Acadia Realty Trust Annual Report 2001 Real Strategies for Real Growth Acadia Realty Trust is a fully integrated, self-managed and self-administered equity real estate investment trust traded on the New York Stock Exchange under the symbol AKR. Acadia specializes in the acquisition, management, leasing and repositioning of neigh- borhood and community shopping centers. The Company operates 52 properties primarily located in the Eastern and Midwestern regions of the United States and encompassing 9.5 million square feet. New Loudon Center, Latham, NY Bradford Towne Centre, Towanda, PA 239 Greenwich Avenue, Greenwich, CT Walnut Hill Plaza, Woonsocket, RI On the Cover: Left to Right Ledgewood Mall, Ledgewood, NJ Abington Towne Center, Abington, PA Pacesetter Park Shopping Center, Pomona, NY Financial Highlights In thousands, except share data Total Revenues Funds from Operations2 Real Estate Owned at Cost 2001 2000 1999 1998 1 1997 $ 85,460 $ 29,513 $ 414,813 $ 96,758 $ 31,789 $514,139 $ 92,709 $ 31,160 $569,521 $ 59,771 $ 10,352 $551,249 $44,498 $ 11,224 $311,688 Common Shares Outstanding 3 28,697,666 28,150,472 25,724,315 25,419,215 8,554,177 Operating Partnership Units Outstanding 3 5,249,717 6,804,144 10,484,143 11,184,143 1,623,000 1Activity for the year ended December 31, 1998 includes the operations of the properties acquired in the RDC Transaction from August 12, 1998 through December 31, 1998. 2NAREIT defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsoli- dated partnerships and joint ventures. Effective January 1, 2000, NAREIT clarified the definition of FFO to include non-recurring events except those that are defined as extraordinary items under GAAP. FFO for the years ended December 31, 1998 and 1997 have been restated to conform to this revised definition. 3These amounts are as of the end of the year. Subsequent to December 31, 2001, the Company com- pleted a “Modified Dutch Auction” share buyback whereby the Company repurchased 4,136,321 Common Shares and 1,387,653 Operating Partnership Units. Letter to Shareholders Year 2001 was an important year of accomplishment for Acadia Realty Trust. The major initiatives that we started three years ago when our new management team was brought in to execute a turnaround program are now complete. We have achieved the turnaround at the real estate level, setting in motion other essential components of our business plan for growth. Our core portfolio is leaner and more focused, and our balance sheet is stronger, providing us with the base necessary for moving forward. And, with the launch of our acquisition joint venture in 2001, we now have access to the substantial capital necessary to fund ongoing growth. Portfolio Strategy Three years ago, our team put two of the major operational initiatives of our business plan into action — a redevelopment/re-anchoring program and a non-core disposition program. The goal was to establish a sound core port- folio of shopping centers that would serve as a solid foundation on which to build for the future. Generally, our core properties have strong national anchors, are well located in high barrier-to-entry markets, and have anchor rents at, or below, market. Our shopping centers are focused on necessity- based retail, providing our core portfolio with stability during economic downturns. Two-thirds of our shopping centers are anchored by supermarkets, while the remaining properties are anchored by discount retailers, such as Wal-Mart, Target, Kmart and TJ Maxx. Redevelopments Two newly redeveloped shopping centers were added to our operating portfolio during 2001. In October, the Abington Towne Center in suburban Philadelphia was completed with the addition of Target as the new anchor tenant. Just north of Boston, the redevelopment of the Methuen Shopping Center was completed with the Wal-Mart opening in September 2001. Acadia Realty Trust | 2001 Annual Report 1 Kenneth F. Bernstein President and Chief Executive Officer “Acadia Realty Trust is well positioned for growth.” Two properties remain in our redevelopment pipeline. There is the Gateway Capital Strategy Shopping Center in South Burlington, Vermont, where we are demolishing Year 2001, we completed a major initiative that secured the capital necessary the existing mall and constructing a new Super Shaw’s supermarket to for future growth — the formation of a joint venture with four of our largest anchor the shopping center. As you can see on page 6, our second redevelop- institutional shareholders. The investment vehicle, Acadia Strategic Oppor- ment — the Elmwood Park Shopping Center — is nearing completion follow- tunity Fund, will enable us to acquire up to $300 million in shopping centers ing the demolition of an office tower and attached retail stores which we are — a goal that is entirely consistent with our growth strategy. We are extremely replacing with a modern-format shopping center. Development activities on pleased with the strong endorsement of these institutional investors. Their both of these projects are well underway; we anticipate both to be opera- support and confidence allows us to be patient and discretionary in our tional in 2003. Dispositions Our second major portfolio initiative was the disposition of non-core assets. Once we have completed the sale of a 17-property group that is currently under contract for sale to a single buyer, we will have sold 26 properties over three years. The primary goal of this program was to establish a fundamen- tally sound portfolio of shopping centers that can serve as our core for future growth. It has also allowed us to reduce exposure to troubled retailers, most notably Kmart and Ames. For example, Ames — once the second largest ten- ant in our portfolio — will drop to the seventh-largest position in our portfo- lio following the closing of the above-mentioned sale. Also included in the assets targeted for sale were several residential properties, which we sold opportunistically at a significant profit to Acadia. acquisitions. Since all of these investors are currently significant shareholders in Acadia, this venture represents a highly beneficial alignment of interests and economic incentives for all of our shareholders. This joint venture structure is a superior acquisition platform for enhancing shareholder value. It enables us to leverage our management team’s talent and our precious capital in a manner that holds potentially superior returns for our shareholders. At the same time, it allows us to maintain the strength of our balance sheet. The completion of our “Dutch Auction” share buyback program was another accomplishment in effectively managing our capital base. We repur- chased 5.5 million shares at $6.05 a share — a price we believe to be highly accretive to our remaining shareholders. It also provided added liquidity for some larger shareholders, significantly diffusing overhang issues related to our shares. Town Line Plaza, Rocky Hill, CT 2 Acadia Realty Trust | 2001 Annual Report Greenridge Shopping Center, Scranton, PA Soundview Marketplace, Port Washington, NY Village Commons Shopping Center, Smithtown, NY Growth Strategy From the Chairman The combination of several exhibit less volatile cash flows and swings in events in the U.S. during net asset value through economic downturns. 2001 created a challenging Why is Acadia positioned to provide total environment for shopping returns in excess of the averages produced center owners and generally by the sector over the next few years? First, all business owners. During our new joint venture provides management Acadia Realty Trust is well positioned for growth in 2002 and beyond. Our the year, the economy offi- the opportunity to invest externally sourced real estate portfolio is strong and focused. Yes, we have recently entered a difficult economic period, and no one knows how robust the recovery will be when it arrives. The company is postured for growth and, given the defen- sive nature of our portfolio, we are also well positioned for difficult times. Our balance sheet is also strong following reductions in high-cost debt related to property dispositions — and now we also have access to a consid- erable stream of capital for growth, based on our recent joint venture. Last, but by no means least, we have in place a strong management team with a proven record of successfully executing our business plan — at both the real estate and capital market levels. With all these factors in place, I look forward to 2002 and remain stead- fast in my commitment to maximize your value in our Company. I thank our shareholders, our tenants and our team for their continued support, which Ross Dworman Chairman of the Board cially entered a recession, institutional capital through a “promote” the equity (stock) markets structure earning fees that increase return declined for the second on equity. Few of our competitors have attrac- straight year, and the September 11th disaster tive external sources of capital available. created additional hurdles. Second, our management team continually What is the current outlook for the shop- evaluates opportunities to maximize return ping center sector? 2002 will be a period to on equity as evidenced by our willingness protect net asset value, as many owners will to buy back large amounts of stock during be faced with the challenge of retenanting periods where share price lags underlying as some retailers struggle with profit mar- net asset value. Third, our stock is just cheap. gins and close stores. Historically, given the In the future, as management implements quality of our locations and properties along mechanisms to maximize shareholder value, with the strength of our management team, and our share price bridges the “gap” to net Acadia has generally derived profits from asset value, the “gap,” when added to the has enabled us to realize the successful completion of a most exciting turn- these types of situations. dividends and earnings growth rates, will around of Acadia. Kenneth F. Bernstein President and Chief Executive Officer What total returns can investors expect provide a superior return. from the strip center sector over the next And finally, our CEO, Ken, has spent 11 few years? The strip center companies will, years carefully assembling a great manage- on average, earn total annual returns of ment team necessary to run a successful 10% – 12% derived from dividends of 7% and public company. earnings growth rates which have stabilized in the range of 3% – 5% (this analysis assumes constant earnings multiples). However, strip center REITs are well positioned to outper- form many other real estate sectors since Thank you for your support. strip centers have a higher percentage of Ross Dworman long-term, fixed-rate leases and therefore Chairman of the Board Blackman Plaza, Wilkes-Barre, PA Acadia Realty Trust | 2001 Annual Report 3 Redevelopment Strategy: Creating Value Our redevelopment strategy is to create value through the aggressive repositioning of assets. Key to our repeated success with this strategy is the careful targeting of the right assets for redevelopment — assets that are well located but in need of significant reconfiguration or re-anchoring. Redevelopment of physical plants has ranged from expanding existing undersized supermarkets to the demolition of an outdated mall and transforming it into a vibrant shopping center. Our leasing group plays an integral role in the successful implementation of our redevelopment strategy by assessing and achieving just the right tenant mix. Time and again, and further demonstrated in this year’s completed projects, our entire team’s depth of expertise and experience has resulted in exceptional “value added” solutions. To provide a clearer picture of our redevelopment strategy and its implementation, here is one case history. Abington Towne Center The Redevelopment Opportunity Formerly known as the Atrium Mall, this asset is located in the densely populated, affluent suburban Philadelphia community of Abington. Originally, it was configured as a three-story mall that was anchored by A&P Supermarket, TJ Maxx and Circuit City (see photo on right). The opportunity that we recognized — increase the value of this well- located asset and generate a superior return on our investment through a “de-malling” and re-anchoring of the center. The Redevelopment Plan A key tenanting decision was made to anchor this center with the right retailer, and we considered a new Target store to be the perfect fit. Testament to the asset’s location quality was Target management’s willing- ness to operate on two floors. Accomplishing our plan required that we terminate two anchor leases and relocate the third anchor (TJ Maxx). The result: Following the opening of the new TJ Maxx store in late 2000, Target opened its store for business on the two upper levels in October 2001. The Value Created The successful redevelopment of the Abington Towne Center resulted in a 30% return on our incremental investment (including downtime). A second redevelopment project at the Methuen Shopping Center was also completed this year (see page 8 for details). These successful projects join our growing list of previously completed projects — the Town Line Plaza in Rocky Hill, Connecticut, the Village Commons Shopping Center in Smithtown, New York, and 239 Greenwich Avenue in Greenwich, Connecticut. Two additional projects are currently in the “pipeline” with completion anticipated during 2003 — the Elmwood Park Shopping Center in Elmwood Park, New Jersey, and the Gateway Shopping Center in South Burlington, Vermont. 4 Acadia Realty Trust | 2001 Annual Report Abington Towne Center, Philadelphia, Pennsylvania. This successful redevelop- ment resulted in a 30% return on our incremental investment. Left to right: the property prior to redevelopment, during construction, and following completion. From Left to Right Carol A. Smrek Vice President, Counsel Joseph Hogan Sr. Vice President, Director of Construction Timothy J. Bruce Sr. Vice President, Director of Leasing Acadia Realty Trust | 2001 Annual Report 5 Leasing Strategy: Adding Value Elmwood Park Shopping Center, Elmwood Park, New Jersey. Scheduled for completion in 2003, this project demonstrates how we add value to a property. Left to right: the previous anchor (Grand Union), which will be replaced by a new Pathmark, the construction phase, and the newly expanded Walgreens. From Left to Right Joseph Povinelli Vice President of Leasing Robert Masters Sr. Vice President, General Counsel, Corporate Secretary 6 Acadia Realty Trust | 2001 Annual Report Our leasing strategy is to create value by repositioning and replacing anchor tenants as part of our redevelop- ment program, and to maximize value at stabilized properties through an aggressive program of ongoing leas- ing that seeks out the best possible tenants. Our leasing group is also closely involved in the underwriting of acquisitions, evaluating the existing tenants and the future leasing prospects given the configuration of, and the market position of the asset. Because our tenants are a key constituency, we are constantly focused on maximizing the tenant mix and the resulting synergies for each of our shopping centers. So we invest the time and resources necessary to under- stand their businesses by carefully separating significant trends (e.g., the expansion of grocery stores) from fads (e.g., the “super-sizing” of virtually every other retail concept). When necessary — and when value for our shareholders is enhanced — we are ready and financially willing to respond to the changing times and needs of our valued tenants. Elmwood Park Shopping Center Leasing Achievement Here is a case history that typifies our effectiveness when employing our leasing strategy of adding value. In December, 2001 our leasing group secured a new anchor at the Elmwood Park Shopping Center, located in Elmwood Park, New Jersey (about ten miles west of New York City). The new tenant, Pathmark Stores, commit- ted to a new 50,000-square-foot supermarket, replacing an undersized Grand Union at a new rent that