Acadia Realty Trust
Annual Report 2002

Plain-text annual report

1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 F r o m L e f t t o R i g h t Greenridge Shopping Center Scranton, PA Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH 4WaystoCreate Growth&Value Acadia Realty Trust Annual Rep0rt 2002 4WaystoCreate Acadia Realty Trust (NYSE: AKR) is a fully integrated and self-managed Financial Highlights real estate investment trust (“REIT”) In thousands 2002 2001 2000 1999 1998 1 which specializes in the acquisition, redevelopment and operation of shopping centers anchored by grocery and value-oriented retail. Acadia currently owns or operates 62 properties totaling approximately nine million square feet, located primarily in the Northeast, Mid- Atlantic and Midwestern regions of the United States. Total Revenues2 Funds from Operations3 Real Estate Owned at Cost2 Common Shares Outstanding Operating Partnership Units Outstanding $ 69,347 $ 61,282 $ 29,402 $ 29,513 $413,878 $ 398,416 25,257 3,163 28,698 5,250 $ 63,450 $ 31,789 $ 387,729 28,150 6,804 $ 58,933 $ 31,662 $ 31,160 $ 10,352 $389,111 $348,563 25,724 10,484 25,419 11,184 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. 2Amounts for 1998 through 2001 have been restated to reflect the activity and balances from continuing operations only. A significant component of the Company’s business plan since the RDC Transaction was the disposition of non-core properties. The Company sold 27 properties under this initiative, which was completed during 2002. Consistent with the adoption of Statement of Financial Accounting Standards No. 144 for the year ended December 31, 2002, the results of operations as well as the assets and liabilities of the sold properties are reported separately as discontinued operations in the Company’s consolidated financial statements. 3The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemen- tal disclosure of operating performance for an equity 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. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined in accordance with accounting principles generally accepted in the United States (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s performance or to cash flows as a measure of liquidity. 3NAREIT 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 unconsolidated 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 year ended December 31, 1998 has been restated to conform to this revised definition. O n t h e C o v e r : F r o m L e f t t o R i g h t F r o m L e f t t o R i g h t Elmwood Park Shopping Center Elmwood Park, NJ New Loudon Center Latham, NY Marketplace of Absecon Absecon, NJ Abington Towne Center Abington, PA Walnut Hill Plaza Woonsocket, RI Market Square Shopping Center Wilmington, DE Ledgewood Mall Ledgewood, NJ Growth&Value While 2002 was a period of continued economic volatility and uncertainty in the broader markets, Acadia continued to deliver stability and strong growth for its shareholders. For the third straight year we outperformed the REIT index. Acadia provided shareholders with a total return in excess of 20% and a three- year average total return of 26%. At a time when too many of our 401(k) accounts and stock portfolios have continued to shrink, it is very comforting to be able to be a bright spot during a difficult period. More importantly, as evidenced by our recent activity, I remain confident that our team can continue to provide growth and stability going forward. Solid Portfolio. After several years of pruning Acadia’s portfolio, redeveloping assets and prof- itably recycling our capital, we have created a strong, focused portfolio and solid balance sheet. In 2002, we disposed of 20 properties totaling three million square feet, further reduc- ing our exposure to weakened retailers and underperforming properties. We successfully re-anchored several of our centers, replacing tenants such as Bradlees, Caldor and Grand Union with strong anchors including Home Depot, Shaw’s and Wal-Mart. We now have a necessity-based and value-oriented portfolio that is two-thirds supermarket- anchored, has performed extremely well in diffi- cult times and continues to be well positioned to provide solid growth as our economy recovers. Strong Balance Sheet. Our balance sheet and key operating ratios are strong. Acadia has some of the most conservative dividend payout and debt service coverage ratios in our sector. What this means is that at a time when some companies are faced with the difficult choice of either cutting their dividend or borrowing and increasing their debt levels in order to maintain their dividend, our dividend and balance sheet remain secure. Moreover, in 2002, we raised our dividend by 8% Kenneth F. Bernstein President and Chief Executive Officer Acadia’s Total Return $250 Acadia’s Annual Dividend $200 $150 $100 $50 $0.58 $0.52 $0.48 Acadia Morgan Stanley REIT Index S&P 500 January 1, 1999 through March 1, 2003 (Assumes reinvestment of all dividends) 2001 2002 2003* *First quarter dividend annualized Acadia Realty Trust 2002 Annual Report 1 and in 2003 we announced an increase of over 11%. We have now put Acadia in a position where we can comfortably provide future dividend increases com- mensurate with our earnings growth while continuing to maintain a disci- plined and strong financial position. I recognize that there are some companies that have been well rewarded for having an artificially high dividend yield, even if it is at the expense of the financial security of their balance sheet. I think this is a mistake. Too often, it is only after problems become irreversible that shareholders become aware of the situation. We have seen too many bubbles burst to believe that “borrow- ing from Peter to pay Paul” is a sound business practice. In short, it is not just the size of the dividend, but the quality of the earnings and balance sheet underlying the dividend that matter. External Growth. With Acadia’s portfolio and financial position in the strongest shape in the company’s history and our corporate turnaround in its final stages, we expanded our focus in 2002 to include an exciting acquisition program that has begun to create significant growth and long-term value for our shareholders. In 2002, we further evidenced our ability to create shareholder value through unique, strategic and, we expect, prof- itable acquisitions. In the past 12 months we acquired over $150 million of prop- erties — at a significant discount to replacement cost — which provide Acadia with an ideal blend of asset qual- ity, growth and attractive current yield. While it was a challenging market- place to acquire assets, we have been able to add properties that will not only contribute significantly to our earnings growth, but also continue to improve the quality of our asset base. Our Wilmington, Delaware acqui- sition, which we highlight later in this report, is just one example of our blend- ing an attractive investment yield with a portfolio-enhancing asset. The highly attractive structure of our acquisition fund enables us to create significant earnings growth without having to compromise the strength of our balance sheet. Transparency and Governance. In 2002, it became clear to most of the invest- ment community that along with delivering results, a company must provide absolute transparency and clarity in its disclosure and reporting. This is a discipline that Acadia has maintained since its creation. We have been consistently recognized for the quality and depth of our reporting. Last year we were recognized by NAREIT with awards for our web site, annual report presentation and Management Discussion and Analysis. We were the only REIT to be