an anchor tenant at the collateral property.
  • Legal Dispute: A servicer alleged non-monetary defaults on two construction loans ($31.0M and $9.4M) regarding completion dates. The company disputes this and is in discussions to resolve the issue, believing it will not have a material adverse effect.
• Liquidity Strategy: The company raised $65.0 million in April 2009 via a common share issuance, primarily used to repurchase convertible notes and pay down credit lines. As of June 30, 2009, the company had $176.6 million in available debt capacity and $107.7 million in cash.

Investor Verification Checklist

• Debt Refinancing: Verify the status of the $33.1 million in debt maturing in 2009 without extension options and the company's ability to refinance or repay it given current credit market conditions.
• Unconsolidated Affiliate Exposure: Review the specific details of the Mervyns impairment charges and the status of the RCP Venture investments, which contributed significantly to the loss in equity earnings.
• Construction Loan Dispute: Monitor the resolution of the alleged defaults on the Pelham Manor and Atlantic Avenue construction loans to ensure no forced liquidation or additional penalties occur.
• FFO vs. Net Income: Analyze the divergence between Net Income and Funds From Operations (FFO), noting that FFO ($26.3M) remained relatively stable compared to the sharp drop in GAAP Net Income, driven by non-cash items and discontinued operations.
• Convertible Note Repurchases: Assess the impact of the $7.0 million gain on debt extinguishment on future earnings, as this was a one-time event.