is five times the previous rent. We have also completed the expansion of an existing Walgreens at this center during the past year. Despite having an outdated drug store format, this Walgreens has consistently generated well- above-average sales: more than $600 per square foot. Now this tenant has a state-of-the-art drug store that includes a drive-through pharmacy to continue its strong performance as this successful location. The Value Created When we bring the Elmwood Park Shopping Center fully online during 2003, we will generate, approxi- mately, an additional three cents per share in funds from operations and a 16% return on our incremental investment (including downtime). Other property re-anchorings during 2001 included a Giant Supermarket (a subsidiary of Ahold) at the Greenridge Shopping Center, Marshalls (a division of TJX Companies) at the Bloomfield Towne Square and Home Depot at the Crescent Plaza. Each project represents a clear and consis- tent demonstration of our leasing team’s exceptional ability to add value for our shareholders. Acadia Realty Trust | 2001 Annual Report 7 Acquisition Strategy: Opportunistic Growth Our acquisition strategy is to identify well-located assets with inherent opportunity for the creation of added value through redevelopment and leasing. Our successes in this area are a result of targeting assets with superior locations, restricted competition due to high barriers of entry and below-market anchor leases in place. Our primary emphasis on these key attributes, as opposed to the current tenancy of a property, is essential for success as specific tenants will come and go based on the constant evolution in retail. In fact, we often seek to acquire centers with weak anchors because they represent the greatest “upside” opportunity to release space at increased rents. In 2001, this strategy proved successful once again with the completion of yet another project. Methuen Shopping Center The Acquisition Opportunity The Methuen Shopping Center operates as both a neighborhood center (with strong supermarket and drug sales) and as a community center, given its excellent highway access. When acquired, the center was 100% occupied by four tenants — Caldor, DeMoulas Market Basket, Osco Drug and Fleet Bank. Our review showed that opportunity existed to create additional asset value and shareholder return by replacing the largest anchor (Caldor), which was paying rent of $2.20 per foot. The Value Added Following Caldor’s anticipated bankruptcy, the Company purchased this lease in 1999. During 2001, we re-anchored this center with a 90,000-square-foot Wal-Mart, which now pays over three times the rent paid by Caldor. Factoring in all costs associated with the replacement of Caldor, including all downtime, we increased the value of our asset by $2.3 million, which represents an incremental investment yield of 25%. Our New Vehicle for Growth This past year, an important step was taken to provide us with the continuing capital necessary to implement our ongoing acquisition program. A new joint venture with four of our key institutional investors was formed in October 2001. Through this vehicle, Acadia will seek to acquire up to $300 million of real estate assets — focusing on neighborhood and community shopping centers. This investment vehicle provides an exception- ally strong alignment of interest between the JV and our shareholders because Acadia will earn a pro-rata return on its invested equity, as well as important profit participation. The launching of this acquisition joint venture means we have the discretionary capital to drive our earnings growth in 2002 and beyond. 8 Acadia Realty Trust | 2001 Annual Report From Left to Right Maggie Hui Vice President, Controller Joseph M. Napolitano Sr. Vice President, Director of Property Management Joel Braun Sr. Vice President, Acquisitions Methuen Shopping Center, Methuen, Massachusetts. We re-anchored this center in 2001 with a 90,000-square- foot Wal-Mart, which now generates over three times the rent paid by the previous anchor, Caldor. Acadia Realty Trust | 2001 Annual Report 9 Asset and Capital Management Strategy: Significant achievements during 2001 included the realization of several key objectives involving both our asset and capital bases, providing additional leverage for the gains achieved in all operating programs. From Left to Right Jon Grisham Vice President, Director of Financial Reporting Robert D. Scholem Vice President, Property Management Perry Kamerman Sr. Vice President, Chief Financial Officer Healthy Balance Sheet: Total Market Capitalization* 6% Common OP Units 1% Preferred OP Units 26% Variable-Rate Debt 28% Fixed-Rate Debt 39% Common Shares Strong Institutional Support: Acadia’s Owners* 2% Other OP Unitholders 4% Employee/Director OP Unitholders 17% Retail Shareholders 77% Institutional Shareholders and OP Unitholders * The above graphs include the effects from the completion of the Company's tender offer in February 2002 for a total of 5,523,974 Common Shares. Of this amount, 1,387,653 Common Shares were the result of the conversion of Operating Partnership (OP) units into Common Shares on a one-for-one basis. Fixed-rate debt includes $50 million of notional principal fixed through swap transactions and conversely, variable-rate debt excludes this amount. 10 Acadia Realty Trust | 2001 Annual Report Maximizing Value Effective management of assets and capital has been fundamental to our success, providing us with the strong platform necessary for the effective operation of our acquisition, development and leasing programs. During 2001, we achieved several key objectives involving both our asset and capital bases, providing additional leverage for the gains achieved in all operating programs. Dispositions Deciding when to hold or sell particular assets is essential to our strategy of maximizing the return on capital invested in assets. We constantly review and evaluate our portfolio for disposition opportunities. When appro- priate, we recycle capital for reinvestment in assets with the potential for yet higher yields. Evaluations are conducted at the individual asset level, as well as over portfolio segments according to geographic and market considerations. Assets are evaluated and identified based on specific criteria, including: property type, location, tenant mix, and whether a property complements other assets in the portfolio. Serving as highly effective tools during these analyses are our information systems, which fully integrate property accounting, manage- ment, budgeting and valuation functions. Non-core Disposition Initiatives A significant component of our 2001 business plan was to refocus our retail portfolio through the disposition of non-core properties. Since commencing this initiative, 26 properties have either been sold or placed under contract for sale. In addition to selling non-core properties, we have opportunistically sold two residential properties for a total of $62 million — generating a cash profit of $15 million on an $11 million equity invest- ment over a three-year hold period. Share Buyback In addition to our asset management achievements, we have successfully executed on the capital manage- ment aspect of our business plan. We have already discussed the capital pipeline that was established through our new joint venture (see page 2). We also completed a second capital initiative — our “Dutch Auction” share buyback program in February 2002. The repurchase of our own stock represented a compelling investment as our stock was trading at a discount to net asset value. We bought 5.5 million shares at $6.05 a share, for a total investment of $33 million. We believe this repurchase program represents an excellent use of our capital, one that has helped to maximize value for our shareholders. Acadia Realty Trust | 2001 Annual Report 11 N WI MI ME VT NH NY MA CT RI IL OH PA NJ DE MD DC IN KY TN MS AL GA MO AR LA VA NC WV SC FL Headquarters Regional Offices Neighborhood and Community Shopping Centers Residential Properties Currently Under Contract For Sale 12 Acadia Realty Trust | 2001 Annual Report Retail Properties Midway Plaza Opelika, AL Northside Mall Dothan, AL 239 Greenwich Avenue Greenwich, CT Town Line Plaza Rocky Hill, CT New Smyrna Beach Shopping Center New Smyrna Beach, FL Cloud Springs Plaza Fort Oglethorpe, GA Hobson West Plaza Naperville, IL Merrillville Plaza Hobart, IN Crescent Plaza Brockton, MA Methuen Shopping Center Methuen, MA Bloomfield Town Square Bloomfield Hills, MI Berlin Shopping Center Berlin, NJ Elmwood Park Shopping Center Elmwood Park, NJ Ledgewood Mall Ledgewood, NJ Manahawkin Village Shopping Center Manahawkin, NJ Marketplace of Absecon Absecon, NJ The Branch Plaza Smithtown, NY Crossroads Shopping Center White Plains, NY New Loudon Center Latham, NY Pacesetter Park Shopping Center Pomona, NY Soundview Marketplace Port Washington, NY Troy Plaza Troy, NY Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH 25th Street Plaza Easton, PA Abington Towne Center Abington, PA Ames Plaza Shamokin, PA Birney Mall Moosic, PA Blackman Plaza Wilkes-Barre, PA Bradford Towne Centre Towanda, PA Circle Plaza Shamokin Dam, PA Dunmore Plaza Dunmore, PA East End Centre Wilkes-Barre, PA Greenridge Plaza Scranton, PA Kingston Plaza Kingston, PA Luzerne Street Shopping Center Scranton, PA Mark Plaza Edwardsville, PA Monroe Plaza Stroudsburg, PA Mountainville Shopping Center Allentown, PA Pittston Plaza Pittston, PA Plaza 15 Lewisburg, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Shillington Plaza Shillington, PA Valmont Plaza West Hazleton, PA Walnut Hill Plaza Woonsocket, RI Martintown Plaza North Augusta, SC Kings Fairground Danville, VA The Gateway Shopping Center South Burlington, VT Multi-Family Properties Colony Apartments Columbia, MO GHT Apartments Columbia, MO Village Apartments Winston-Salem, NC Trustees and Corporate Officers Trustees Ross Dworman Chairman of the Board Kenneth F. Bernstein President and Chief Executive Officer Martin L. Edelman, Esq. Of Counsel to Paul, Hastings, Janofsky & Walker, LLP Marvin J. Levine, Esq. Of Counsel to Wachtel & Masyr, LLP Lawrence J. Longua Sr. Vice President Koeppel Tenner Real Estate Services, Inc. Gregory A. White Sr. Vice President Conning Asset Management Co. Lee S. Wielansky President and Chief Executive Officer JDN Development Company, Inc. Senior Officers Kenneth F. Bernstein President and Chief Executive Officer Joel Braun Sr. Vice President, Acquisitions Timothy J. Bruce Sr. Vice President Director of Leasing Joseph Hogan Sr. Vice President Director of Construction Perry Kamerman Sr. Vice President Chief Financial Officer Robert Masters, Esq. Sr. Vice President General Counsel Corporate Secretary Joseph M. Napolitano Sr. Vice President, Director of Property Management k r o Y w e N , s e t a i c o s s A r e l d A n a t S : n g i s e D d n a t p e c n o C Shareholder Information Corporate Headquarters Stock Exchange Acadia Realty Trust 20 Soundview Marketplace Port Washington, NY 11050-2221 Tel: 516.767.8830 Internet Address Visit us online at www.acadiarealty.com for more information about Acadia Realty Trust and its real estate portfolio. The 2001 Annual Report is available online, as well as current news and quarterly financial and operational supplementary information. New York Stock Exchange Symbol: AKR Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 Tel: 877.777.0800 website: http://www.amstock.com email: info@amstock.com Legal Counsel Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Independent Auditors Ernst & Young LLP 1211 Avenue of the Americas New York, NY 10036 Investor Relations Jon Grisham Vice President Tel: 516.767.8830 ext. 342 Fax: 516.767.8834 email: jgrisham@acadiarealty.com Annual Meeting The annual meeting will be held on May 16, 2002 at 10:00 am at the offices of Paul, Hastings, Janofsky & Walker, LLP, Park Avenue Tower, 75 East 55th Street, New York, NY 10022. A copy of the Company’s annual report and Form 10-K filed with the Securities and Exchange Commission may be obtained with- out charge by contacting Investor Relations. Dividend Reinvestment Acadia Realty Trust offers a dividend reinvest- ment plan that enables its shareholders to automatically reinvest dividends as well as make voluntary cash payments toward the purchase of additional shares. To participate, contact Acadia Realty Trust’s dividend reinvestment agent at 800.937.5449 ext. 6820 or write to: American Stock Transfer & Trust Company Attn: Dividend Reinvestment Dept. 59 Maiden Lane Plaza Level New York, NY 10038 For further information contact Investor Relations. 20 Soundview Marketplace Port Washington, NY 11050-2221 Tel: 516.767.8830 Left to Right Mad River Station, Dayton, OH Marketplace of Absecon, Absecon, NJ Ledgewood Mall, Ledgewood, NJ Acadia Realty Trust Selected Financials 2001 Left to Right Ledgewood Mall, Ledgewood, NJ Abington Towne Center, Abington, PA Pacesetter Park Shopping Center, Pomona, NY Contents 1 Management’s Discussion and Analysis 11 Report of Independent Auditors 12 Consolidated Balance Sheets 13 Consolidated Statements of Income 14 Consolidated Statements of Shareholders’ Equity 15 Consolidated Statements of Cash Flows 17 Notes to Consolidated Statements Management’s Discussion and Analysis Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements of the Com- pany (including the related notes thereto) appearing elsewhere in this Annual Report. Certain statements contained in this report constitute forward-looking statements within the meaning of the Private Securi- ties Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncer- tainties, and other factors which may cause the actual results, performance or achievements of the Company decreases was an increase in rents from retenanting activities and rent step-ups for existing tenants through- out the balance of the portfolio during 2000 and 2001. Percentage rents decreased $718,000, or 24%, to $2.3 million for 2001 compared to $3.0 million for 2000. This decrease was primarily attributable to Property Disposi- tions and certain tenants paying percentage rent in lieu of minimum rent in 2000 pursuant to anchor co-ten- ancy lease provisions. These tenants have reverted to paying full minimum rent in 2001. Additionally, certain tenant bankruptcies contributed to lower percentage rent income in 2001. to be materially different from any future results, per- In total, expense reimbursements decreased $462,000, formance or achievements expressed or implied by or 3%, from $14.2 million for 2000 to $13.8 million such forward-looking statements. Such factors include, for 2001. Common area maintenance (CAM) expense among others, the following: general economic and reimbursements decreased $687,000, or 11%, from $6.0 business conditions, which will, among other things, million in 2000 to $5.3 million in 2001. This resulted affect demand for rental space, the availability and primarily from a decrease in reimbursements following creditworthiness of prospective tenants, lease rents the planned termination of certain leases and the sale and the availability of financing; adverse changes in of 160,000 square feet of the main building at the the Company’s real estate markets, including, among Abington Towne Center in connection with its redev- other things, competition with other companies; risks elopment commencing in 2000, and from Property of real estate development and acquisition; govern- Dispositions. Real estate tax reimbursements increased mental actions and initiatives; and environmental/ $225,000, which was primarily the result of general safety requirements. increases in real estate taxes experienced throughout Results of Operations Comparison of the year ended December 31, 2001 (2001) to the year ended December 31, 2000 (2000) Total revenues decreased $11.3 million, or 12%, to $85.5 million for 2001 compared to $96.8 million for 2000. Minimum rents decreased $7.1 million, or 10%, to $67.0 million for 2001 compared to $74.1 million for 2000. Of this decrease, $8.0 million was due to the loss of rents following the sale of