recognized in all three categories. We did not do this to win awards. We did this because we believe that the more information we provide to the investment community, the easier it will be for our shareholders to have confidence in what we are doing. We have been fortunate to have some of the most respected institu- tional investors as significant long-term shareholders in Acadia. These investors demand the highest level of integrity, accountability and performance. Our hard work has gained their trust and support which we intend to maintain. And as a result, all our shareholders benefit from our holding ourselves to this high standard. Strong Team. Looking back on all that we achieved last year, one fact becomes quite evident: none of this could have been achieved without the awesome talent and dedication of the team at Acadia. I am humbled by and grateful for the people who day after day have dedicated themselves to creating the results that are now hitting the bottom line. As the shopping center business has become more sophisticated and demanding, we are fortunate to have a core group of professionals who can help assure all of Acadia’s stake- holders that this is a company that will be run with the highest levels of intelligence, intensity and integrity. Acadia enters 2003 proud of all that we have accomplished and energized and excited by the opportunities that we see ahead of us. We recognize that there remains a tremendous amount of uncertainty and challenges for the world and our economy. And, as they say, past performance is no guarantee of future results. Nevertheless, we remain confident that as long as we remain focused and persistent, we will continue to successfully navigate through the challenges ahead and continue to create shareholder value for years to come. Kenneth F. Bernstein President and Chief Executive Officer F r o m L e f t t o R i g h t Ledgewood Mall Ledgewood, NJ 239 Greenwich Avenue Greenwich, CT 2 Acadia Realty Trust 2002 Annual Report From the Chairman Acadia’s 26% average annual return for the past three years places us in the top 10% of all REITs. A major portion of this total return was the result of a vastly improved Ross Dworman Chairman of the Board portfolio and steady growth in FFO and NAV. FFO multiple expansion also contributed to our success. As of this writing, the strip center sector is trad- ing at an average 12% premium to NAV, 7% higher than the 10-year average premium of 5%. Considering the fact that Acadia is still trading at a discount to NAV, the company represents solid value in the strip center universe. Acadia’s mission continues to be maximizing shareholder value and producing total annual returns in excess of the historical REIT average of 10%–12% for shopping centers. We can accomplish these goals two ways: first, by intensively leasing and managing existing proper- ties to create “upside,” and second, by investing capital — our own equity or third-party equity — at an attractive spread over our cost of funds. In 2002, Acadia took advantage of attractive investment opportunities by deploying capital through our Joint Venture that contributed to earnings growth. The Joint Venture, when fully invested, provides Acadia with a vehicle to invest nearly 10% of our net share- holder equity opportunistically by leveraging our equity with institutional capital. The associated management fees and “carried” interests will grow our FFO and NAV at rates faster than would be attainable through ordinary means. Simply put, the Joint Venture can add about 1%–2% per year to return on equity, a significant amount for an industry averaging 10%–12% total annual returns. The Joint Venture is an exciting tool to have in an economic and indus- try environment where same store NOI growth has slowed to almost 0%. In the face of weaker NOI growth, protecting net asset value from poten- tial tenant bankruptcies continues to be important. Historically, we have not only mitigated potential lost income from tenant bankruptcies — long-term, we have profited from the rotation of anchors in similar situations. The successful implementation of our multi-year plan to sell off non-core assets, refinance and reduce debt and invest through a disciplined approach based on careful analysis has resulted in a reduction of our Debt to Total Market Capitalization ratio from 66% three years ago to 45% today — significantly increasing Acadia’s financial flexibility. In looking forward to 2003, we must remain cautiously optimistic on the growth front. Asset values for both strip centers and real estate in general continue to increase while fundamentals remain weak. Many investors are “paying up” for shopping centers because of the lack of alterna- tive investment options, and histori- cally low interest rates, which make leveraged returns on real estate attrac- tive despite higher prices relative to replacement cost. Opportunities will be harder to find and discipline more important than ever. Once again, thanks for your support. Ross Dworman Chairman of the Board F r o m L e f t t o R i g h t Town Line Plaza Rocky Hill, CT Soundview Marketplace Port Washington, NY Acadia Realty Trust 2002 Annual Report 3 1' 1' $7.50 1 ' $12.75 1 ' How do you make the same square foot of retail space bigger? Throughout the shopping center industry, there is the inevitable rotation of anchor tenants resulting from the ebb and flow of fortune in retail — we position ourselves to profit from this rotation. 4 Acadia Realty Trust 2002 Annual Report 1.Enhance Value Our constant goal has been to establish a stable and dependable portfolio with steady growth through the continual refinement and redevelopment of our properties. We have achieved our goal by the aggressive repositioning of our portfolio; through both our disposi- tion and redevelopment programs. Here are the fundamentals: Step 1: It All Starts with the Right Foundation. Acadia has refined its portfolio so that it now consists of well-located shopping centers, situated in high barrier-to-entry markets, predominantly anchored by supermarkets and discount retailers. We have carefully pruned our portfolio of those properties that do not have the potential to be solid necessity/value oriented shopping centers. In 2002, we sold 20 shopping centers, including our entire southeast portfolio, for $74 million — assets which were not consis- tent with our long-term growth strategy. Step 2: Then Create Value through Redevelopment and Re-anchoring. We focus our attention, talent and resources on the redevelopment process. In 2002, two projects illustrate how this works at Acadia: ■ During 2002, we completed the redevelopment of the Elmwood Park Shopping Center located in densely populated Elmwood Park, New Jersey. The former anchor was an undersized and obsolete Grand Union supermarket. We re-anchored the center with a new Pathmark supermarket and Walgreens drugstore — realizing over a 25% incremental return on our investment. ■ In Burlington, Vermont, we are “de-malling” and redeveloping what was a partially enclosed shopping center anchored by an undersized Grand Union supermarket. Upon the opening of a new 72,000-square-foot Shaw’s supermarket during 2003, we will have increased the anchor base rent by four-fold in this revitalized and contemporary open-air center. There is also an ongoing rotation of anchors in the shopping center business resulting from the ebb and flow of fortune in the retail industry. Key to our success is positioning ourselves to profit from this rotation: ■ We recently replaced Bradlees, an anchor tenant at the Crescent Plaza, with Home Depot, and in doing so doubled the base rent for the space. ■ We have worked through similar rotations within our