ACADIA REALTY TRUST quarterly report, Q3 FY2012

Business Context and Reporting Period

Acadia Realty Trust is an integrated equity REIT focused primarily on retail, urban/infill mixed-use and self-storage properties in high-barrier-to-entry markets along the East Coast and in Chicago. This unaudited Form 10-Q covers the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods.

The company held interests in 58 Core Portfolio properties and 37 properties through three Opportunity Funds, for 95 properties overall.
Core Portfolio physical occupancy was 92.9% and leased occupancy was 94.8% at September 30, 2012.
The company formed Fund IV in May 2012 and completed closings totaling $540.6 million of equity commitments; no Fund IV investments had been made by quarter-end.

Financial Performance and Position

Metric	Q3 2012	Q3 2011	First 9 Months 2012	First 9 Months 2011
Total revenues	$44.1 million	$35.9 million	$124.7 million	$110.3 million
Operating income	$12.6 million	$10.1 million	$37.0 million	$34.0 million
Net income	$6.7 million	$4.6 million	$20.7 million	$39.3 million
Net income attributable to common shareholders	$7.6 million	$4.0 million	$18.4 million	$43.7 million
Basic and diluted EPS	$0.16	$0.10	$0.41	$1.08
Funds from operations	$12.7 million	$8.9 million	$34.2 million	$32.1 million
Diluted FFO per share	$0.27	$0.22	$0.75	$0.78

Q3 revenue increased approximately 23% year over year, while nine-month revenue increased approximately 13%, primarily from acquisitions, redevelopment and leasing activity.
Q3 operating margin was approximately 28.5%, compared with 28.1% in the prior-year quarter. Nine-month operating margin was approximately 29.6%, compared with 30.8% in 2011.
Core Portfolio same-store NOI increased 6.2% in Q3 and 4.0% for the first nine months. Consolidated Core Portfolio NOI was $24.6 million in Q3 and $69.1 million for the first nine months.
Q3 earnings benefited from $5.9 million of gain on property sales. Nine-month 2011 earnings benefited from substantially larger property-sale gains of $32.5 million, resulting in the significant year-over-year decline in reported EPS and net income.
Equity in earnings of unconsolidated affiliates declined to a $2.5 million loss in Q3 from $3.1 million of earnings, primarily reflecting the Mervyns litigation settlement and related investment write-down.

Cash Flow, Capital and Liquidity

Net cash provided by operating activities was $35.9 million for the first nine months, down from $39.1 million in 2011.
Net cash used in investing activities was $190.1 million, including $137.2 million of property acquisitions and $55.8 million of redevelopment and property improvements.
Net cash provided by financing activities was $149.6 million, supported by mortgage borrowings, common-share issuance and $122.3 million of noncontrolling-interest contributions.
Cash and cash equivalents were $85.3 million at September 30, 2012, compared with $89.8 million at December 31, 2011.
The company paid $24.5 million of dividends and distributions during the first nine months. Dividends declared were $0.54 per common share.
During 2012, the company issued common shares through ATM programs for approximately $98.7 million of net proceeds through September 30. It subsequently raised approximately $85.8 million of net proceeds in an October public offering.

Debt and Interest-Rate Exposure

Mortgage and convertible notes payable totaled approximately $872.2 million at September 30, 2012, compared with $768.1 million at December 31, 2011.
Approximately 52.6% of debt was fixed-rate, including debt hedged through swaps, and 47.4% was floating-rate. The weighted average rates were approximately 4.88% and 4.25%, respectively.
Debt maturities totaled $94.5 million in 2012 and $170.4 million in 2013. Management stated that available cash may not be sufficient to repay the remaining 2012 maturities and expects to refinance at least part of this debt or pursue alternatives.
Available capacity under existing debt facilities was approximately $64.5 million, in addition to cash on hand.
Management estimated that a 100-basis-point increase on refinanced debt would increase annual interest expense by approximately $2.6 million, while a 100-basis-point LIBOR increase on net variable-rate debt would increase annual interest expense by approximately $4.1 million before noncontrolling-interest effects.