the Northwood Centre (December 2000), Marley Run Apartments (May 2001), Wesmark Plaza (August 2001), Tioga West (October 2001) and Glen Oaks Apartments (December 2001) (collectively, Property Dispositions). Partially offsetting these the portfolio in 2001. Other income decreased $3.0 million, or 56%, from $5.3 million in 2000 to $2.3 million in 2001. This was prima- rily the result of a decrease of $2.2 million in lease ter- mination income (primarily at the Abington Towne Center), a $174,000 decrease in third-party manage- ment fees earned in 2001 following the cancellation of one management contract in November 2000 and Property Dispositions. Total operating expenses increased $12.3 million, or 21%, to $72.5 million for 2001, from $60.2 million for 2000. Excluding charges of $15.9 million for the impairment of real estate, total operating expenses decreased $3.6 million, or 6% for 2001. Acadia Realty Trust | 2001 Selected Financials 1 Management’s Discussion and Analysis continued Property operating expenses decreased $2.8 million, or following certain loan payoffs, primarily as a result of 12%, to $20.4 million for 2001 compared to $23.2 million Property Dispositions, during 2000 and 2001. for 2000. This decrease resulted primarily from Property Dispositions, a decrease in non-recurring repairs and maintenance expense experienced throughout the port- folio and a reduction in estimated property liability claims related to prior year policies. These decreases were partially offset by higher payroll costs and an increase in bad debt expense in 2001. Real estate taxes decreased $259,000, or 2%, from $11.5 million in 2000 to $11.2 million in 2001. This net decrease was the result of a decrease in taxes following Property Dispositions and the partial sale at the Abington Towne Center as discussed above, offset by higher real estate taxes experienced generally throughout the portfolio in 2001. General and administrative expense increased $499,000, or 10%, from $5.1 million for 2000 to $5.6 million for 2001, which was primarily attributable to an increase in third-party professional fees in 2001. Depreciation and amortization decreased $982,000, or 5%, from $20.5 million for 2000 to $19.5 million for 2001. Depreciation expense decreased $907,000. This was a result of a $1.5 million decrease related to Prop- erty Dispositions, offset against additional depreciation expense related to capitalized tenant installation costs incurred during 2000 and 2001. Amortization expense decreased $75,000, which was primarily the result of a decrease in amortization of loan costs following certain loan payoffs during 2000 and 2001. The $149,000 cumulative effect of change in accounting principle was a result of the adoption of SFAS No. 133, whereby the Company recorded a transition adjust- ment related to the January 1, 2001 valuation of two LIBOR caps. The $140,000 extraordinary loss in 2001 was a result of the write-off of deferred financing fees as a result of the early repayment of the related debt. Comparison of the year ended December 31, 2000 (2000) to the year ended December 31, 1999 (1999) Total revenues increased $4.1 million, or 4%, to $96.8 million for 2000 compared to $92.7 million for 1999. Minimum rents increased $1.2 million, or 2%, to $74.2 million for 2000 compared to $73.0 million for 1999. Of this increase, $2.0 million was attributable to the redevelopment of 239 Greenwich Avenue and re-anchor- ing of the Ledgewood Mall (the 1999 Redevelopments). Additionally, the full year effect in 2000 of the acquisi- tion of the Mad River Shopping Center in February 1999, the Gateway Shopping Center in May 1999 and the Pacesetter Park Shopping Center in November 1999 (the 1999 Acquisitions) resulted in an increase of $1.3 million. These increases were partially offset by $1.4 mil- lion of non-recurring income received in 1999 related to two settlements with former tenants and a $1.0 million decrease in rents resulting from the planned termination of various tenant leases at the Abington Towne Center as Impairment of real estate of $15.9 million in 2001 was part of the redevelopment and partial sale of the center. due to the write-down of two properties that were held for sale as of December 31, 2001 to net realizable value as the anticipated sales proceeds (net of selling costs) were expected to be insufficient to recover the associated car- rying value of the property. One of these properties, for which the Company recorded a $14.8 million impairment loss, was sold subsequent to December 31, 2001. Expense reimbursements increased $444,000, or 3%, from $13.8 million for 1999 to $14.2 million for 2000. An increase in real estate tax reimbursements of $601,000 was primarily the result of the 1999 Acquisitions and 1999 Redevelopments. This was partially offset by a $157,000 decrease in CAM expense reimbursements. This net decrease in CAM reimbursements was prima- Interest expense of $18.6 million for 2001 decreased $6.6 rily a result of a $379,000 decrease in reimbursements million, or 26%, from $25.2 million for 2000. Of the following the termination of tenant leases in connec- decrease, $3.6 million was due to a lower average interest tion with the redevelopment of the Abington Towne rate on the portfolio mortgage debt and $3.1 million was Center, partially offset against an increase in reimburse- attributable to lower average outstanding borrowings ments related to the 1999 Acquisitions. 2 Acadia Realty Trust | 2001 Selected Financials Other income increased $2.4 million, or 83%, from $2.9 Interest expense of $25.2 million for 2000 increased million in 1999 to $5.3 million in 2000. $2.0 million of $1.9 million, or 8%, from $23.3 million for 1999. Of the this increase was attributable to lease termination increase, $532,000 was a result of higher average out- income received from former tenants at the Abington standing borrowings related to property redevelop- Towne Center. Total operating expenses increased $1.8 million, or 3%, to $60.2 million for 2000, from $58.4 million for 1999. Property operating expenses increased $1.6 million, or 7%, to $23.2 million for 2000 compared to $21.6 million for 1999. This increase was primarily attributable to higher payroll costs and CAM expenses throughout the portfolio as well as a $557,000 increase due to the 1999 Acquisitions. These increases were partially offset against a decrease in bad debt expense in 2000. Real estate taxes increased $928,000, or 9%, from $10.5 million for 1999 to $11.4 million for 2000. Of this increase, $759,000 was a result of a higher assessment at the Ledgewood Mall following the re-anchoring of Wal-Mart and Circuit City and the 1999 Acquisitions. The balance of this increase was experienced throughout the portfolio. ments, $418,000 was due to a higher weighted average interest rate on the portfolio and $899,000 was attrib- utable to less capitalized interest in 2000. Funds from Operations The Company considers funds from operations (FFO) as defined by the National Association of Real Estate Investment Trusts (NAREIT) to be an appropriate sup- plemental disclosure of operating performance for an equity real estate investment trust (REIT) due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing the performance of the Company. How- ever, the Company’s method of calculating FFO may be different from methods used by other REITs and, accord- ingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by accounting principles generally accepted in Depreciation and amortization increased $573,000, or the United States (GAAP) and is not indicative of cash 3%, from $19.9 million for 1999 to $20.5 million for 2000. available to fund all cash needs, including distributions. This increase was attributable to a $633,000 increase It should not be considered as an alternative to net in depreciation expense, which was primarily related to income for the purpose of evaluating the Company’s the redevelopment of 239 Greenwich Avenue and the performance or to cash flows as a measure of liquidity. 1999 Acquisitions. NAREIT defines FFO as net income (computed in accor- General and administrative expense decreased $1.3 dance with GAAP), excluding gains (or losses) from sales million, or 21%, from $6.3 million for 1999 to $5.0 mil- of property, plus depreciation and amortization, and lion for 2000. This variance was primarily the result after adjustments for unconsolidated partnerships and of a $766,000 decrease in third party professional joint ventures. Effective January 1, 2000, NAREIT clari- fees in 2000 and an $189,000 decrease in office rent fied the definition of FFO to include non-recurring expense following the relocation of the Pennsylvania events except those that are defined as extraordinary regional office. items under GAAP. The reconciliation of net income to FFO for the years ended December 31, 2001, 2000, 1999, 1998 and 1997 is as follows: Acadia Realty Trust | 2001 Selected Financials 3 Management’s Discussion and Analysis continued Reconciliation of Net Income (Loss) to Funds from Operations Net income (loss) $ 9,802 $ 19,907 $ 7,195 $ (13,898) $ (1,564) YEARS EN DED DECEMBER 31, 2001 2000 1999 1998 a 1997 a Depreciation of real estate and amortization of leasing costs: Wholly owned and consolidated partnerships Unconsolidated partnerships Income (loss) attributable to minority interest(b) (Gain) loss on sale of properties Impairment of real estate Extraordinary item — loss on extinguishment of debt Cumulative effect of change in accounting Principle 18,422 627 2,221 (17,734) 15,886 140 149 19,325 625 5,674 (13,742) — — — 18,949 626 3,106 1,284 — — — 14,925 231 (3,348) 175 11,560 707 — 12,993 — (217) 12 — — — Funds from operations $ 29,513 $ 31,789 $ 31,160 $ 10,352 $ 11,224 Notes: (a)Effective January 1, 2000, NAREIT clarified the definition of FFO to include non-recurring events except those that are defined as extraordinary items under GAAP. FFO for the years ended December 31, 1998 and 1997 have been restated above to conform to this clarification. (b)Does not include distributions paid to Preferred OP Unitholders. Liquidity and Capital Resources Uses of Liquidity The Company’s principal uses of its liquidity are expected to be for distributions to its shareholders and operating partnership (OP) unitholders, debt Acadia Strategic Opportunity Fund, LP As discussed in the consolidated financial statements of the Company and the notes thereto appearing else- where in this Annual Report, the Company has commit- ted $20.0 million to a new joint venture formed with four of its institutional shareholders for the purpose of acquiring additional community and neighborhood service and loan repayments, and property investment shopping centers. which includes funding of its joint venture commit- ments, acquisition, redevelopment, expansion and Property Redevelopment and Expansion retenanting activities. In order to qualify as a REIT for The Company’s redevelopment program focuses on Federal income tax purposes, the Company must cur- selecting well-located neighborhood and community rently distribute at least 90% of its taxable income to shopping centers and creating significant value through its shareholders. On December 14, 2001, the Board of retenanting and property redevelopment. At the onset Trustees of the Company approved and declared a cash of 2001, the Company had four properties under rede- quarterly dividend for the quarter ended December 31, velopment. Two of these projects were completed dur- 2001 of $0.12 per common share of beneficial interest ing 2001 as follows: (Common Share) and Common OP Unit. The dividend was paid on January 15, 2002 to the shareholders of record as of December 31, 2001. The Board of Trustees also approved a distribution of $22.50 per Preferred OP Unit, which was paid on January 15, 2001. Abington Towne Center — The Company completed the redevelopment of this previously enclosed multi-level mall located in the Philadelphia suburb of Abington, Pennsylvania. In December 2000, the Company sold approximately 160,000 square feet representing the top two floors and the rear portion of the ground level and the related parking area to the Target Corporation 4 Acadia Realty Trust | 2001 Selected Financials (Target) for $11.5 million. Target completed the construc- the demolition of 90% of the property and the con- tion of its store and opened for business in September struction of a new anchor supermarket. Following the 2001. The Company has de-malled the balance of the bankruptcy of Grand Union, the lease was assigned to center consisting of approximately 46,000 square feet of and assumed by Shaw’s Supermarkets. During October the main building and 14,000 square feet of store space 2001, the Company executed a new lease with Shaw’s in outparcel buildings, which it continues to own and for the construction of a new 72,000-square-foot super- operate. An existing anchor, T.J. Maxx, was relocated to market. This will replace the 32,000-square-foot store a 27,000-square-foot space in the Company’s portion formerly occupied by Grand Union. Total costs to date of the main building and reopened for business during for this project, including the original acquisition costs, 2000. Costs for this project totaled approximately $3.5 are $8.2 million. The Company estimates $9.2 million of million, net of amounts reimbursed by Target. remaining costs to complete this redevelopment. Methuen Shopping Center — This center, located in Additionally, the Company currently estimates that Methuen, Massachusetts (part of the Boston metropo- for the remaining portfolio, capital outlays of approxi- litan statistical area) was formerly anchored by a Caldor mately $3.0 to $5.0 million will be required for tenant department store. The Company acquired this lease improvements, related renovations and other property out of bankruptcy and reanchored the center with improvements related to executed leases. an 89,000-square-foot Wal-Mart which opened its store in October 2001. Costs incurred for this project were approximately $800,000. The Company currently has two redevelopment projects currently in progress as follows: Elmwood Park Shopping Center — During 2001, the Company continued with the redevelopment of this center located in Elmwood Park, New Jersey, approxi- mately ten miles west of New York City. The redevel- opment consists of reanchoring, renovating and expanding the existing 125,000-square-foot shopping center by 30,000 square feet. The new anchor, a 49,000-square-foot freestanding Pathmark supermar- ket, will replace the former undersized (28,000 square feet) in-line Grand Union supermarket when com- pleted. The project also includes the expansion of an Share Repurchase Plan The Company’s repurchase of its Common Shares is an additional use of liquidity. In January 2001, the Board of Trustees of the Company approved a continuation and expansion of the Company’s existing stock repur- chase program. Management is authorized, at its discre- tion, to repurchase up to an additional $10.0 million of the Company’s outstanding Common Shares. Through March 22, 2002, the Company had repurchased 1,928,432 (net of 123,173 shares reissued) at a total cost of $11.6 million under the expanded share repurchase program which allows for the repurchase of up to $20.0 million of the Company’s outstanding Common Shares. The program may be discontinued or extended at any time and there is no assurance that the Company will pur- chase the full amount authorized. As discussed in the existing Walgreens drug store. As of December 31, 2001, consolidated financial statements of the Company and costs incurred on this project totaled $4.1 million. The Company expects remaining redevelopment costs of the notes thereto appearing elsewhere in this Annual Report, in February 2002, the Company also conducted approximately $3.3 million, net of reimbursements from a Tender Offer whereby it purchased 4,136,321 Common tenants, to complete this project in 2002. In addition, Shares and 1,387,653 Common OP Units for a total of the Company is obligated, in connection with the RDC $33.4 million. Transaction, to issue Common OP Units equal to up to $2.8 million upon the supermarket rent commence- ment at this project. Gateway Shopping Center — The redevelopment of the Gateway Shopping Center, a partially enclosed mall located in South Burlington, Vermont, includes Sources of Liquidity The Company intends on using its newly formed joint venture as the primary vehicle for future acquisitions. Sources of capital for funding the Company’s joint ven- ture commitment, other property acquisitions, redevel- opment, expansion and retenanting, as well as future Acadia Realty Trust | 2001 Selected Financials 5 Management’s Discussion and Analysis continued repurchase of Common Shares are expected to be See the consolidated financial statements of the obtained primarily from cash on hand, additional debt Company and the notes thereto appearing elsewhere financings and sales of existing properties. As of in this Annual Report for additional details related to December 31, 2001, the Company had cash on hand the Company’s mortgage debt. of $34.1 million as well as a $34.8 million note receiv- able which was collected in full during January 2002. In February 2002, $33.4 million of the Company’s work- ing capital was utilized to fund the Tender Offer. As of December 31, 2001, the Company had a total of approx- imately $28.0 million of additional capacity with four lenders, of which the Company is required to draw $7.7 million by June 2002 and an additional $9.4 million by December 2002, or forego the ability to draw these funds at any time during the remaining term of the loans. Of the remaining capacity, approximately $4.0 is subject to additional leasing requirements at the collateral properties and certain lender requirements. The Company also has seven properties that are cur- rently unencumbered and therefore available as poten- tial collateral for future borrowings. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements. Financing and Debt At December 31, 2001, mortgage notes payable aggre- The Company owns a 49% interest in each of the Cross- roads Joint Venture and Crossroads II Joint Venture (col- lectively, Crossroads), which collectively own a 311,000- square-foot shopping center. The Company accounts for its investment in Crossroads using the equity method of accounting as it has a non-controlling investment in Crossroads, but exercises significant influence. As such, the Company’s financial statements reflect its share of income from, but not the assets and liabilities of Crossroads. The Company’s pro-rata share of Crossroads mortgage debt as of December 31, 2001 was $16.7 mil- lion. Interest on the debt, which matures in October 2007, has been effectively fixed at 7.2% through vari- able to fixed-rate swap agreements. The Company’s effective pro-rata share of debt from Acadia Strategic Opportunity Fund, LP, which has not yet acquired any property, and, as such, currently has no debt, will be approximately 22% of any future outstanding debt. The Company currently has one outstanding letter of credit for $2.0 million, from which no amounts have been drawn against, related to the completion of certain work at one of its properties currently under gated $261.6 million and were collateralized by 45 redevelopment. properties and related tenant leases. Interest on the Company’s mortgage indebtedness ranged from 3.5% to 9.9% with maturities that ranged from March 2002 The following summarizes the financing and refinanc- ing transactions since December 31, 2000: to November 2021. Of the total outstanding debt, $105.6 On December 28, 2001, the Company closed on a $23.0 million, or 40%, was carried at fixed interest rates with million loan with a bank. As of December 31, 2001, $12.4 a weighted average of 8.5%, and $156.0 million, or 60%, million was funded under the loan. The Company is was carried at variable rates with a weighted average required to draw an additional $7.7 million within six of 3.9%. Taking into effect $50.0 million of notional months following the closing of the loan, or forego principal under variable to fixed-rate swap agreements, the ability to draw these funds at any time during the $155.6 million of the portfolio, or 59% was fixed at a remaining term of the loan. The availability of the 7.8% weighted average interest rate. Of the total out- remaining $3.0 million is subject to achieving addi- standing debt, $70.3 million will become due by 2003, tional leasing requirements at the collateral properties. with scheduled maturities of $46.7 million at a weighted The debt, which is secured by three of the Company’s average interest rate of 5.0% in 2002 and $23.6 million properties, requires the monthly payment of interest with a weighted average interest rate of 4.1% in 2003. at the rate of LIBOR plus 175 basis points and principal As the Company does not anticipate having sufficient amortized over 25 years and matures January 1, 2007. cash on hand to repay such indebtedness, it will need As of December 31, 2001, the funded loan proceeds were to refinance this indebtedness or select other alter- available for working capital purposes. natives based on market conditions at that time. 6 Acadia Realty Trust | 2001 Selected Financials On December 21, 2001, the Company closed on a $26.0 The second swap agreement, which extends through million loan with a bank. As of December 31, 2001, $16.0 October 1, 2006, provides for a fixed all-in rate of 6.28% million was funded under the loan. The remaining bal- on $20.0 million of notional principal. ance, less environmental and engineering holdbacks of approximately $600,000 must be drawn within one year from the loan closing, or the Company foregoes the ability to draw these funds at any time during the remaining term of the loan. The debt, which is secured On May 15, 2001 the Company repaid $14.1 million of outstanding debt with a bank in connection with the sale of the Marley Run Apartments. On April 10, 2001 the Company repaid $3.5 million of by two of the Company’s properties, requires the monthly outstanding debt under a revolving credit facility with payment of interest at the rate of LIBOR plus 185 basis a bank. Following this repayment, the Company had no points and principal amortized over 25 years and matures outstanding balance under this facility, which provides January 1, 2007. Approximately $16.0 million, or two- for total borrowings of up to $7.4 million and matures thirds of the loan amount, must be swapped to fixed rate in August 2003. within a year. As of December 31, 2001, the funded loan proceeds were available for working capital purposes. On December 21, 2001, the Company repaid $17.6 million of outstanding debt in connection with the sale of the Glen Oaks Apartments. On March 30, 2001, the Company fully repaid $9.9 million of outstanding debt with a bank that was collateralized by one of the Company’s properties. On March 29, 2001, the Company borrowed an addi- tional $23.0 million under an existing $59.0 million During August and September of 2001, the Company secured financing line with a bank. completed two interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $50.0 million of LIBOR based variable-rate debt. The first swap agreement, which extends through April 1, 2005, provides for a fixed all- in rate of 6.55% on $30.0 million of notional principal. On January 8, 2001, the Company partially repaid $10.1 million of a fixed-rate mortgage debt, which was secured by two of the Company’s properties, with a life insurance company. On March 30, 2001, the remain- ing outstanding debt of $7.9 million with this lender was fully repaid. Asset Sales Asset sales are an additional source of liquidity for the Company. Five assets were sold during 2001 and January 2002 as follows (dollar amounts in millions): Property Type Sales Price Proceeds Marley Run Apartments Apartment complex — 336 Units Glen Oaks Apartments Apartment complex — 463 Units Wesmark Plaza Shopping Center — 207,000 square feet Tioga West Shopping Center — 122,000 square feet Union Plaza (Sold in 2002) Shopping Center — 218,000 square feet $27.4 $ 35.1 $ 5.7 $ 3.2 $ 4.8 $12.8 $15.2 $ 5.5 $ 3.1 $ 4.21 1 $3.6 million of this represents a note from the buyer Additionally, in November 2001, the Company entered into a contract to sell the remaining portion of its non-core portfolio to a single buyer. The portfolio consists of 17 retail properties that in the aggregate contain approximately 2.3 million square feet; ten are located in Pennsylvania and seven in various southeastern states ranging from Vir- ginia to Florida. The portfolio is being sold subject to a fixed-rate, cross-collateralized and securitized loan, and the contract is conditioned upon obtaining the lender’s consent permitting the buyer to assume the loan as well as other customary conditions to closing and, as such, the completion of this transaction cannot be assured. Acadia Realty Trust | 2001 Selected Financials 7 Management’s Discussion and Analysis continued Historical Cash Flow Critical Accounting Policies Cash and cash equivalents were $34.1 million and Management’s discussion and analysis of financial $22.2 million at December 31, 2001 and 2000, respec- condition and results of operations is based upon the tively. The increase of $11.9 million was a result of Company’s consolidated financial statements, which the following increases and decreases in cash flows have been prepared in accordance with GAAP. The prep- (amounts in millions): Years Ended December 31, 2001 2000 Variance Net Cash Provided by Operating Activities $ 31.0 $ 32.6 $(1.6) Net Cash Provided by Investing Activities $ 21.4 $ 8.2 $13.2 aration of these financial statements requires manage- ment to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on histori- cal experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results Net Cash Used in may differ from these estimates under different assump- Financing Activities $ (40.5) $ (54.0) $13.5 tions or conditions. The Company believes the following The variance in net cash provided by operating activi- ties resulted from a decrease of $1.6 million in operating income before non-cash expenses in 2001 offset by a net increase in cash provided by changes in operating assets and liabilities of $91,000. The variance in net cash used provided by investing activities was primarily the result of an increase in net sales proceeds of $9.3 million received in 2001 and a decrease of $3.9 million in expenditures for real estate acquisitions, development and tenant installation in 2001. The decrease in net cash used in financing activities resulted primarily from $58.7 of additional cash used in 2000 for the repayment of debt and $5.7 million of additional cash used in 2000 for the repurchase of Common Shares. This was partially offset by a decrease of $46.7 million in cash provided by additional borrow- ings and $5.1 million of cash used for the redemption of OP Units in 2001. critical accounting policies affect its significant judg- ments and estimates used in the preparation of its consolidated financial statements. Valuation of Property Held for Use and Sale On a quarterly basis, the Company reviews the carrying value of both properties held for use and for sale. The Company records impairment losses and reduces the carrying value of properties when indicators of impair- ment are present and the expected undiscounted cash flows related to those properties are less than their car- rying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. For the year ended December 31, 2001, an impair- ment loss of $14.8 million was recognized related to a property sold subsequent to December 31, 2001. Additionally, an impairment loss of $1.1 million was 8 Acadia Realty Trust | 2001 Selected Financials recognized related to a shopping center that was held for sale as of December 31, 2001. Management does not believe that the value of the remaining properties Recently Issued Accounting Pronouncements held for sale or properties in use are impaired as of In July 2001, the Financial Accounting Standards Board December 31, 2001. Bad Debts The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inabil- ity of tenants to make payments on arrearages in billed rents, as well as the likelihood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight- line rent. As of December 31, 2001, the Company had recorded an allowance for doubtful accounts of $2.4 million. If the financial condition of the Company’s ten- ants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inflation (FASB) issued Statement of Financial Accounting Stan- dards (SFAS) No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141 requires the purchase method to be used for business combinations initiated after June 30, 2001. SFAS No. 142 requires that goodwill no longer be amor- tized to earnings, but instead reviewed for impairment, when the statement is required to be adopted on Janu- ary 1, 2002. The adoption of these statements is not expected to have a material impact on the financial posi- tion or results of operations of the Company. In August 2001, the FASB issued SFAS No. 143, “Account- ing for Asset Retirement Obligations,” which addresses the financial accounting and reporting for asset retire- ment costs and related obligations and is effective for fiscal years beginning after June 15, 2002. The adoption of this statement is not expected to have a material The Company’s long-term leases contain provisions impact on the financial position or results of operations designed to mitigate the adverse impact of inflation of the Company. on the Company’s net income. Such provisions include clauses enabling the Company to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and/or, in certain cases, escala- tion clauses, which generally increase rental rates dur- ing the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indexes. In addition, many of the Company’s leases are for terms of less than ten years, which permits the Company to seek to increase rents upon re-rental at market rates if current rents are below the then existing market rates. Most of the Company’s leases require the tenants to pay their share of operat- ing expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and oper- ating expenses resulting from inflation. In October 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment and Disposal of Long- Lived Assets,” which supercedes SFAS No. 121, “Account- ing for the Impairment of Long Lived Assets and for Long-Lived Assets to be Disposed Of.” It also supercedes the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infre- quently Occurring Events and Transactions.” SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measure- ment of long-lived assets to be disposed of by sale, but broadens the definition of what constitutes a dis- continued operation and how the results of a discontin- ued operation are to be measured and presented. The statement is effective for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material impact on the financial position or results of operations of the Company. Acadia Realty Trust | 2001 Selected Financials 9 Management’s Discussion and Analysis Item 7A. Quantitative and Qualitative Disclosures About Market Risk The Company’s primary market risk exposure is to changes in interest rates related to the Company’s mort- gage debt. See the consolidated financial statements and notes thereto appearing elsewhere in this Annual Report for certain quantitative details related to the Company’s mortgage debt. In addition, $23.6 million of notional variable-rate prin- cipal is hedged through the use of LIBOR caps as of December 31, 2001. The Company also has two interest rate swaps hedging the Company’s exposure to changes in interest rates with respect to $16.7 million of LIBOR based variable-rate debt related to its investment in Crossroads. Of the Company’s total outstanding debt, $70.3 million will become due by 2003. As the Company intends on refinancing some or all of such debt at the then-existing market interest rates which may Currently, the Company manages its exposure to fluc- be greater than the current interest rate, the Company’s tuations in interest rates primarily through the use interest expense would increase by approximately of fixed-rate debt, interest rate swap agreements and $703,000 annually if the interest rate on the refinanced LIBOR caps. As of December 31, 2001, the Company had debt increased by 100 basis points. Furthermore, inter- total mortgage debt of $261.6 million of which $105.6 est expense on the Company’s variable debt as of million, or 40%, was fixed-rate and $156.0 million, or December 31, 2001 would increase by $1.1 million annu- 60%, was variable-rate based upon LIBOR plus certain ally for a 100 basis point increase in interest rates. The spreads. During 2001, the Company completed two Company may seek additional variable-rate financing interest rate swap transactions to hedge the Company’s if and when pricing and other commercial and financial exposure to changes in interest rates with respect to terms warrant. As such, the Company would consider $50.0 million of LIBOR based variable-rate debt, hedging against the interest rate risk related to such effectively increasing the fixed-rate portion of its additional variable-rate debt through interest rate total outstanding debt as of December 31, 2001 to 59%. swaps and protection agreements, or other means. 