portfolio — Wal-Mart replacing Caldor at both our Town Line Plaza and the Methuen Shopping Center; Stop & Shop replacing Grand Union at the Pacesetter Park Shopping Center; and Waldbaum’s Super- markets replacing Grand Union at our Branch Shopping Center. In each of these cases, we realized incremental value within our portfolio. F r o m L e f t t o R i g h t Pacesetter Park Shopping Center Pomona, NY Elmwood Park Shopping Center Elmwood Park, NJ Acadia Realty Trust 2002 Annual Report 5 2.Build an Ideal Capital Structure continue to exercise patience in executing on our external growth plan without weakening our balance sheet by adding dilutive capital. Step 3: Establish a Dependable and Growing Dividend. Effective capital management includes a solid dividend that results from a rational dividend policy. At a time when some REITs have had to make a choice between reducing their dividend or borrowing to pay it, we have been able to increase our dividend while still main- taining a conservative payout ratio. For the fourth quarter of 2002, our dividend payout ratio stood at 66% of funds from operations, which is among the most conservative in our sector. This is after we increased our dividend by 8% in the beginning of 2002. At the beginning of 2003, we have again increased our dividend over 11%. A stable and flexible capital structure is an essential component to any company’s success. These are the essential ingredients: Step 1: Begin with the Proper Base. The ideal capital structure starts with a healthy balance sheet, appropriate leverage levels and an overall low-cost debt structure. As of the end of 2002, our blended interest rate on our portfolio debt, including our pro-rata share of debt from our joint ventures, was below 6% and our fixed-charge coverage ratio (EBIDTA / interest + preferred dividends) stood at three times. These metrics — as well as our dividend payout ratio — are among the most conservative in our sector. We have also elimi- nated a substantial amount of exposure to future interest rate increases by locking in much of our debt during 2002 through inter- est rate swap agreements. The result — current interest rates, which are at historic lows, have been locked in for 75% of our debt portfolio. Step 2: Add Access to Efficient Capital. In late 2001, we formed a joint venture with four of Acadia’s largest institutional shareholders resulting in a strong alignment of interest between the joint venture and our shareholders. Acadia has already put a substantial portion of this capital to work. Our joint venture has acquired over $150 million of real estate assets to date. Because this capital is discretionary, we will FFO Payout and Fixed Charge Coverage Ratios Strong Balance Sheet* t u o y a P O F F > > > R E G N O R T S 50 55 60 65 70 75 80 85 90 Acadia Other Shopping Center REITs OPTIMAL QUADRANT 7% 13% 34% Common and Preferred O.P. Units Variable-Rate Debt Fixed-Rate Debt 46% Common Shares 1.5 2.0 2.5 3.0 3.5 Fixed Charge Coverage STRONGER >>> *Based on a March 13, 2003 Common Share price of $8.00 per share. Fixed-rate debt includes $87 million of notional principal fixed through swap transactions, and, conversely, variable-rate debt excludes this amount. 6 Acadia Realty Trust 2002 Annual Report How do you achieve the right capital structure? We created a strong balance sheet — a solid platform to build on. We then secured access to efficient capital — we now have ideally positioned Acadia for future growth. Acadia Realty Trust 2002 Annual Report 7 ntify e 1.Id 2 . E x e c u t e 3.Maximize How do you maximize profits? We constantly pursue the highest return on our capital. It starts with selling the right asset at the right time and for the right price — then we put this capital back to work generating superior yields. 8 Acadia Realty Trust 2002 Annual Report 3.Profitably Recycle Capital not consistent with our current portfolio of necessity and value oriented shopping centers located in high barrier-to-entry markets. As part of this process, we substantially reduced our exposure to troubled retailers, selling six Ames and four Kmart anchored centers. Step 3: Maximize the Return on Reinvested Capital. Once we profitably convert assets to liquid capital, we then invest it accretively at superior returns. Currently, we are investing capital into our acquisition joint venture, which has to date acquired over $150 million of properties with an average projected cash yield in excess of 15%. Earlier in 2002, we also recycled capital accretively by repurchasing 5.5 million of our shares for a total investment of $33 million, or $6.05 a share — well below our current share price. Capital recycling consists of selling targeted assets and reinvesting the capital in higher growth opportunities and is fundamental to maximizing the return on capital invested in assets and ultimately the return to our shareholders. We recycle capital by selling two types of assets. First is the strategic sale of non-core assets that are not consistent with our long term growth. Second is the oppor- tunistic and profitable disposition of mature, lower yielding assets, where we can realize a profit and redeploy the capital into higher performing assets. This is how we do it: Step 1: Identify the Opportunity. It all starts with deciding when to hold or sell particular assets. We constantly review and evaluate our portfolio for disposition opportunities — both at the individual asset level as well as across portfolio segments based on factors including property type, geography, and overall portfolio tenant exposures. Step 2: Execute on the Disposition Plan. When the multi-family sector began overheating in 2001, we opportunistically sold two of our apartment properties for $62 million — generating a cash profit of $15 million over a three-year hold period for Acadia. More recently, in 2002, we completed our multi-year strategic non-core disposition initiative. To date, we have sold 28 properties, most of which were F r o m L e f t t o R i g h t Abington Towne Center Abington, PA Amherst Marketplace Amherst, OH Acadia Realty Trust 2002 Annual Report 9 4.Deliver External Growth Top Five Tenants Acadia Strategic Opportunity Fund Tenant 1 Safeway 2 Kroger 3 Lowe’s 4 Giant Eagle 5 Target Base Rent (in thousands) $ 3,743 3,731 1,852 1,188 800 Percent of Total Base Rent 18% 18 9 6 4 $ 11,314 55% With the recent completion of two major transactions, Acadia has not only fulfilled its acquisition mandate for 2002, but for 2003 as well. These acquisitions, totaling over $150 million, are anticipated to provide a blended leveraged yield in excess of 15% and external earnings growth for Acadia of approximately 9% for 2003. Our success is the result of our focus on the key fundamentals: Step 1: Our Success Is Built on Our Team’s Philosophy. Our acquisition philosophy is to acquire well-located shopping centers at a discount to replacement cost with inherent opportunity for the creation of value through redevelopment and leasing. We target assets with restricted competition due to high barriers of entry and with below-market leases. Although the competition for buying shopping centers remains intense, our management team has the experience to identify opportunities overlooked by our peers and, once identified, the capability and flexibility to structure and close the deals. Our ability to execute quickly and efficiently keeps us extremely competitive and enables us to achieve attractive returns for our shareholders and joint venture partners. Step 2: Add an Efficient Source of Capital. We established an acquisition joint venture with four of our current key institutional shareholders in late 2001. The goal — to acquire $300 million of real