Material Changes Versus the Prior Comparable Period

Rental income increased due to 2012 and 2011 acquisitions, redevelopment and re-tenanting. Core Portfolio rental income increased $3.0 million in Q3 and $7.2 million for the first nine months; Opportunity Fund rental income increased $3.4 million and $8.9 million, respectively.
Operating expenses increased with the larger asset base, higher property taxes, acquisition costs, legal expenses and depreciation.
Q3 equity in unconsolidated affiliates changed from $3.1 million of earnings to a $2.5 million loss, principally because of the Mervyns settlement and related charge.
The company acquired multiple Core Portfolio and Fund III properties during 2012, including properties in New York, Washington, D.C., Chicago and Massachusetts. Acquisition spending was $137.2 million for the first nine months.
Fund I and Fund III completed property dispositions during 2012, producing $8.6 million of consolidated gains for the first nine months. This was materially below the $32.5 million of gains recorded in the 2011 comparable period.
Common shares outstanding increased from 42.6 million at December 31, 2011 to 47.1 million at September 30, 2012, primarily reflecting ATM issuance and other equity activity.

Outlook, Commentary, Risks and Unusual Items

Management’s stated strategy is to grow through Core Portfolio acquisitions and redevelopment, Opportunity Fund investments, and disciplined use of equity, debt and third-party capital.
Properties under contract totaled approximately $175.3 million, but most remained under due diligence and were subject to customary closing conditions and lender approval; completion was not assured.
Remaining costs for identified re-anchoring projects were estimated at $4.0 million to $6.0 million.
The company had $107.3 million of unfunded capital commitments in Fund III and $411.2 million in Fund IV at September 30, 2012. Fund III’s future capital commitments had been reduced to $134.0 million following the launch of Fund IV.
The Mervyns litigation was settled in Q3. The Investor Consortium settlement payment was $163.7 million, with an estimated net cost of $143.6 million after cash at the investee level. Mervyns I and II’s combined contribution was approximately $0.9 million, and Acadia recorded a $1.7 million charge, of which the Operating Partnership’s after-tax share was approximately $0.2 million.
A mortgage loan with a balance of approximately $23.5 million was in maturity default as of September 30, 2012. The company had commenced foreclosure proceedings and a receiver had been appointed; it had recorded an allowance for notes receivable of $8.4 million, including a $5.1 million provision during the first nine months.
The company was pursuing insurance claims related to a flood-damaged property. It had received approximately $6.9 million of initial insurance proceeds, but final claims had not been completed.
Management stated that no material property impairment existed as of September 30, 2012 and that previously disclosed risk factors had not materially changed. Key risks include refinancing and leverage, interest rates, real estate market conditions, development and acquisition execution, joint ventures, tenant credit, insurance recovery, litigation and REIT distribution requirements.
Subsequent to quarter-end, the company acquired a Home Depot property for $12.5 million, completed an approximately $86.9 million public share offering, and Fund III refinanced 11 self-storage facilities for $120.0 million and terminated its subscription line.

Investor Verification Points

Verify the company’s ability to refinance or repay the $94.5 million of 2012 debt maturities and the $170.4 million due in 2013.
Assess recurring operating performance separately from property-sale gains, discontinued operations and the Mervyns-related charge.
Reconcile reported FFO and same-store NOI with company-defined non-GAAP measures and evaluate comparability with other REITs.
Monitor occupancy, lease spreads, tenant credit losses and the execution and remaining costs of redevelopment and re-anchoring projects.
Review the credit quality and collateral supporting the $78.8 million notes receivable, including the maturity-defaulted Brooklyn loan.
Evaluate dilution from ATM and public equity issuance against acquisition growth and funding needs.
Track Fund III and Fund IV capital calls, investment deployment, noncontrolling-interest economics and potential promote income.
Confirm the resolution and insurance recovery status of the flood-damaged property and any remaining Mervyns-related obligations.