10 Acadia Realty Trust | 2001 Selected Financials Report of Independent Auditors To the Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheets of Acadia Realty Trust (a Maryland Trust) and subsidiaries (the Company) as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2001. These finan- cial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acadia Realty Trust and subsidiaries as of December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. New York, New York February 22, 2002 Acadia Realty Trust | 2001 Selected Financials 11 Consolidated Balance Sheets In thousands, except per share amounts Assets Real Estatei Land Buildings and improvements Less: accumulated depreciation Net Real Estate Properties held for sale Cash and cash equivalents Cash in escrow Investments in unconsolidated partnerships Rents receivable, net Note receivable Prepaid expenses Deferred charges, net Other assets Liabilities and Shareholders’ Equity Mortgage notes payable Accounts payable and accrued expenses Dividends and distributions payable Due to related parties Other liabilities Total liabilities Minority interest in Operating Partnership Minority interests in majority-owned partnerships Total minority interests Shareholders’ equity: Common Shares, $.001 par value, authorized 100,000,000 shares, issued and outstanding 28,697,666 and 28,150,472 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Deficit Total shareholders’ equity See accompanying notes. 12 Acadia Realty Trust | 2001 Selected Financials December 31, 2001 2000 $ 57,155 357,658 414,813 75,373 339,440 49,080 34,138 5,246 5,169 7,114 34,757 2,308 14,131 2,556 $ 69,206 444,933 514,139 102,461 411,678 49,445 22,167 5,213 6,784 9,667 — 2,905 13,026 2,726 $ 493,939 $ 523,611 $ 261,607 $ 277,112 5,705 4,119 107 4,487 276,025 37,387 1,429 38,816 29 189,378 (1,206) (9,103) 179,098 $ 493,939 7,495 4,241 111 4,179 293,138 48,959 2,197 51,156 28 188,392 — (9,103) 179,317 $ 523,611 Consolidated Statements of Income In thousands, except per share amounts Revenuesi Minimum rents Percentage rents Expense reimbursements Other Total revenues Operating Expensesi Property operating Real estate taxes General and administrative Depreciation and amortization Impairment of real estate Total operating expenses Operating income Equity in earnings of unconsolidated partnerships Gain (loss) on sale of properties Interest expense Income before minority interest, extraordinary item and cumulative effect of change in accounting principle Minority interests Extraordinary item — loss on early extinguishment of debt Cumulative effect of change in accounting principle Years Ended December 31, 2001 2000 1999 $ 67,014 $ 74,161 $ 73,021 2,330 13,768 2,348 85,460 20,398 11,209 5,556 19,478 15,886 72,527 12,933 504 17,734 (18,589) 12,582 (2,491) (140) (149) 3,048 14,230 5,319 96,758 23,198 11,468 5,057 20,460 — 60,183 36,575 645 13,742 (25,163) 25,799 (5,892) — — 2,994 13,786 2,908 92,709 21,606 10,540 6,337 19,887 — 58,370 34,339 584 (1,284) (23,314) 10,325 (3,130) — — Net income $ 9,802 $ 19,907 $ 7,195 Earnings per Common Share — basic and dilutedi Income before extraordinary item and cumulative effect of change in accounting principle Extraordinary item Cumulative effect of change in accounting principle Net income per Common Share See accompanying notes. $ .37 (.01) (.01) $ .35 $ .$ .75 — — .75 $ .28 — — $ .28 Acadia Realty Trust | 2001 Selected Financials 13 Consolidated Statements of Shareholders’ Equity In thousands, except per share amounts Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity Deficit Balance, December 31, 1998 25,419,215 $ 25 $ 170,746 $ — $ (16,180) $ 154,591 Conversion of 700,000 OP Units to Common Shares by limited partner of the Operating Partnership 700,000 Dividends declared ($.48 per Common Share) — Repurchase of Common Shares (394,900) Income before minority interest Minority interest’s equity — — Balance, December 31, 1999 25,724,315 Conversion of 3,679,999 OP Units to Common Shares by limited partners 1 — — — — 26 5,012 (5,133) (1,984) — — 168,641 of the Operating Partnership 3,679,999 3 26,999 Dividends declared ($.48 per Common Share) — Repurchase of Common Shares (1,339,905) Reissuance of Common Shares 86,063 Income before minority interest Minority interest’s equity — — Balance, December 31, 2000 28,150,472 — (1) — — — 28 — (7,691) 443 — — 188,392 Conversion of 826,884 OP Units to Common Shares by limited partners of the Operating Partnership 826,884 1 5,815 Repurchase of 8,000 OP Units from limited partner of the Operating Partnership Dividends declared ($.48 per Common Share) Repurchase of Common Shares Reissuance of Common Shares Purchase of minority interest in majority-owned partnership Unrealized loss on valuation of swap agreements Income before minority interest Minority interest’s equity — — (316,800) 37,110 — — — — — — — — — — — — 8 (3,832) (1,964) 239 720 — — — — — — — — — — — — — — — — — — — — — — (1,206) — — — 5,013 (7,195) (12,328) — 10,325 (3,130) (1,984) 10,325 (3,130) (16,180) 152,487 — 27,002 (12,830) (12,830) — — (7,692) 443 25,799 25,799 (5,892) (5,892) (9,103) 179,317 — 5,816 — 8 (9,802) (13,634) — — — — 12,023 (2,221) (1,964) 239 720 (1,206) 12,023 (2,221) Balance at December 31, 2001 28,697,666 $ 29 $ 189,378 $ (1,206) $ (9,103) $179,098 See accompanying notes. 14 Acadia Realty Trust | 2001 Selected Financials Consolidated Statements of Cash Flows In thousands, except per share amounts Cash Flows from Operating Activities Net income $ 9,802 $ 19,907 $ 7,195 Years Ended December 31, 2001 2000 1999 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Minority interests Equity in earnings of unconsolidated partnerships Provision for bad debts Stock-based compensation (Gain) loss on sale of properties Extraordinary item — loss on early extinguishment of debt Cumulative effect of change in accounting principle Impairment of real estate Changes in assets and liabilities Funding of escrows, net Rents receivable Prepaid expenses Due to/from related parties Other assets Accounts payable and accrued expenses Other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Expenditures for real estate and improvements Net proceeds from sale of properties Contributions to unconsolidated partnerships Distributions from unconsolidated partnerships Payment of deferred leasing costs Net cash provided by (used in) investing activities 19,478 2,491 (504) 1,195 239 (17,734) 140 149 15,886 (33) 1,358 597 (4) (184) (1,790) (48) 31,038 (11,272) 33,713 (36) 1,252 (2,250) 21,407 20,460 19,887 5,892 (645) 453 443 (13,742) — — — 1,250 (1,255) 47 130 (792) 470 (45) 32,573 (15,865) 24,413 — 1,324 (1,623) 8,249 3,130 (584) 1,404 — 1,284 — — — 2,943 (4,263) (155) (195) (879) (4,288) 407 25,886 (25,091) 6,128 — 637 (1,604) (19,930) Acadia Realty Trust | 2001 Selected Financials 15 Consolidated Statements of Cash Flows continued In thousands, except per share amounts Cash Flows from Financing Activities Principal payments on mortgage notes Proceeds received on mortgage notes Payment of deferred financing costs Dividends paid Distributions to minority interests in Operating Partnership Distributions on Preferred OP Units Distributions to minority interest in majority-owned partnerships Redemption of Common OP Units Repurchase of Common Shares Purchase of minority interest in majority owned partnership Net cash (used in) provided by financing activities INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR Years Ended December 31, 2001 2000 1999 $ (75,155) $ (133,838) $(17,598) 59,650 (1,018) (13,569) (2,985) (199) (90) (5,114) (1,964) (30) (40,474) 11,971 22,167 106,350 (1,435) (12,545) (4,617) (173) (45) — (7,692) — (53,995) (13,173) 35,340 48,168 (1,091) (9,238) (3,929) — (127) — (1,984) — 14,201 20,157 15,183 CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,138 $ 22,167 $ 35,340 Supplemental Disclosures of Cash Flow Information: Cash paid during the year for interest, net of amounts capitalized of $372, $439, and $1,299, respectively $ 19,047 $ 25,035 $ 23,793 Supplemental Disclosures off Non-Cash Investing and Financing Activities: Note received in connection with sale of property $ 34,757 Disposition of real estate through assignment of debt $ 22,051 Acquisition of real estate by assumption of debt Acquisition of real estate by issuance of Preferred OP Units See accompanying notes. $ 18,521 $ 2,212 16 Acadia Realty Trust | 2001 Selected Financials Notes to Consolidated Statements December 31, 2001 In thousands, except per share amounts Note 1i Organization, Basis of Presenta- tion and Summary of Significant Accounting Policies Acadia Realty Trust (the Company) is a fully integrated and self-managed real estate investment trust (REIT) $2,750 upon the commencement of rental payments from a designated tenant at one of the acquired prop- erties. Concurrent with the RDC Transaction, the Com- pany appointed former RD Capital, Inc. executives Ross Dworman as Chairman and Chief Executive Officer, and Kenneth F. Bernstein as President. In January 2001, the Board of Trustees appointed Mr. Bernstein as Chief Executive Officer with Mr. Dworman remaining focused primarily on the ownership, acquisition, rede- as Chairman. velopment and management of neighborhood and community shopping centers. All of the Company’s assets are held by, and all of its operations are conducted through, Acadia Realty Lim- ited Partnership (the Operating Partnership or OP) and its majority owned subsidiaries. As of December 31, 2001, the Company controlled 85% of the Operating Partnership as the sole general partner. As the general partner, the Company is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The limited partners represent entities or individuals who contributed their interests in certain properties or part- nerships to the Operating Partnership in exchange for As of December 31, 2001, the Company operated 53 properties, which it owned or had an ownership inter- est in, consisting of 49 neighborhood and community shopping centers, one enclosed shopping mall and three multi-family properties, all of which are located in the Eastern and Midwestern regions of the United States. Principles of Consolidation The consolidated financial statements include the con- solidated accounts of the Company and its majority owned subsidiaries, including the Operating Partner- ship. Non-controlling investments in partnerships are accounted for under the equity method of accounting as the Company exercises significant influence. common or preferred units of limited partnership inter- Use of Estimates est (Common or Preferred OP Units). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Company (Common Shares). This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.” On August 12, 1998, the Company completed a major reorganization (RDC Transaction) in which it acquired twelve shopping centers, five multi-family properties and a 49% interest in one shopping center along with certain third party management contracts and promis- sory notes from real estate investment partnerships (RDC Funds) managed by affiliates of RD Capital, Inc. In exchange for these and a cash investment of $100,000, the Company issued 11.1 million Common OP Units and 15.3 million Common Shares to the RDC Funds. After giving effect to the conversion of the Common OP Units the RDC Funds beneficially owned 72% of the Common Shares as of the closing of the RDC Transaction. The Company is also obligated to issue OP Units valued at The preparation of the financial statements in conform- ity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Properties Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, develop- ment, construction and improvement of properties, as well as significant renovations are capitalized. Inter- est costs are capitalized until construction is substan- tially complete. Depreciation is computed on the straight-line method over estimated useful lives of 30 to 40 years for buildings and the shorter of the use- ful life or lease term for improvements, furniture, fix- tures and equipment. Expenditures for maintenance and repairs are charged to operations as incurred. The Company records impairment losses and reduces the Acadia Realty Trust | 2001 Selected Financials 17 Notes to Consolidated Statements continued carrying value of properties when indicators of impair- Reimbursements from tenants for real estate taxes, ment are present and the expected undiscounted cash insurance and other property operating expenses flows related to those properties are less than their car- are recognized as revenue in the period the expenses rying amounts. In cases where the Company does not are incurred. expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. For the year ended December 31, 2001, an impair- ment loss of $14,756 was recognized related to a prop- erty sold subsequent to December 31, 2001. Additionally, An allowance for doubtful accounts has been provided against certain tenant accounts receivable which are estimated to be uncollectible. Rents receivable at December 31, 2001 and 2000 are shown net of an allowance for doubtful accounts of $2,376 and $1,738, respectively. an impairment loss of $1,130 was recognized related to Cash and Cash Equivalents a shopping center that was held for sale as of Decem- ber 31, 2001. Management does not believe that the The Company considers all highly liquid investments with an original maturity of three months or less when value of the remaining properties held for sale or prop- purchased to be cash equivalents. erties in use are impaired as of December 31, 2001. As of December 31, 2001, 19 of the Company’s shopping centers were held for sale. Of these properties, 17 are under contract to a single buyer and subject to a cross- collateralized and securitized loan. As such, the sale is conditioned upon obtaining the lender’s consent permitting the buyer to assume the loan. Deferred Costs Cash in Escrow Cash in escrow consists principally of cash held for real estate taxes, property maintenance, insurance, minimum occupancy and property operating income requirements at specific properties as required by cer- tain loan agreements. Income Taxes Fees and costs incurred in the successful negotiation of leases have been deferred and are being amortized on a straight-line basis over the terms of the respective leases. Fees and costs incurred in connection with The Company has made an election to be taxed, and believes it qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. A REIT will generally not be subject to obtaining financing have been deferred and are being federal income taxation on that portion of its income amortized over the term of the related debt obligation. that qualifies as REIT taxable income to the extent Revenue Recognition Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases. As of that it distributes at least 90% of its taxable income to its shareholders and complies with certain other requirements. Accordingly, no provision has been made for federal income taxes for the Company in the accom- panying consolidated financial statements. The Company December 31, 2001 and 2000, unbilled rents receivable is subject to state income or franchise taxes in certain relating to straight-lining of rents were $4,828 and $4,098, respectively. Percentage rents are recognized in the period when the tenant sales breakpoint is met. states in which some of its properties are located. These state taxes, which in total are not significant, are included in general and administrative expenses in the accompa- nying consolidated financial statements. 