estate assets over three years. Acadia Strategic Opportunity Fund has several significant competitive advantages over alternative sources of capital and other joint ventures: ■ First, there is a strong alignment of interest between the JV investors and our shareholders because all of our JV investors are significant shareholders in Acadia. ■ Second, there is important profit participation that further enhances Acadia’s total return on investment. ■ Third, the capital is accessed on a highly discretionary basis, thus ensuring our ability to move quickly and with certainty. ■ Finally, due to the fact that we do not have to hold unused acquisition capital which in turn dilutes net asset value, we have been able to exercise patience and discipline in acquiring assets. Step 3: Execute on the Transactions. In 2002, we began the process of selectively acquiring assets within our newly formed JV, as follows: Ohio Portfolio: Our first acquisition was a portfolio of three well- located, supermarket-anchored shopping centers located in Ohio, complementing our existing mid-west portfolio of necessity-based retail anchored shopping centers. F r o m L e f t t o R i g h t Diablo Plaza San Ramon, CA Brandywine Town Center Wilmington, DE 10 Acadia Realty Trust 2002 Annual Report Brandywine Portfolio: In January of 2003, we acquired a one-million- square-foot, open-air retail complex located in Wilmington, Delaware for an initial purchase price of $89 million, or $89 per square foot. The seller of the property had invested over $200 per square foot in the recent construction of this center, which anchors currently include Target, Lowe’s, Bed Bath & Beyond, Regal Cinema, Michaels, Petsmart, Old Navy, Thomasville Furniture, KB Toys and Dick’s Sporting Goods. We structured this transaction with an earnout component related to the future lease-up of a portion of this center. Not only does the 101⁄4% capitalization rate on this transaction represent an attractive initial yield, but given the high-quality tenants and the vacancies, it is an ideal blend of strong location, high credit quality and future growth potential. Kroger-Safeway Portfolio: In January of 2003, we also acquired a one-million-square-foot Kroger and Safeway supermarket portfolio for $48 million, or $48 per square foot. The projected cash flow on Acadia’s portion of its equity investment is anticipated to yield in excess of a 15% return after debt amortization. At the end of the lease term in 2009, our venture will control one million square feet free of debt with tremendous redevelopment and recycle oppor- tunities, providing additional upside in addition to the attractive current yield. How do you drive future growth? Although the competition for buying shopping centers is intense — we are extremely competitive. We have already met our acquisition target for 2003 — acquiring three portfolios totaling over $150 million. Acadia Realty Trust 2002 Annual Report 11 VT MI NY MA RI CT IL IN OH PA RETAIL PROPERTIES 239 Greenwich Avenue Greenwich, CT Town Line Plaza Rocky Hill, CT Brandywine Town Center Wilmington, DE Market Square Shopping Center Wilmington, DE 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 Marketplace of Absecon Absecon, NJ The Branch Plaza Smithtown, NY Soundview Marketplace Port Washington, NY Village Commons Shopping Center Smithtown, NY Amherst Marketplace Amherst, OH Granville Center Columbus, OH Mad River Station Dayton, OH Sheffield Crossing Sheffield, OH Crossroads Shopping Center White Plains, NY Abington Towne Center Abington, PA New Loudon Center Latham, NY Pacesetter Park Shopping Center Pomona, NY Blackman Plaza Wilkes-Barre, PA Bradford Towne Centre Towanda, PA East End Centre Wilkes-Barre, PA Greenridge Plaza Scranton, PA Luzerne Street Shopping Center Scranton, PA Mark Plaza Edwardsville, PA Pittston Plaza Pittston, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Walnut Hill Plaza Woonsocket, RI The Gateway Shopping Center South Burlington, VT 12 Acadia Realty Trust 2002 Annual Report Headquarters Regional Offices Neighborhood and Community Shopping Centers Joint Venture Property NJ DE MULTI-FAMILY PROPERTIES GHT and Colony Apartments Columbia, MO Village Apartments Winston-Salem, NC HEADQUARTERS White Plains, NY 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 Alan S. Forman Director of Investments Office Yale University Marvin J. Levine, Esq. Of Counsel to Wachtel & Masyr, LLP Lawrence J. Longua Sr. Vice President Newmark & Company Real Estate, Inc. Gregory A. White Sr. Vice President Conning Asset Management Co. Lee S. Wielansky Chairman of the Board and Chief Executive Officer Midland Development Group Inc. SENIOR OFFICERS Kenneth F. Bernstein President and Chief Executive Officer Joel Braun Sr. Vice President, Chief Investment Officer Joseph Hogan Sr. Vice President, Director of Construction Robert Masters, Esq. Sr. Vice President, General Counsel and Corporate Secretary Joseph M. Napolitano Sr. Vice President, Director of Property Management Michael Nelsen Sr. Vice President, Chief Financial Officer Joseph Povinelli Sr. Vice President, Director of Leasing 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 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 F r o m L e f t t o R i g h t Greenridge Shopping Center Scranton, PA Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH Shareholder Information CORPORATE HEADQUARTERS INDEPENDENT AUDITORS Acadia Realty Trust 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 INTERNET ADDRESS Visit us online at www.acadiarealty.com for more information about Acadia Realty Trust and its real estate portfolio. The 2002 Annual Report is available online, as well as current news and quarterly financial and operational supplementary information. LEGAL COUNSEL Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 ANNUAL MEETING The annual meeting will be held on June 25, 2003 at 10:00 am at the offices of Paul, Hastings, Janofsky & Walker, LLP, Park Avenue Tower, 75 East 55th Street, New York, NY 10022. Ernst & Young LLP 5 Times Square New York, NY 10036 STOCK EXCHANGE 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: www.amstock.com email: info@amstock.com INVESTOR RELATIONS Jon Grisham Vice President Tel: 800.227.5570 email: jgrisham@acadiarealty.com 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. 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 F r o m L e f t t o R i g h t Greenridge Shopping Center Scranton, PA Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH 4WaystoCreate Growth&Value Acadia Realty Trust Annual Rep0rt 2002 Acadia Realty Trust Selected Financials 2002 Contents 1 Management’s Discussion and Analysis 15 Report of Independent Auditors 16 Consolidated Balance Sheets 17 Consolidated Statements of Income 19 Consolidated Statements of Shareholders’ Equity 20 Consolidated Statements of Cash Flows 22 Notes to Consolidated Statements O n t h e C o v e r : F r o m L e f t t o R i g h t Elmwood Park Shopping Center Elmwood Park, NJ Marketplace of Absecon Absecon, NJ Abington Towne Center Abington, PA Walnut Hill Plaza Woonsocket, RI 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- In total, expense reimbursements increased $535,000, or 5%, from $10.9 million for 2001 to $11.4 million for 2002. Common area maintenance (“CAM”) expense reimbursements, which comprise the majority of the variance between years, increased $511,000, or 12%, from $4.2 million in 2001 to $4.7 million in 2002. This resulted primarily from tenant reimbursement of higher insurance costs experienced throughout the portfolio and an increase in tenant reimbursement ties Litigation Reform Act of 1995. Such forward-looking from re-tenanting activities for 2002. statements