AKR

Business Context and Reporting Period

Company: Acadia Realty Trust (ACADIA)

Filing Type: Form 10-K (Annual Report)

Period Ended: December 31, 2005

Business Overview: Acadia is a fully integrated, self-managed equity REIT focused on the ownership, acquisition, redevelopment, and management of retail properties, primarily neighborhood and community shopping centers and mixed-use properties. As of December 31, 2005, the Company operated 71 properties (wholly-owned and joint ventures) totaling approximately 10 million square feet, concentrated in the Northeast, Mid-Atlantic, and Midwestern United States. The Company utilizes an "UPREIT" structure, holding assets through the Acadia Realty Limited Partnership.

Key Financial Metrics

Liquidity: As of December 31, 2005, the Company held $39.6 million in cash and cash equivalents and had approximately $48.4 million of additional borrowing capacity under existing debt facilities. The Company maintains a strong balance sheet with 91% of its mortgage debt fixed-rate (inclusive of swaps).

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 16% to $83.3 million, driven by a 140% increase in management fee income (due to Fund II asset management fees and Klaff contract acquisitions) and a 140% increase in interest income (from preferred equity investments and notes receivable).
• Net Income: Net income rose 5% to $20.6 million. This growth was supported by a significant increase in "Equity in earnings of unconsolidated partnerships" (up 356% to $8.2 million), largely due to the Company's share of gains from the sale of Mervyn's locations and bankruptcy proceeds from Penn Traffic.
• Discontinued Operations: The Company reported a loss of $0.9 million from discontinued operations in 2005, compared to income of $6.1 million in 2004. The 2004 figure included a $6.7 million gain on the sale of the East End Centre.
• Debt Expansion: Total mortgage indebtedness increased by $85 million (55%) to $238.4 million to fund acquisitions and joint venture commitments. Despite the increase, the weighted average interest rate remained stable at 5.8% due to hedging strategies.
• Dividend Increase: The quarterly dividend was increased by 7.2% in the fourth quarter of 2005 to $0.1850 per share.

Guidance, Outlook, and Risks

Management Commentary & Strategy:

• Acquisition Strategy: The Company continues to pursue growth through its joint ventures, specifically Fund II (with $300 million committed capital) and the Retailer Controlled Property (RCP) Venture. Recent activities include investments in the Mervyn's portfolio and New York urban infill redevelopment projects.
• Capital Allocation: Management intends to maintain a strong balance sheet to fund property redevelopment and acquisitions. Sources of capital include cash on hand, debt financings, and equity issuances (with $46.7 million remaining capacity under shelf registration).
• Dividend Policy: The Company aims to distribute at least 90% of taxable income to maintain REIT status. For 2005, 95% of dividends were characterized as ordinary income.

Risks and Contingencies:

• Tenant Bankruptcy: Significant exposure to major tenants. The filing of Chapter 11 by Levitz Furniture (a preferred equity investment target) and previous bankruptcies of Penn Traffic and KB Toys pose risks to cash flow and lease renewals.
• Joint Venture Risks: Limited control over joint venture investments (Funds I and II) and potential conflicts of interest with partners.
• Interest Rate Risk: While 91% of debt is fixed, the Company has variable-rate exposure. A 100 basis point increase in rates would increase interest expense by approximately $0.2 million annually on variable debt.
• REIT Qualification: Failure to qualify as a REIT would subject the Company to corporate income tax and reduce cash available for distribution.

Unusual Items:

• Accountant Change: The Audit Committee replaced Ernst & Young LLP with BDO Seidman, LLP effective October 6, 2005, primarily to reduce accounting service costs. No disagreements were reported.
• Impairment: An impairment loss of $0.8 million was recognized in 2005 related to the Berlin Shopping Center prior to its sale.

Investor Verification Checklist

• Joint Venture Performance: Verify the specific cash flow contributions and "Promote" income from Fund I and Fund II, which significantly impacted 2005 earnings.
• Levitz Investment Status: Confirm the current status of the $20 million preferred equity investment in Levitz SL following the tenant's Chapter 11 bankruptcy filing in October 2005.
• Debt Maturities: Review the schedule of debt maturities, noting $16.4 million due in 2007 and the Company's plan to refinance rather than repay from cash on hand.
• Dividend Sustainability: Assess whether the increased dividend rate ($0.1850 quarterly) is sustainable given the volatility in discontinued operations and joint venture income.
• Accounting Firm Transition: Review the audit report from the new auditor (BDO Seidman) for any qualifications or emphasis of matter regarding the transition.