18 Acadia Realty Trust | 2001 Selected Financials Earnings Per Common Share Recent Accounting Pronouncements Basic earnings per share was determined by dividing In July 2001, the FASB issued SFAS No. 141,“Business Com- the net applicable income or loss to common share- binations,” and SFAS No. 142,“Goodwill and Other Intan- holders for the year by the weighted average number gible Assets.” SFAS No. 141 requires the purchase method of Common Shares outstanding during each year con- to be used for business combinations initiated after June sistent with the Financial Accounting Standards Board 30, 2001. SFAS No. 142 requires that goodwill no longer be Statement No. 128. The weighted average number of amortized to earnings, but instead reviewed for impair- Common Shares outstanding for the years ended ment, when the statement is required to be adopted on December 31, 2001, 2000, and 1999 were 28,313,070, January 1, 2002. The adoption of these statements is not 26,437,265 and 25,708,787, respectively. expected to have a material impact on the financial posi- Diluted earnings per share reflects the potential dilu- tion or results of operations of the Company. tion that could occur if securities or other contracts to In August 2001, the FASB issued SFAS No. 143, “Account- issue Common Shares were exercised or converted into ing for Asset Retirement Obligations,” which addresses Common Shares or resulted in the issuance of Common the financial accounting and reporting for asset retire- Shares that then shared in the earnings of the Com- ment costs and related obligations and is effective for pany. For the years ended December 31, 2001, 2000 and fiscal years beginning after June 15, 2002. The adoption 1999 no additional shares were reflected as the impact of this statement is not expected to have a material would be anti-dilutive in such years. impact on the financial position or results of operations Interest Rate Hedges On January 1, 2001, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 133, “Account- ing for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” SFAS No. 133, as amended, establishes accounting and reporting standards for derivative instruments. Specifi- cally, SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the state- ment of financial position and to measure those instru- ments at fair value. Additionally, the fair value of those instruments will affect either shareholders’ equity or net income depending on whether the derivative instrument qualifies as a hedge for accounting pur- poses and, if so, the nature of the hedging activity. In connection with the adoption of SFAS No. 133, the Company recorded a transition adjustment of $149 related to the January 1, 2001 valuation of two LIBOR caps that hedge $23,203 of variable-rate mortgage debt. This adjustment is reflected as a cumulative effect of a change in accounting principle in the accompanying financial statements. of the Company. In October, 2001, the FASB issued SFAS No. 144, “Account- ing for the Impairment and Disposal of Long-Lived Assets,” which supercedes SFAS No. 121, “Accounting for the Impairment of Long Lived Assets and for Long- Lived Assets to be Disposed Of.” It also supercedes the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infre- quently Occurring Events and Transactions.” SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for recognition and measurement of the impairment of long-lived assets to be held and used and measurement of long-lived assets to be disposed of by sale, but broad- ens the definition of what constitutes a discontinued operation and how the results of a discontinued opera- tion are to be measured and presented. The statement is effective for fiscal years beginning after December 15, 2001. The adoption of this statement is not expected to have a material impact on the financial position or results of operations of the Company. Acadia Realty Trust | 2001 Selected Financials 19 Notes to Consolidated Statements continued Comprehensive Income The Company sold its interest in the Marley Run Apart- Comprehensive income for the year ended December 31, ments for $27,400 on May 15, 2001, recognizing a $7,035 2001 totaled $8,596 and was comprised of net income gain on the sale. Net proceeds after the repayment of of $9,802 and other comprehensive loss of $1,206. The the associated debt and other closing costs were $12,803 following table sets forth the change in accumulated of which $4,765 was used to redeem 680,667 Common other comprehensive loss for the period since Decem- OP Units at $7.00 per unit. The redemption price repre- ber 31, 2000: Accumulated other comprehensive loss Balance at December 31, 2000 Unrealized loss on valuation of swap agreements Balance at December 31, 2001 $ — 1,206 $ 1,206 As of December 31, 2001, the balance in accumulated other comprehensive loss was comprised entirely of sented a premium of $0.35 over the market price of the Company’s Common Shares as of the redemption date. These redeemed Common OP Units were held by the original owners of the property who contributed it to the Company in connection with the ROC Transaction. Pursuant to the RDC Transaction, the Company agreed to indemnify the Common OP Unit holders for any income taxes recognized with respect to a disposition of the property within five years following the contribu- tion of the property. As part of the redemption as dis- unrealized losses on the valuation of swap agreements. cussed above, the Common OP Unit holders waived Reclassifications their rights to this tax reimbursement which the Com- pany estimated to be in excess of $2.00 per Common Certain 2000 and 1999 amounts were reclassified to OP Unit. conform to the 2001 presentation. 2000 Dispositions On December 14, 2000, the Company sold the North- wood Centre, located in Tallahassee, Florida, for $31,500 resulting in a $15,616 gain on the sale. The buyer assumed the mortgage balance of $22,051 and acquired various mortgage-related escrows for $1,784 which, following additional net closing adjustments and costs, resulted in net proceeds of $11,026 to the Company. On December 11, 2000, the Company sold approxi- mately 160,000 square feet of the main building and related parking lot at the Abington Towne Center for $11,500 resulting in a $1,035 loss on the sale. The Com- pany retained ownership of approximately 50,000 square feet of the main building, as well as the out- parcels (14,000 square feet) and related parking areas. Total sales proceeds were $1,366 following the repay- ment of the mortgage balance of $10,137 and addi- tional net closing adjustments and costs. Note 2i Acquisition and Disposition of Properties 2001 Dispositions On December 21, 2001, the Company sold the Glen Oaks Apartments, a 463 unit multi-family property located in Greenbelt, Maryland for $35,100 resulting in an $8,546 gain on the sale. As part of the transaction, the Com- pany received a promissory note (which was secured by an irrevocable letter of credit) for $34,757, which was subsequently paid in January 2002 resulting in net pro- ceeds of $15,205 after closing costs and the repayment of mortgage debt of $17,595. On October 4, 2001, the Company sold the Tioga West shopping center, a 122,000 square foot shopping center located in Tunkhannock, Pennsylvania, for $3,200 resulting in a $908 gain on the sale and net proceeds of $3,078. On August 27, 2001 the Company sold the Wesmark Plaza, a 207,000 square foot shopping center located in Sumter, South Carolina, for $5,750, recognizing a $1,245 gain on the sale and net proceeds of $5,533. 20 Acadia Realty Trust | 2001 Selected Financials On August 25, 2000, the Company sold 13 acres at the On February 24, 1999, the Company acquired the Union Plaza, located in New Castle, Pennsylvania, for Mad River Station, a 154,000 square foot shopping $1,900 resulting in a $839 loss on the sale. Proceeds center located in Dayton, Ohio for $11,500. The Com- from the sale totaled $1,882 after net closing costs and pany assumed $7,661 in mortgage debt and funded adjustments. the remaining purchase from working capital. 1999 Acquisitions and Dispositions On November 16, 1999, the Company acquired 100% of the partnership interests of the limited partnership which owns the Pacesetter Park Shopping Center, a 96,000 square foot community shopping center located in Rockland County, New York. The aggregate purchase price of $7,400 consisted of the assumption The Company sold two properties during 1999, the Searstown Mall on February 1, 1999 for a sale price of $3,300 and the Auburn Plaza on March 29, 1999 for $3,500 resulting in a $1,284 total loss on the sales. Note 3i Segment Reporting of $4,637 in first mortgage debt and the issuance of The Company has two reportable segments: retail prop- $2,212 in preferred Operating Partnership units with erties and multi-family properties. The accounting poli- the balance funded from working capital. cies of the segments are the same as those described On May 5, 1999, the Company acquired the sole general partner’s interest in the limited partnership owning the Gateway Shopping Center , a 122,000 square foot shop- ping center located in Burlington, Vermont, for $6,547. The interest was acquired out of bankruptcy by restructur- ing and assuming the mortgage debt of $6,222. The bal- ance of the purchase was funded from working capital. in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. The reportable segments are managed separately due to the differing nature of the leases and property opera- tions associated with the retail versus residential ten- ants. The table on the following page sets forth certain segment information for the Company as of and for the years ended December 31, 2001, 2000, and 1999 (does not include unconsolidated partnerships): Acadia Realty Trust | 2001 Selected Financials 21 Notes to Consolidated Statements continued In thousands, except per share amounts 2001 2000 1999 Retail Multi-Family All Retail Multi-Family All Retail Multi-Family Properties Properties Other Total Properties Properties Other Total Properties Properties All Other Total Revenues $ 70,207 $ 13,597 $ 1,656 $ 85,460 $ 79,229 $ 15,396 $ 2,133 $96,758 $ 75,823 $ 14,915 $ 1,971 $ 92,709 Property operating expenses and real estate taxes Net property income before depreciation and amortization Depreciation and amortization Interest expense 25,651 5,956 — 31,607 28,547 6,119 — 34,666 26,190 5,956 — 32,146 44,556 7,641 1,656 53,853 50,682 9,277 2,133 62,092 49,633 8,959 1,971 60,563 17,205 14,826 1,919 3,763 354 — 19,478 18,064 18,589 20,802 2,066 4,361 330 20,460 25,163 17,817 19,199 1,829 4,115 — — 241 — — 19,887 23,314 569,521 Real estate at cost 377,472 37,341 — 414,813 430,841 83,298 514,139 487,376 82,145 Total assets 453,012 35,758 5,169 493,939 435,287 81,540 6,784 523,611 481,175 82,165 7,463 570,803 Gross leasable area (multi-family: 1,474 units [2001], and 2,273 [2000 and 1999]) Expenditures for real estate and improvements REVENUES Total revenues for 7,982 1,207 10,012 1,260 — — 9,189 8,371 2,039 — 10,410 8,817 2,039 11,272 14,712 1,153 — 15,865 23,912 1,179 — — 10,856 25,091 reportable segments $ 86,451 Elimination of intersegment ground rent and manage- ment fee income Total consolidated revenues PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES Total property operating expenses and real estate taxes for reportable segments (991) $ 85,460 $ 32,598 Elimination of intersegment management fee expense (991) Total consolidated expense $ 31,607 RECONCILIATION TO INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE Net property income before depreciation and amortization Depreciation and amortization $ 53,853 (19,478) General and administrative (5,556) Equity in earnings of unconsolidated partnerships Gain (loss) on sale of properties Interest expense Impairment of real estate Income before minority interest, extraordinary item and cumulative effect of change in accounting principle 504 17,734 (18,589) (15,886) $ 97,710 (952) $ 96,758 $ 35,618 (952) $ 34,666 $ 62,092 (20,460) (5,057) 645 13,742 (25,163) — $ 93,766 (1,057) $ 92,709 $ 33,203 (1,057) $ 32,146 $ 60,563 (19,887) (6,337) 584 (1,284) (23,314) — $ 12,582 $ 25,799 $ 10,325 22 Acadia Realty Trust | 2001 Selected Financials Note 4i Investment in Unconsolidated Partnerships Crossroads In connection with the RDC Transaction, the Company acquired a 49% interest in each of the Crossroads Joint Venture and Crossroads II Joint Venture (collectively, Crossroads) which collectively own a 311,000 square foot shopping center in Greenburgh, New York. The Company accounts for its investment in Crossroads using the equity method. Summary financial informa- tion of Crossroads and the Company’s investment in Years Ended December 31, 2001 2000 1999 Statement of Income Total revenue $ 7,174 $7,242 $7,003 Operating and other expenses 2,159 1,895 1,910 Interest expense 2,620 2,699 2,568 Depreciation and amortization 538 532 534 Net income $1,857 $ 2,116 $ 1,991 and share of income from Crossroads is as follows: Company’s share of Balance Sheet Assets: December 31, net income $ 910 $ 1,037 $ 976 2001 2000 Amortization of excess investment (See below) 392 392 392 Income from partnerships $ 518 $ 645 $ 584 Rental property, net $ 7,997 $ 8,446 The unamortized excess of the Company’s investment Other assets 3,715 4,655 over its share of the net equity in Crossroads at the Total assets $ 11,712 $ 13,101 Liabilities and partners’ equity date of acquisition was $19,580. The portion of this excess attributable to buildings and improvements is being amortized over the life of the related property. Mortgage note payable $ 34,133 $ 34,642 Acadia Strategic Opportunity Fund, LP (ASOF) Other liabilities 2,759 736 On September 28, 2001, the Company entered into Partners’ equity (25,180) (22,277) a joint venture with four of its current institutional investors. Under the terms of the joint venture agree- ment, the Company and the investors will contribute Total liabilities and partners’ equity $ 11,712 $ 13,101 $20,000 and $70,000, respectively, and will seek to Company’s investment $ 5,147 $ 6,784 acquire up to $300,000 of real estate assets, focusing on neighborhood and community shopping centers. The Company will earn a pro-rata return on its invested equity and standard fees for construction, leasing and management. The Company will also earn an asset management fee equal to 1.5% of the total committed capital, as well as the opportunity to earn additional amounts based on certain investment return thresholds. As of and for the period ended December 31, 2001, ASOF had total assets and equity, each of $98, and a net loss of $402. The Company’s investment in, and share of net loss of ASOF were $22 and $14, respectively. Acadia Realty Trust | 2001 Selected Financials 23 Notes to Consolidated Statements continued Note 5i Deferred Charges Deferred charges consist of the following as of December 31, 2001 and 2000: 2001 2000 ronmental and engineering holdbacks of approximately $600, must be drawn within one year from the loan clos- ing, or the Company foregoes the ability to draw these funds at any time during the remaining term of the loan. The debt, which is secured by two of the Company’s prop- erties, requires the monthly payment of interest at the Deferred financing costs $ 7,553 $ 7,091 rate of LIBOR plus 185 basis points and principal amor- Deferred leasing and other costs 14,893 13,092 tized over 25 years and matures January 1, 2007. Approxi- Accumulated amortization (8,315) (7,157) 22,446 20,183 mately $16,000, or two-thirds of the loan amount, must be swapped to fixed rate within a year. As of December 31, 2001, the funded loan proceeds were available for $ 14,131 $ 13,026 working capital purposes. Note 6i Mortgage Loans At December 31, 2001, mortgage notes payable aggre- gated $261,607 and were collateralized by 45 properties and related tenant leases. Interest rates ranged from 3.49% to 9.88%. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2021. Certain loans are cross- collateralized and cross-defaulted as part of a group of properties. The loan agreements contain customary representations, covenants and events of default. Cer- tain loan agreements require the Company to comply with certain affirmative and negative covenants, includ- ing the maintenance of certain debt service coverage and leverage ratios. On December 28, 2001, the Company closed on a $23,000 loan with a bank. As of December 31, 2001, $12,350 was funded under the loan. The Company is required to draw an additional $7,650 within six months following the closing of the loan, or forego the ability to draw these funds at any time during the remaining term of the loan. The availability of the remaining $3,000 is subject to achieving additional leasing requirements at the collat- On December 21, 2001, the Company repaid $17,600 of outstanding debt in connection with the sale of the Glen Oaks Apartments. During August and September of 2001, the Company completed two interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $50,000 of LIBOR based variable rate debt. The first swap agreement, which extends through April 1, 2005, provides for a fixed all-in rate of 6.55% on $30,000 of notional principal. The second swap agreement, which extends through October 1, 2006, provides for a fixed all-in rate of 6.28% on $20,000 of notional principal. On May 15, 2001 the Company repaid $14,100 of out- standing debt with a bank in connection with the sale of the Marley Run Apartments. On April 10, 2001 the Company repaid $3,500 of out- standing debt under a revolving credit facility with a bank. Following this repayment, the Company had no outstanding balance under this facility, which provides for total borrowings of up to $7,400. On March 30, 2001, the Company fully repaid $9,900 of outstanding debt with a bank that was collateralized eral properties. The debt, which is secured by three of the by one of the Company’s properties. Company’s properties, requires the monthly payment of interest at the rate of LIBOR plus 175 basis points and principal amortized over 25 years and matures January 1, 2007. As of December 31, 2001, the funded loan proceeds On March 29, 2001, the Company borrowed an addi- tional $23,000 under an existing $59,000 secured financing line with a bank. were available for working capital purposes. On January 8, 2001, the Company partially repaid $10,100 On December 21, 2001, the Company closed on a $26,000 loan with a bank. As of December 31, 2001, $16,000 was funded under the loan. The remaining balance, less envi- of a fixed-rate mortgage debt, which was secured by two of the Company’s properties. On March 30, 2001, the remaining outstanding debt of $7,900 with this lender was fully repaid. 24 Acadia Realty Trust | 2001 Selected Financials The following table summarizes the Company’s mortgage indebtedness as of December 31, 2001 and 2000: In thousands, except per share amounts DECEMBER 31, Properties Monthly 2001 2000 Interest Rate Maturity Encumbered Payment Terms MORTGAGE NOTES PAYABLE — VARIABLE-RATE Fleet Bank, N.A. Fleet Bank, N.A. Sun America Life Insurance Company Sun America Life Insurance Company KBC Bank Fleet Bank, N.A. Fleet Bank, N.A. Metropolitan Life Insurance Company First Union National Bank Dime Savings Bank of New York Fleet Bank, N.A. Dime Savings Bank of New York $ 4,051 $ 4,110 3.79% (LIBOR + 1.75%) 9,106 13,521 9,682 — — 8,853 10,800 13,512 58,149 12,350 16,000 9,216 13,774 9,856 14,238 3,500 8,965 3.82% (LIBOR + 1.78%) 4.28% (LIBOR + 2.05%) 4.65% (LIBOR + 2.05%) — (LIBOR + 1.50%) — 3.89% (LIBOR + 1.75%) 10,800 4.20% (LIBOR + 2.00%) 13,636 35,814 3.49% (LIBOR + 1.45%) 3.87% (LIBOR + 1.75%) — 3.73% (LIBOR + 1.75%) — 3.73% (LIBOR + 1.85%) Total variable-rate debt 156,024 123,909 MORTGAGE NOTES PAYABLE — FIXED RATE Sun America Life Insurance Company Huntoon Hastings Capital Corp. North Fork Bank Anchor National Life Insurance Company Lehman Brothers Holdings, Inc. Mellon Mortgage Company Northern Life Insurance Company Reliastar Life Insurance Company Metropolitan Life Insurance Company Bank of America, N.A. Bank of America, N.A. Morgan Stanley Mortgage Capital Total fixed-rate debt Notes: — 6,194 — 3,676 — 7,305 2,619 1,805 24,820 11,017 5,508 42,639 17,999 6,222 9,887 3,775 17,792 7,442 2,895 1,996 25,148 11,100 5,550 43,397 105,583 153,203 $261,607 $ 277,112 7.75% 9.88% 7.75% 7.93% 8.32% 9.60% 7.70% 7.70% 8.13% 7.55% 7.55% 8.84% 03/15/02 05/31/02 08/01/02 10/01/02 — 03/01/03 08/01/03 11/01/03 01/01/05 04/01/05 01/01/07 01/01/07 — 09/01/02 — 01/01/04 — 05/23/05 12/01/08 12/01/08 11/01/10 01/01/11 01/01/11 11/01/21 (1) (3) (4) (5) — (6) (7) (8) (9) (10) (11) (12) — (13) — (14) — (15) (16) (16) (17) (18) (19) (20) (2) (2) (2) (2) — (2) (2) (21) (2) (2) (2) (2) — $ 55 (2) — $ 33 (2) — $ 70 (2) $ 41 (2) $ 28 (2) $ 197 (2) $ 78 (2) $ 39 (2) $ 380 (2) (1) Town Line Plaza (10) Ledgewood Mall (16) Manahawkin Shopping (2) Monthly principal and interest (3) Smithtown Shopping Center (4) Merrillville Plaza (5) Village Apartments (6) Marketplace of Absecon New Loudon Center Route 6 Plaza Bradford Towne Centre Berlin Shopping Center (11) Branch Shopping Center Abington Towne Center Methuen Shopping Center (12) Walnut Hill Plaza (7) Soundview Marketplace Bloomfield Town Square (8) Green Ridge Plaza (13) Gateway Shopping Center Luzerne Street Plaza Valmont Plaza (9) 239 Greenwich Avenue (14) Pittston Plaza (15) Mad River Shopping Center Center (17) Crescent Plaza East End Centre (18) GHT Apartments (19) Colony Apartments (20) Midway Plaza Kings Fairgrounds Shillington Plaza Dunmore Plaza Kingston Plaza 25th Street Shopping Center Circle Plaza Northside Mall Monroe Plaza New Smyrna Beach Mountainville Plaza Cloud Springs Plaza Birney Plaza Troy Plaza Martintown Plaza Plaza 15 Ames Plaza (21) Interest only until 5/02; monthly principal and interest thereafter Acadia Realty Trust | 2001 Selected Financials 25 Notes to Consolidated Statements continued The scheduled principal repayments of all mortgage indebtedness as of December 31, 2001 are as follows: Hedge Notional Type Value Interest Maturity Fair Value Rate 2002 2003 2004 2005 2006 Thereafter $ 46,699 23,573 7,761 77,444 40,835 65,295 $261,607 Note 7i Interest Rate Hedges During 2001, the Company completed two interest rate swap transactions to hedge the Company’s exposure Swap1 Swap1 Swap Swap $ 11,974 5.94% 6/16/07 $ (545) 5,000 6.48% 6/16/07 30,000 4.80% 4/1/05 20,000 4.53% 10/1/06 (358) (561) 204 — Caps 9/1/02 1Relates to the Company’s investment in Crossroads. 24,000 6.50% On December 31, 2001, the derivative instruments were reported at their fair value as other liabilities ($357) and investments in unconsolidated partnerships ($903). For the year ended December 31, 2001, the Company recorded a $54 expense due to partial ineffectiveness on one of the swaps. The ineffectiveness resulted from differences between the swap notional and the princi- to changes to interest rates with respect to $50,000 pal amount of the hedged debt. of LIBOR based variable-rate debt. The first swap agree- ment, which extends through April 1, 2005, provides for a fixed all-in rate of 6.55% (includes a credit spread of 1.75%) on $30,000 of notional principal. The second swap agreement, which extends through October 1, 2006, provides for a fixed all-in rate of 6.28% (includes a credit spread of 1.75%) on $20,000 of notional principal. The Company is also a party to two swap agreements with a bank through its 49% interest in Crossroads (see note 4). These swap agreements effectively fix the inter- est rate on the Company’s pro rata share, or $16,725, of the joint venture mortgage debt. As of December 31, 2001, unrealized losses of $1,206 representing the fair value of the aforementioned swaps were reflected in accumulated other compre- hensive loss, a component of shareholder’s equity. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments. The notional value provides an indication of the extent of the Company’s involvement in these The Company’s interest rate hedges are designated as cash flow hedges and hedge the future cash out- flows on debt. Interest rate swaps that convert variable payments to fixed payments, such as those held by the Company, as well as interest rate caps, floors, collars, and forwards are cash flow hedges. The unrealized gains/ losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or earnings depending on the type of hedging relation- ship. For cash flow hedges, offsetting gains and losses are reported in accumulated other comprehensive income. Over time, the unrealized gains and losses held in accumulated other comprehensive income will be reclassified to earnings. This reclassification occurs over the same time period in which the hedged items affect earnings. Within the next twelve months, the Company expects to reclassify to earnings as interest expense approximately $300 of the current balance held in accumulated other comprehensive loss. instruments on December 31, 2001, but does not repre- The Company hedges its exposure to the variability in sent exposure to credit, interest rate or market risks. future cash flows for forecasted transactions over a maximum period of twelve months. During the fore- casted period, unrealized gains and losses in the hedg- ing instrument will be reported in accumulated other comprehensive income or loss. Once the hedged trans- action takes place, the hedge gains and losses will be reported in earnings during the same period in which the hedged item is recognized in earnings. 26 Acadia Realty Trust | 2001 Selected Financials Note 8i Note 9i Minority Interests Related Party Transactions Minority interest represents the limited partners’ inter- On December 30, 1999, the Company and Marvin est of 5,249,717 and 6,804,144 Common OP Units in the Slomowitz, the former Chief Executive Officer of the Operating Partnership at December 31, 2001 and 2000, Compay, terminated certain obligations which were respectively, and 2,212 units of Preferred Limited Part- incurred in connection with the RDC Transaction. The nership Interests designated as Series A Preferred Units principal terms included the cancellation of the lease for (Preferred OP Units) issued November 16, 1999 in con- the Company’s prior headquarters in a building owned nection with the acquisition of all the partnership by Mr. Slomowitz. Rent expenses for this office space was interests of the limited partnership which owns the $119 for the year ended December 31, 1999. The Company Pacesetter Park Shopping Center. paid Mr. Slomowitz the sum of $329 in connection with The Preferred OP Units, which have a stated value of $1,000 each, are entitled to a quarterly preferred distri- bution of the greater of (i) $22.50 (9% annually) per Preferred OP Unit or (ii) the quarterly distribution attributable to a Preferred OP Unit if such unit were converted into a Common OP Unit. The Preferred OP Units are currently convertible into Common OP Units based on the stated value divided by $7.50. After the seventh anniversary following their issuance, either the Company or the holders can call for the conversion of the Preferred OP Units at the lesser of $7.50 or the market price of the Common Shares as of the conversion date. On April 12, 2001, the Company redeemed 8,000 Common OP Units held by a limited partner at $6.15 per unit, the market price of the Common Shares at that date of share. Related to the sale of two properties during 2001, the Company redeemed 680,667 Common OP Units on May 15, 2001 in connection with the sale of its interest in the Marley Run Apartments and 38,877 Common OP Units on December 21, 2001 in connection with the sale of the Glen Oaks Apartments (note 2). During 2001, various limited partners converted a total of 826,884 Common OP Units into Common Shares on a one-for-one basis. Minority interests at December 31, 2001 and 2000 also include an aggregate amount of $1,429 and $2,197, the lease cancellation. Additionally, Mr. Slomowitz termi- nated his options to acquire 301,000 Common Shares and waived a $100 payment which was due August, 2000. Mr. Slomowitz also retained the right to continue to guarantee Company debt up to $55,000. Mr. Slo- mowitz also removed all restrictions on the sale of any properties which he had originally contributed to the Company, waived his claims for present and future bro- kerage commissions and agreed to absorb up to $1,250 of tax liabilities resulting in event of the sale thereof. The Company remains responsible to reimburse Mr. Slomowitz for any such liability in excess of $1,250. Mr. Slomowitz also resigned from the Company’s Board of Trustees effective December 8, 1999. On July 16, 1999, and April 9, 1999, Mr. Slomowitz converted 600,000 and 100,000 Common OP Units, respectively, into Common Shares. The Company currently manages one property in which a shareholder of the Company has an ownership inter- est for which the Company earns a management fee of 3% of tenant collections. In each of 2001 and 2000, the Company terminated contracts to manage a prop- erty owned by related parties that earned fees of 3.25% and 3.5% of tenant collections, respectively. Manage- ment fees earned by the Company under these con- tracts aggregated $391, $853, and $639 for the years ended December 31, 2001, 2000 and 1999 respectively. In connection with the RDC Transaction, the Company respectively, which as of December 31, 2001, represent is obligated, for a period of five years following the third party interests in three of the properties in which transaction, to reimburse the partners of the real estate the Company has a majority ownership position. Dur- ing, 2001, the Company purchased the entire minority partnerships which contributed properties as part of the transaction, for any tax liabilities resulting from the interest position in one formerly majority-owned part- sale of any of the contributed properties. As a result, in nership for $30. Acadia Realty Trust | 2001 Selected Financials 27 Notes to Consolidated Statements continued connection with the sale of a portion of the Abington rejected nor affirmed. During the years ended Towne Center (note 2), the Company reimbursed a total December 31, 2001, 2000 and 1999, no single tenant of $643 to the partners of the limited partnership which collectively accounted for more than 10% of the contributed this property. Of this amount, Messrs. Dwor- Company’s total revenues. man and Bernstein received a total of $241 as a result of their interests in the contributing partnership. Note 11i On May 15, 2001, the Company redeemed 680,667 Common OP Units in connection with the sale of its interest in the Marley Run Apartments (Note 2). Messrs. Dworman and Bernstein owned a total of 13,600 of these redeemed Common OP Units through various affiliated entities. Included in the Common OP Units converted to Com- mon Shares during 2001, were 10,000 Common OP Units converted by Mr. Dworman who then transferred them to a private charitable foundation in accordance with a pre-existing arrangement. In connection with the Company’s Tender Offer, which was completed in February of 2002, Mr. Dworman, ten- dered and sold 492,271 Common OP Units and 107,729 Common Shares (note 21). Note 10i Tenant Leases Space in the shopping centers and other retail proper- ties is leased to various tenants under operating leases which usually grant tenants renewal