involve known and unknown risks, uncer- tainties, and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results, per- formance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in the Company’s real estate markets, including, among other things, competition with other companies; risks of real estate development and acquisition; govern- mental actions and initiatives; and environmental/ safety requirements. Results of Operations Comparison of the year ended December 31, 2002 (“2002”) to the year ended December 31, 2001 (“2001”) Lease termination income of $3.9 million in 2002 was primarily the result of the settlement of the Company’s claim against a former tenant. Other income increased $2.4 million, or 154%, from $1.5 million in 2001 to $3.9 million in 2002. This was primarily due to an increase of $795,000 in asset and property management fees earned in 2002 from Acadia Strategic Opportunity Fund (“ASOF”), $1.0 million in interest earned on purchase money notes from the sales of properties in 2002 and an increase in interest income due to higher interest earning assets in 2002. Total operating expenses increased $3.3 million, or 8%, to $46.0 million for 2002, from $42.7 million for 2001. Property operating expenses increased $677,000, or 6%, to $12.3 million for 2002 compared to $11.6 million for 2001. This variance was primarily the result of a general increase during 2002 in property and liability insurance costs across the portfolio and a reduction in 2001 of estimated property liability insurance claims related to prior-year policies based on actual claims filed under Total revenues increased $8.0 million, or 13%, to $69.3 these policies. In addition, there was an increase in million for 2002 compared to $61.3 million for 2001. non-recurring repairs and maintenance expense experi- Minimum rents increased $1.4 million, or 3%, to $48.5 million for 2002 compared to $47.1 million for 2001. This increase was attributable to increases in rents from re-tenanting activities and contractual rent enced throughout the portfolio. These increases were offset by lower utility expenses following the redevel- opment of the Elmwood Park Shopping Center and a decrease in bad debt expense in 2002. increases for existing tenants offset by a decrease General and administrative expense increased $1.2 million, in rents following certain tenant bankruptcies. or 13%, from $9.0 million for 2001 to $10.2 million for 2002. Percentage rents decreased $117,000, or 10%, to $1.1 million for 2002 compared to $1.2 million for 2001. This decrease was primarily attributable to certain tenant bankruptcies and tenants experiencing lower sales volume. This increase was primarily attributable to an increase in third-party professional fees in 2002 as well as an increase in leasing related salary expense as a result of the Company’s current accounting policy to expense all internal leasing costs commencing in 2002. Acadia Realty Trust 2002 Annual Report 1 Management’s Discussion and Analysis continued Depreciation and amortization increased $1.2 million, Percentage rents decreased $381,000, or 24%, to $1.2 or 9%, from $13.6 million for 2001 to $14.8 million for million for 2001 compared to $1.6 million for 2000. This 2002. Depreciation expense increased $591,000. This decrease was primarily attributable to certain tenants was principally a result of increased depreciation paying percentage rent in lieu of minimum rent in expense related to capitalized tenant installation 2000 pursuant to anchor co-tenancy lease provisions. costs during 2001 and 2002 and the write-off of tenant These tenants reverted to paying full minimum rent improvement costs related to certain tenant leases. in 2001. Additionally, certain tenant bankruptcies Amortization expense increased $608,000, which contributed to lower percentage rent income in 2001. was primarily attributable to the write-off of deferred leasing costs related to certain tenant leases and increased loan amortization expense related to financing activity in 2002. In total, expense reimbursements decreased $212,000, or 2%, from $11.1 million for 2000 to $10.9 million for 2001. CAM expense reimbursements decreased $515,000, or 11%, from $4.7 million in 2000 to $4.2 million in 2001. Interest expense of $11.0 million for 2002 decreased This resulted primarily from a decrease in reimburse- $1.4 million, or 11%, from $12.4 million for 2001. Of the ments following the planned termination of certain decrease, $1.6 million was the result of a lower average leases and the sale of 160,000 square feet of the main interest rate on the portfolio mortgage debt and building at the Abington Towne Center in connection $559,000 was due to higher capitalized interest in with its redevelopment which commenced in 2000. 2002. These decreases were offset by a $822,000 Real estate tax reimbursements increased $303,000, increase in interest expense for 2002 due to higher which was primarily the result of general increases in average outstanding borrowings during 2002. real estate taxes experienced throughout the portfolio The $140,000 extraordinary loss in 2001 was a result in 2001. of the write-off of deferred financing fees as a result Lease termination income of $2.0 million in 2000 of the early repayment of debt. relates to termination income received from former The $149,000 cumulative effect of a change in account- tenants at the Abington Towne Center. ing principle in 2001 was a transition adjustment related Other income decreased $189,000, or 11%, from $1.7 mil- to the valuation of LIBOR caps recognized in connection lion in 2000 to $1.5 million in 2001. This was primarily with the January 1, 2001 adoption of SFAS No. 133. the result of a decrease in third-party management Operating income from discontinued operations decreased $2.8 million due to the timing of property sales in 2002 and 2001. Comparison of the year ended December 31, 2001 (“2001”) to the year ended December 31, 2000 (“2000”) fees earned in 2001 following the cancellation of one management contract in November 2000. Total operating expenses increased $782,000, or 2%, to $42.7 million for 2001, from $41.9 million for 2000. Property operating expenses decreased $549,000, or 5%, to $11.6 million for 2001 compared to $12.1 million Total revenues decreased $2.2 million, or 3%, to $61.3 for 2000. This decrease resulted primarily from a million for 2001 compared to $63.5 million for 2000. decrease in non-recurring repairs and maintenance Minimum rents increased $638,000, or 1%, to $47.1 million for 2001 compared to $46.4 million for 2000. This increase was primarily due to an increase in rents from re-tenant- ing activities and rent step-ups for existing tenants throughout the portfolio during 2000 and 2001. expense experienced throughout the portfolio and a reduction in estimated property liability claims related to prior year policies based on actual claims filed under these policies in 2001. These decreases were partially offset by higher payroll costs and an increase in bad debt expense in 2001. 