AKR

Business Context and Reporting Period

Company: Acadia Realty Trust (REIT)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2006
Business Overview: A fully integrated, self-managed REIT focused on neighborhood and community shopping centers, primarily in the Northeast, Mid-Atlantic, and Midwest. The Company operates 76 properties (74 retail, 2 multi-family). As of September 30, 2006, there were 31,772,952 common shares outstanding.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue: Total revenues for the nine months ended September 30, 2006, were $74.6 million, a decrease of 1.7% from $75.9 million in the prior year. However, on an adjusted basis excluding the Brandywine Portfolio (which was consolidated in 2005 but equity-accounted in 2006), revenues increased 17% to $74.6 million from $64.0 million.
• Net Income: Net income decreased to $13.3 million from $16.0 million in the prior year. This decline is largely attributable to the absence of significant gains from the sale of Mervyns assets in 2005 and the change in accounting treatment for the Brandywine Portfolio.
• Operating Expenses: General and administrative expenses increased significantly by 51% (adjusted) to $15.9 million, driven by increased compensation ($4.5 million) and infrastructure expansion related to Fund assets.
• Equity in Earnings: Equity in earnings of unconsolidated affiliates dropped from $18.9 million in 2005 to $4.3 million in 2006, primarily due to the lack of Mervyns asset sale gains in the current period.
• Debt: Total mortgage notes payable decreased to $388.5 million from $411.0 million at year-end 2005. The Company refinanced the Brandywine Portfolio for $166.2 million in 2006.

Outlook, Risks, and Unusual Items

• Accounting Changes: Effective January 1, 2006, the Company adopted EITF 04-5, consolidating Fund I, Fund II, Mervyns I, and Mervyns II. Historical periods were restated retrospectively. The Brandywine Portfolio was recapitalized in January 2006; the Company retained a 22.2% interest and now accounts for it under the equity method, whereas it was consolidated in 2005.
• Dividends: A quarterly dividend of $0.185 per Common Share and Common OP Unit was declared for the quarter ended September 30, 2006, paid on October 13, 2006.
• Subsequent Event: On November 3, 2006, the Company sold the Bradford Towne Center (a discontinued operation) for $16.5 million, intending to defer taxable gain under Section 1031.
• Liquidity: The Company has approximately $23.1 million of additional capacity under existing debt facilities and $92.1 million under Fund II facilities. Cash on hand (including Funds) was $69.0 million.
• Risks: Primary market risk is exposure to interest rate changes on mortgage debt. Approximately 84% of the portfolio is fixed-rate, while 16% is floating. The Company uses interest rate swaps to hedge exposure.

Investor Verification Checklist

• Brandywine Portfolio Accounting: Verify the impact of the shift from consolidation to equity method accounting on comparability of 2005 vs. 2006 results.
• Mervyns Investment: Review the status of the Mervyns investment (RCP Venture) and the timing of future distributions, as 2005 results were heavily influenced by asset sales.
• Debt Maturities: Confirm refinancing plans for the $54.9 million of debt maturing in 2007.
• Levitz Loan: Monitor the $10.9 million mortgage loan to Levitz SL (converted from preferred equity), given Levitz Furniture's Chapter 11 bankruptcy status.
• Discontinued Operations: Track the sale of remaining properties held for sale (Soundview Marketplace, Pittston Plaza, etc.) and the realization of gains.