options and gen- erally provide for additional rents based on certain operating expenses as well as tenants’ sales volume. Minimum future rentals to be received under non- cancelable leases for shopping centers and other retail properties as of December 31, 2001 are summarized as follows: 2002 2003 2004 2005 2006 Thereafter $ 49,356 48,447 43,534 37,153 32,646 213,232 Lease Obligations The Company leases land at six of its shopping centers, which are accounted for as operating leases and gener- ally provide the Company with renewal options. The leases terminate during the years 2016 to 2066. Four of these leases provide the Company with options to renew for additional terms aggregating from 20 to 44 years. The Company leases space for its New York City corporate office for a term expiring in 2002. Future minimum rental payments required for leases having remaining non-cancelable lease terms are as follows: 2002 2003 2004 2005 2006 Thereafter $ 668 642 642 642 642 19,997 $ 23,233 Note 12i Share Incentive Plan During 1999, the Company adopted the 1999 Share Incentive Plan (the 1999 Plan) which replaced both the 1994 Share Option Plan and the 1994 Non-Employee Trustees’ Share Option Plan. The 1999 Plan authorizes the issuance of options equal to up to 8% of the total Common Shares outstanding from time to time on a fully diluted basis. However, not more than 4,000,000 of the Common Shares in the aggregate may be issued pursuant to the exercise of options and no participant may receive more than 5,000,000 Common Shares dur- ing the term of the 1999 Plan. Options are granted by the Share Option Plan Committee (the Committee), which currently consists of two non-employee Trustees, $424,368 and will not have an exercise price less than 100% of Minimum future rentals above include a total of $53,710 for four tenants (with 20 leases), which have filed for bankruptcy protection. None of these leases have been the fair market value of the Common Shares and a term of greater than ten years at the grant date. Vesting of options is at the discretion of the Committee with the exception of options granted to non-employee Trustees, 28 Acadia Realty Trust | 2001 Selected Financials which vest in five equal annual installments beginning employee stock options equaled or exceeded the mar- on the date of grant. Pursuant to the 1999 Plan, non- ket price of the underlying stock on the date of grant. employee Trustees receive an automatic grant of 1,000 The alternative fair value accounting provided for under options following each Annual Meeting of Shareholders. SFAS No. 123, “Accounting for Stock-Based Compensa- As of December 31, 2001, the Company has issued tion,” has not been elected by the Company. 2,579,400 options to officers and employees, which are for ten-year terms and vest in three equal annual install- ments beginning on the grant date. In addition, 14,000 options have been issued to non-employee Trustees. Accordingly, pro forma information regarding net income and earnings per share as required by SFAS No. 123 has been determined as if the Company had accounted for its employee stock options under the fair value method. The 1999 Plan also provides for the granting of Share The fair value for these options was estimated at the date Appreciation Rights, Restricted Shares and Performance of the grant using the Black-Scholes option-pricing model Units/Shares. Share Appreciation Rights provide for the with the following weighted-average assumptions: participant to receive, upon exercise, cash and/or Com- mon Shares, at the discretion of the committee, equal to in value to the excess of the option exercise price over the fair market value of the Common Shares at the exercise date. The Committee will determine the award and restrictions placed on Restricted Shares, including the dividends thereon and the term of such restrictions. The Committee also determines the award and vesting of Performance Units and Performance Shares based on the attainment of specified performance objectives of the Company within a specified performance period. For the year ended December 31, 2001, 2000 and 1999, the Company has issued 37,110, 84,063 and 2,000 Restric- ted Shares, respectively, to employees, which vest equally over three years. No awards of Share Appreciation Rights or Performance Units/Shares were granted for the years Risk-free interest rate Dividend Yield Expected Life Years ended December 31, 2001 5.4% 8.4% 2000 4.9% 7.8% 1999 6.4% 9.5% 7.0 years 7.7 years 8.6 years Expected volatility 17.7% 30.0% 32.4% For purposes of pro forma disclosure, the estimated fair value of the options are amortized to expense over the options vesting period. For the years ended December 31, 2001, 2000 and 1999, pro forma net income is $9,699 ($0.34 per Common Share), $19,038 ($0.72 per Common Share), and $6,573 ($0.26 per Common Share), respectively. Note 13i Employee 401(k) Plan ended December 31, 2001, 2000 and 1999. The Company maintains a 401(k) plan for employees The Company accounts for stock-based compensation pursuant to Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB No. 25, no compen- sation expense has been recognized in the accompany- ing financial statements related to the issuance of stock options because the exercise price of the Company’s under which the Company currently matches 50% of a plan participant’s contribution up to 6% of the employee’s annual salary. A plan participant may con- tribute up to a maximum of 15% of their compensation but not in excess of $11 for the year ended December 31, 2001. The Company contributed $135, $143, and $93 for the years ended December 31, 2001, 2000 and 1999, respectively. Acadia Realty Trust | 2001 Selected Financials 29 Notes to Consolidated Statements continued Changes in the number of shares under all option arrangements are summarized as follows: Outstanding at beginning of period Granted Years Ended December 31, 2001 2,124,600 475,000 2000 2,071,600 55,000 1999 300,000 2,071,600 Option price per share granted $6.00–$7.00 $5.00–$5.75 $4.89–$7.50 Cancelled Exercisable at end of period Exercised Expired 6,200 2,418,137 — — 2,000 2,108,200 — — 300,000 1,368,733 — — Outstanding at end of period 2,593,400 2,124,600 2,071,600 Option prices per share outstanding $4.89–$7.50 $4.89–$7.50 $4.89–$7.50 As of December 31, 2001 the outstanding options had a weighted average remaining contractual life of approxi- mately 7.1 years. Note 14i Note 15i Repurchase of Common Shares In January 2001, the Board of Trustees approved a con- Dividends and Distributions Payable tinuation and expansion of the Company’s existing On December 14, 2001, the Company declared a cash share repurchase program. Management is authorized, dividend for the quarter ended December 31, 2001 of at its discretion, to repurchase up to an additional $0.12 per Common Share. The dividend was paid on $10,000 of the Company’s outstanding Common January 15, 2002 to shareholders of record as of Decem- Shares. The program may be discontinued or extended ber 31, 2001. at any time and there is no assurance that the Com- pany will purchase the full amount authorized. The Company has determined that the cash distributed to the shareholders is characterized as follows for Fed- As of December 31, 2001, the Company had repurchased eral income tax purposes: 1,928,432 Common Shares (net of 123,173 Common Shares reissued) at a total cost of $10,983 under the expanded share repurchase program which allows for the repur- chase of up to $20,000 of the Company’s outstanding Common Shares. The repurchased shares are reflected as a reduction of par value and additional paid-in capital. In addition to the above share repurchase program, the Company commenced a modified “Dutch Auction” ten- der offer (the Tender Offer) in December 2001 whereby, upon completion in February 2002, it repurchased a total of 5,523,974 Common Shares and Common OP Units at a price of $6.05 per share (note 21). 30 Acadia Realty Trust | 2001 Selected Financials Years Ended December 31, 2001 2000 1999 Ordinary income 79% 100% 41% Long Term Capital Gain Return of capital 21% — — — — 59% 100% 100% 100% Note 16i Fair Value of Financial Instruments SFAS No. 107, “Disclosures About Fair Value of Financial Assets, Accounts Payable and Accrued Expenses, Divi- dends Payable and Other Liabilities. The carrying amount of these assets and liabilities approximates fair value due to the short-term nature of such accounts. Instruments,” requires disclosure on the fair value of Mortgage Notes Payable. As of December 31, 2001 and financial instruments. Certain of the Company’s assets 2000, the Company has determined the estimated fair and liabilities are considered financial instruments. Fair value estimates, methods and assumptions are set forth below. Cash and Cash Equivalents, Cash in Escrow, Rents Receivable, Note Receivable, Prepaid Expenses, Other value of its mortgage notes payable are approximately $272,208 and $287,588, respectively, by discounting future cash payments utilizing a discount rate equiva- lent to the rate at which similar mortgage notes payable would be originated under conditions then existing. Note 17i Summary of Quarterly Financial Information (unaudited) The separate results of operations of the Company for the years ended December 31, 2001 and 2000 are as follows: 2001 Revenue $22,589 $ 21,018 $ 20,513 $ 21,340 $85,460 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL Income (loss) before minority interest, extraordinary item and cumulative effect of change in accounting principle Net income (loss) Net income (loss) per Common Share — basic and diluted Income (loss) before extraordinary item and cumulative effect of a change in accounting principle Net income (loss) Cash dividends declared per Common Share Weighted average Common Shares outstanding — basic and diluted Revenue Income before minority interest Net income Net income per Common Share — basic and diluted Cash dividends declared per Common Share Weighted average Common Shares outstanding — basic and diluted $ 2,312 $ 1,583 $ 9,546 $ 7,800 $(10,905) $ (9,269) $ 11,629 $ 9,688 $ 12,582 $ 9,802 $ 0.08 $ 0.06 $ 0.12 $ $ $ 0.27 0.27 0.12 $ $ $ (0.33) (0.33) 0.12 $ 0.34 $ 0.34 $ 0.12 $ $ 0.36 0.35 $ 0.48 28,091,479 28,089,593 28,488,712 28,575,250 28,313,070 2000 MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 TOTAL $ 23,863 $ 2,701 $ 1,874 $ 0.07 $ 0.12 $24,969 $ 4,238 $ 2,964 $ $ 0.12 0.12 $ 23,489 $ $ 1,527 1,105 $ 0.04 $ 0.12 $ 24,437 $ 17,333 $ 13,964 $ 0.49 $ 0.12 $ 96,758 $ 25,799 $ 19,907 $ 0.75 $ 0.48 25,476,098 25,241,794 26,789,666 28,218,059 26,437,265 Acadia Realty Trust | 2001 Selected Financials 31 Notes to Consolidated Statements continued Note 18i Legal Proceedings On July 30, 2001, the Company filed a lawsuit in Supe- may be potentially liable for costs associated with any potential environmental remediation at any of its for- merly or currently owned properties. rior Court of New Jersey Law Division: Bergen County The Company conducts Phase I environmental reviews against The Great Atlantic & Pacific Tea Company with respect to properties it acquires. These reviews (A&P). The complaint alleges A&P defaulted under its include an investigation for the presence of asbestos, lease at the Elmwood Park Shopping Center by failing underground storage tanks and polychlorinated to accept delivery of its site at the center. During 2001, biphenyls (PCBs). Although such reviews are intended the Company completed all required sitework and also to evaluate the environmental condition of the subject complied with all other requirements of the lease in delivering the pad site to A&P. The Company believed A&P wrongfully refused acceptance of the site and property as well as surrounding properties, there can be no assurance that the review conducted by the Com- pany will be adequate to identify environmental or sought to have the Court declare the lease in default, other problems that may exist. Where a Phase I assess- terminate the lease and accelerate the rent that totaled ment so recommended, a Phase II assessment was approximately $24,400 over the 20 year lease term. On December 31, 1998, the Company settled certain litigation with Jack Wertheimer, a former President of the Company. The Company entered into an agreement whereby the Company paid Mr. Wertheimer $1,000 on December 31, 1998 and $900 on April 1, 1999 and agreed to pay him five annual payments of $200 which com- menced January 10, 2000. In March 2002, the Company conducted to further determine the extent of possible environmental contamination. In all instances where a Phase I or II assessment has resulted in specific recom- mendations for remedial actions, the Company has either taken or scheduled the recommended remedial action. To mitigate unknown risks, the Company has obtained environmental insurance for most of its prop- erties, which covers only unknown environmental risks. agreed to pay Mr. Wertheimer $388,000 in satisfaction The Company believes that it is in compliance in all of all remaining payments owed. The Company is involved in other various matters of lit- igation arising in the normal course of business. While the Company is unable to predict with certainty the amounts involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting liability, if any, will not have a significant effect on the Company’s consoli- dated financial position. Note 19i Contingencies Under various Federal, state and local laws, ordinances and regulations relating to the protection of the envi- ronment, a current or previous owner or operator of real estate may be liable for the cost of removal or remedia- tion of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company material respects with all Federal, state and local ordi- nances and regulations regarding hazardous or toxic substances. Management is not aware of any environ- mental liability that they believe would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which it would incur significant environ- mental costs if any or all properties were sold, disposed of or abandoned. However there can be no assurance that any such non-compliance, liability, claim or expen- diture will not arise in the future. Note 20i Extraordinary Item — Loss on Early Extinguishment of Debt The consolidated statement of income for the year ended December 31, 2001 includes the write-off of $140 in net deferred financing fees as a result of the repayment of the related mortgage debt. 32 Acadia Realty Trust | 2001 Selected Financials Note 21i Subsequent Events On January 16, 2002, the Company sold Union Plaza, a 218,000 square foot shopping center located in New Castle, Pennsylvania for $4,750. The Company received a $3,560 purchase money note. The note, which matures January 15, 2005, requires monthly interest of 7% for year one, increasing at a rate of 1% per annum throughout the term. As part of the transaction, the Company has agreed to reimburse the purchaser 50% of the former Ames rent, or $43 per month, for a period of 18 months. In February 2002, the Company completed a Tender Offer (note 1). The Company purchased a total of 5,523,974 Common Shares and Common OP Units at a purchase price of $6.05 per share for a total of $33,400. In February 2002, the Board of Trustees voted to permit Yale University (Yale) to acquire 2,266,667 additional Common Shares from the Howard Hughes Medical Institute by granting a conditional waiver of the provi- sion in the Company’s Declaration of Trust that prohibits ownership positions in excess of 4% of the Company. The waiver was limited to this particular transaction. Following this, Yale owned 8,421,759 Common Shares, or 34% of the Company’s outstanding Common Shares. Additionally, as a condition to approving the waiver, Yale agreed to establish a voting trust whereby all shares owned by Yale in excess of 30% of the Company’s out- standing Common Shares, will be voted in the same proportion as all other shares voted, excluding Yale. Acadia Realty Trust | 2001 Selected Financials 33 20 Soundview Marketplace Port Washington, NY 11050-2221 Tel: 516.767.8830