2 Acadia Realty Trust 2002 Annual Report Real estate taxes increased $228,000, or 3%, from $8.2 Funds from Operations million in 2000 to $8.4 million in 2001. This increase The Company considers funds from operations (“FFO”) was attributable to higher real estate taxes experienced as defined by the National Association of Real Estate generally throughout the portfolio in 2001. Investment Trusts (“NAREIT”) to be an appropriate sup- General and administrative expense increased $634,000, or 8%, from $8.4 million for 2000 to $9.0 million for 2001, which was primarily attributable to an increase in third-party professional fees in 2001. plemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is pre- sented to assist investors in analyzing the performance of the Company. However, the Company’s method of Depreciation and amortization increased $469,000, calculating FFO may be different from methods used or 4%, from $13.1 million for 2000 to $13.6 million for by other REITs and, accordingly, may not be comparable 2001. Depreciation expense increased $492,000. This to such other REITs. FFO does not represent cash gener- increase was due to additional depreciation expense ated from operations as defined by accounting princi- related to capitalized tenant installation costs incurred ples generally accepted in the United States (“GAAP”) during 2000 and 2001. Amortization expense decreased and is not indicative of cash available to fund all cash $23,000, which was primarily the result of a decrease needs, including distributions. It should not be consid- in amortization of loan costs following certain loan ered as an alternative to net income for the purpose of payoffs during 2000 and 2001. evaluating the Company’s performance or to cash flows Interest expense of $12.4 million for 2001 decreased as a measure of liquidity. $3.5 million, or 22%, from $15.9 million for 2000. Of NAREIT defines FFO as net income (computed in accor- the decrease, $3.0 million was the result of a lower dance with GAAP), excluding gains (or losses) from sales average interest rate on the portfolio mortgage debt of property, plus depreciation and amortization, and and $541,000 was attributable to lower average out- after adjustments for unconsolidated partnerships standing borrowings in 2001. See the 2002 discussion regarding the $140,000 extra- ordinary loss and the $149,000 cumulative effect of a change in accounting principle. 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. The reconciliations of net income to FFO for the years ended December 31, 2002, 2001, 2000, Operating income from discontinued operations 1999 and 1998 are as follows: decreased $1.7 million due to the timing of property sales in 2001 and 2000. Acadia Realty Trust 2002 Annual Report 3 Management’s Discussion and Analysis continued Reconciliation of Net Income (Loss) to Funds from Operations Net income (loss) Depreciation of real estate and amortization of leasing costs: Wholly owned and consolidated partnerships Unconsolidated partnerships Income (loss) attributable to minority interest2 (Gain) loss on sale of properties3 Impairment of real estate Extraordinary item — loss on extinguishment of debt Cumulative effect of change in accounting principle YEARS ENDED DECEMBER 31, 2002 2001 2000 1999 1998 1 $ 19,399 $ 9,802 $ 19,907 $ 7,195 $(13,898) 15,305 662 2,928 (9,089) 197 — — 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 — Funds from operations $ 29,402 $ 29,513 $ 31,789 $ 31,160 $ 10,352 Notes: 1Effective 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 year ended December 31, 1998 has been restated above to conform to this clarification. 2Does not include distributions paid to Preferred OP Unitholders. 3Amount is net of minority interest of $573 related to land sale. 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 service and loan repayments, and property investment which includes funding of its joint venture commitments, acquisition, redevelopment, expansion and re-tenanting activities. In order to qualify as a REIT for federal income tax pur- poses, the Company must currently distribute at least 90% of its taxable income to its shareholders. For the year ended December 31, 2002, the Company paid a quarterly dividend of $0.13 per Common Share and Common OP Unit. In February of 2003, the Board of Trustees approved and declared an 11.5% increase in for the purpose of acquiring a total of approximately $300.0 million of community and neighborhood shop- ping centers on a leveraged basis. The Company is the manager and general partner of ASOF with a 22% interest. In addition to a pro-rata return on its invested equity, the Company is entitled to a profit participation in excess of its invested capital based upon certain investment return thresholds. Cash flow is to be distrib- uted to the partners (including the Company) until they have received a 9% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 80% to the partners (including the Company) and 20% to the Company. The Company also earns a fee for asset management services equal to 1.5% of the total equity commitments, as well as market-rate fees for property management, leasing the Company’s quarterly dividend to $0.145 per Common and construction services. Share and Common OP Unit. The first quarter 2003 dividend is payable April 15, 2003 to shareholders and OP unitholders of record as of March 31, 2003. The Board of Trustees also approved a distribution of $22.50 per Preferred OP Unit, to be paid on April 15, 2003. Acadia Strategic Opportunity Fund, LP (“ASOF”) During 2001, the Company committed $20.0 million to a newly formed joint venture formed with four of its institutional shareholders, who committed $70.0 million, To date, ASOF has purchased a total of approximately $163.9 million in assets in three separate transactions, with an additional potential earnout of $42.0 million to $62.0 million related to the Brandywine Town Center acquisition. Details of these transactions are as follows: Ohio Portfolio: In September of 2002, ASOF acquired three supermarket-anchored shopping centers located in Cleveland and Columbus, Ohio for a total purchase price of $26.7 million. ASOF assumed $12.6 million of 4 Acadia Realty Trust 2002 Annual Report fixed-rate debt on two of the properties at a blended minimum investment returns to be determined on rate of 8.1%. A new $6.0 million loan was obtained on a “look-back” basis. the third property at a floating rate of LIBOR plus 200 basis points. The balance of the purchase price was funded by ASOF, of which the Company’s share was $1.8 million. Brandywine Portfolio: In January of 2003, ASOF acquired a major open-air retail complex located in Wilmington, Delaware. The approximately one-million-square-foot value-based retail complex consists of the following Kroger/Safeway Portfolio: In January of 2003, ASOF two properties: formed a joint venture (the “Kroger/Safeway JV”) with an affiliate of real estate developer and investor AmCap Incorporated (“AmCap”) for the purpose of acquiring a portfolio of twenty-five supermarket leases. The port- folio, which aggregates approximately 1.0 million square Market Square Shopping Center is a 103,000-square- foot community shopping center which is 92% leased and anchored by a T.J. Maxx and a Trader Joe’s gourmet food market. feet, consists of 25 anchor-only leases with Kroger Brandywine Town Center is a two phase open-air value (12 leases) and Safeway supermarkets (13 leases). The retail center. The first phase (“Phase I”) is approximately majority of the properties are free-standing and all are 450,000 square feet and 97% occupied, with tenants triple-net leases. The Kroger/Safeway JV acquired the including Lowe’s, Bed Bath & Beyond, Regal Cinema, portfolio subject to long-term ground leases with terms, Michaels, Petsmart, Old Navy, Annie Sez, Thomasville including renewal options, averaging in excess of 80 Furniture, KB Toys and Dick’s Sporting Goods. The second years, which are master leased to a non-affiliated entity. phase (“Phase II”) consists of approximately 420,000 The base rental options for the supermarket leases at square feet of existing space, of which Target occupies the end of their primary lease term in approximately 138,000 square feet. The balance of Phase II, which is seven years (“Primary Term”) are at an average of $5.13 currently not occupied, is to be paid for on an earnout per square foot. Although there is no obligation for the basis as it is leased and occupied. Kroger/Safeway JV to pay ground rent during the Primary Term, to the extent it exercises an option to renew a ground lease for a property at the end of the Primary Term, it will be obligated to pay an average ground rent of $1.55 per square foot. The initial investment for the portfolio was approximately $89.3 million; inclusive of closing and other related acqui- sition costs. ASOF assumed $38.1 million of fixed rate debt on the two properties at a blended rate of 8.1%. A new $30.0 million, 4.7% fixed-rate loan was also Including closing and other related acquisition costs, obtained in conjunction with the acquisition and is the Kroger/Safeway JV acquired the portfolio for $47.9 collateralized by a portion of the Brandywine Town million, which included the assumption of an aggregate Center. The balance of the purchase price was funded of $34.5 million of existing fixed-rate mortgage debt, by ASOF, of which the Company’s share was $4.3 million. which is at a blended fixed interest rate of 6.6% and is ASOF will also pay additional amounts in conjunction fully amortizing over the Primary Term. The individual with the lease-up of the current vacant space in Phase II mortgages are secured by each individual property and (the “Earnout”). The additional investment, depending are not cross-collateralized. ASOF invested 90%, or $11.3 on the Earnout, is projected to be between $42.0 million million, of the equity capitalization, of which the Com- and $62.0 million, of which the Company’s share would pany’s share was $2.5 million. AmCap contributed 10%, be between $9.3 million and $13.8 million. To the extent or $1.2 million. Cash flow is to be distributed to the ASOF places additional mortgage debt upon the lease- Kroger/Safeway JV partners until they have received up of Phase II, the required equity contribution for the an 11% cumulative return and a full return of all con- Earnout would be less. The Earnout is structured such tributions. Thereafter, remaining cash flow is to be that ASOF has no time requirement or payment obliga- distributed 75% to ASOF and 25% to AmCap. The Kroger/ tion for any portion of currently vacant space which it Safeway JV agreement also provides for additional is unable to lease. allocations of cash based on ASOF achieving certain Acadia Realty Trust 2002 Annual Report 5 Management’s Discussion and Analysis continued Property Redevelopment and Expansion the original acquisition costs, were $10.4 million. The The Company’s redevelopment program focuses on Company expects remaining redevelopment costs of selecting well-located neighborhood and community approximately $7.5 million to complete this project, which shopping centers and creating significant value through it anticipates completing in the second half of 2003. re-tenanting and property redevelopment. The Company completed the redevelopment of the Elmwood Park Shopping Center during 2002 and continued its progress on the redevelopment of the Gateway Shopping Center as follows: Elmwood Park Shopping Center: This shopping center located in Elmwood Park, New Jersey, is approximately ten miles west of New York City. The redevelopment consisted of re-anchoring, renovating and expanding the existing 125,000-square-foot shopping center by 30,000 square feet. The first phase included the relocation and expansion of a Walgreen’s into a 15,000- square-foot, state-of-the-art drugstore that includes a drive-through pharmacy. In November 2002, a Pathmark supermarket opened in a new freestanding 49,000-square-foot building, replacing the former undersized (28,000 square feet) in-line Grand Union supermarket. As of December 31, 2002, costs incurred on this project totaled $13.3 million, which excludes $3.8 million in reimbursements. Costs incurred to date include $2.8 million representing an obligation to the original owners who contributed the property to the Company in connection with the RDC Transaction in August 1998. These partners had the option to receive either cash or OP Units in settlement of this obligation. In March 2003, $2.5 million was paid in cash and $262,000 was satisfied with the issuance Additionally, for the year ending December 31, 2003, the Company currently estimates that capital outlays of approximately $12.0 million to $14.0 million will be required for tenant improvements, related renovations and other property improvements. Share Repurchase The Company’s repurchase of its Common Shares is an additional use of liquidity. Upon completion of a Tender Offer in February 2002 (the “Tender Offer”), the Company purchased a total of 5,523,974 Common Shares and Common OP Units (collectively, “Shares”), comprised of 4,136,321 Common Shares and 1,387,653 Common OP Units (which were converted to Common Shares upon tender), at a Purchase Price of $6.05 per Share. The aggregate purchase price paid for the 5,523,974 Shares was $33.4 million. In addition to the Tender Offer, the Company has an existing share repurchase program that authorizes management, at its discretion, to repur- chase up to $20.0 million of the Company’s outstanding Common Shares. Through March 24, 2003, the Com- pany had repurchased 1,931,682 Common Shares (net of 123,173 shares reissued) at a total cost of $11.6 million. The program may be discontinued or extended at any time and there is no assurance that the Company will purchase the full amount authorized. Sources of Liquidity of a total of 34,841 Common OP Units, all of which were The Company intends on using ASOF as the primary issued to Mr. Dworman, Chairman of the Company’s vehicle for future acquisitions. Sources of capital for Board of Trustees. The Company expects remaining funding the Company’s joint venture commitment, redevelopment costs of approximately $1.0 million to other property acquisitions, redevelopment, expansion complete this project. Gateway Shopping Center: The redevelopment of the Gateway Shopping Center, formerly a partially enclosed mall located in South Burlington, Vermont, includes the demolition of 90% of the property and the con- struction of a new anchor supermarket. Construction of a new 72,000-square-foot Shaw’s Supermarket is ongoing, which will replace the 32,000-square-foot store formerly occupied by Grand Union. Total costs through December 31, 2002 for this project, including and re-tenanting, as well as future repurchases of Common Shares are expected to be obtained primarily from cash on hand, additional debt financings and future sales of existing properties. As of December 31, 2002, the Company had a total of approximately $48.1 million of additional capacity with six lenders, of which the Company is required to draw $12.7 million by December 2003, or forego the ability to draw these funds at any time during the remaining term of the loans. Of the remaining capacity, approximately $6.0 6 Acadia Realty Trust 2002 Annual Report million is subject to additional leasing requirements certain construction at the property, the rate decreases at the collateral properties and certain lender require- to LIBOR plus 175 basis points. The Company has drawn ments, which the Company has not yet satisfied. The $6.3 million under this facility to repay $6.2 million to the Company also had cash and cash equivalents on hand previous lender on the property and for loan closing costs. of $45.2 million at December 31, 2002 as well as six Upon completion of the planned construction at this properties that are currently unencumbered and there- property and subject to other conditions including fore available as potential collateral for future borrow- loan-to-value limit and debt service coverage ratio, ings. The Company anticipates that cash flow from the Company may draw the remaining $3.1 available operating activities will continue to provide adequate under this facility. capital for all debt service payments, recurring capital expenditures and REIT distribution requirements. Financing and Debt At December 31, 2002, mortgage notes payable aggre- gated $202.4 million and were collateralized by 25 proper- ties and related tenant leases. Interest on the Company’s outstanding mortgage indebtedness ranged from 2.9% to 8.1% with maturities that ranged from August 2003 On May 31, 2002, the Company refinanced a maturing $9.1 million loan with a bank. The loan, which is secured by one of the 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 now matures June 1, 2007. Subject to other conditions inclu- ding loan-to-value limit and debt service coverage ratio, the Company may draw an additional $1.3 million under to January 2011. Taking into effect $87.1 million of notional this facility. principal under variable to fixed-rate swap agreements, $145.2 million of the portfolio, or 72%, was fixed at a 6.8% weighted average interest rate and $57.2 million, or 28%, was floating at a 3.3% weighted average interest rate. Of the total outstanding debt, $19.6 million will become due by 2004, with scheduled maturities of $16.1 million with a weighted average interest rate of 3.4% in 2003, and $3.5 million with a weighted average interest rate of 7.9% in 2004. As the Company does not anticipate having sufficient cash on hand to repay such indebtedness, it will need to refinance this indebted- ness or select other alternatives based on market conditions at that time. The following summarizes the financing and refinanc- ing transactions since December 31, 2001: On March 15, 2002, the Company extended a maturing $7.0 million loan with a bank. The debt, which is secured by one of the 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 now matures March 15, 2007. On April 16, 2002, the Company closed on a $9.4 million loan with a bank. The debt, which is secured by one of the Company’s properties and matures January 1, 2007, initially requires the monthly payment of interest at the rate of LIBOR plus 300 basis points and principal amortized over 25 years. Following the completion of On June 17, 2002, the Company repaid a $7.2 million loan, which was secured by one of the Company’s prop- erties, with a bank using funds from working capital. On June 25, 2002, the Company refinanced a maturing $13.4 million loan with a life insurance company, increas- ing the outstanding principal to $13.8 million. The loan, which is secured by one of the Company’s properties, requires the monthly payment of interest at the rate of 6.5% and principal amortized over 25 years and now matures July 1, 2007. In June of 2002, the Company completed two interest rate swap transactions (“Swap Agreements”) to hedge the Company’s exposure to changes in interest rates with respect to $25.1 million of LIBOR based variable rate debt. The Swap Agreements, which are for $15.9 million and $9.2 million of notional principal, mature January 1, 2007 and June 1, 2007, respectively. These Swap Agreements are at a weighted average fixed interest rate, including the credit spreads of 175 basis points, of 6.2%. On July 10, 2002, the Company entered into an interest rate swap agreement to hedge its exposure to changes in interest rates with respect to $12.3 million of LIBOR based variable-rate debt. The swap agreement, which matures January 1, 2007, provides for a fixed all-in interest rate of 5.9%. Acadia Realty Trust 2002 Annual Report 7 Management’s Discussion and Analysis continued On September 26, 2002, the Company refinanced a and matures November 22, 2007, requires the monthly maturing $9.5 million loan with a life insurance company. payment of interest only at the rate of LIBOR plus The loan, which is secured by one of the Company’s 170 basis points subject to a total floor of 3.3%. As of properties, requires monthly payment of interest at December 31, 2002, no amounts have been drawn under the rate of LIBOR plus 173 basis points and principal this facility and future draws are subject to meeting amortized over 25 years and matures October 1, 2005. certain conditions including a loan-to-value limit and On September 27, 2002, the Company repaid a $4.0 million loan with a life insurance company in connec- tion with the sale of a property on October 11, 2002. On November 22, 2002, the Company closed on a $20.0 million revolving credit facility with a bank. The facility, which is secured by one of the Company’s properties debt service coverage ratio. The Company also pays a 15 basis point fee per annum for the unused portion of the facility on a quarterly basis. On January 2, 2003, the Company drew down $5.0 million of an available $10.0 million on a facility with a bank and used the proceeds to partially pay down the outstanding principal on another loan with the same lender. 8 Acadia Realty Trust 2002 Annual Report 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 Union Plaza Ames Plaza Birney Plaza Circle Plaza Dunmore Plaza Kingston Plaza Monroe Plaza Mountainville Shopping Center Plaza 15 Shillington Plaza 25th Street Shopping Center Kings Fairgrounds Troy Plaza Midway Plaza Northside Mall New Smyrna Beach Shopping Center Cloud Springs Plaza Martintown Plaza Manahawkin Village Shopping Center Valmont Plaza Total State GLA Sales Price Net Proceeds PA PA PA PA PA PA PA PA PA PA PA VA NY AL AL FL GA SC NJ PA 217,992 96,154 193,899 92,171 45,380 64,824 130,569 118,847 113,530 150,742 131,477 118,535 128,479 207,538 382,299 101,321 113,367 133,892 175,228 200,164 2,916,408 $ 4.8 52.72 $ 4.21 12.92 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 —2 16.83 —3 $ 74.3 9.53 —3 $ 26.6 1The Company received a $3.6 million 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 agreed to reimburse the purchaser 50% of the former Ames rent, or $22 per month, for a period of 18 months (through July 2003). 2This portfolio of 17 properties was sold to a single buyer subject to a $42.4 million fixed-rate, cross-collateralized and securitized loan. Proceeds include the sale of various escrows including capital expenditure reserves. $6.3 million of the initial proceeds repre- sented a note from the buyer which was subsequently repaid to the Company in December 2002. 3These two properties were sold to a single buyer. The Company received two purchase money notes in connection with the sale. The first for $11.0 million was repaid in full in November 2002. The second for $1.6 million matures October 2003, requiring monthly interest of 5% to February 1, 2003, and then 10% thereafter. As part of the transaction, the Company repaid $3.1 million of mortgage debt secured by the Valmont Plaza. The $4.0 million of mortgage debt secured by the Manahawkin Village Shopping Center was repaid in full in September 2002, prior to the sale. Additionally the Company completed the following Simultaneously, the Company sold approximately 46% of two land sales in 2002: In January 2002, the Company, in conjunction with a joint venture partner, purchased a three-acre site located in the Bronx, New York for $3.1 million. the land to a self-storage facility for $3.3 million. The Com- pany’s share of net proceeds totaled $2.9 million. The Company currently plans to build and lease a 15,000- square-foot retail building on the remaining parcel. Acadia Realty Trust 2002 Annual Report 9 Management’s Discussion and Analysis continued On November 8, 2002, the Company and an unaffiliated The Company’s effective pro rata share of Crossroads joint venture partner completed the sale of a contract mortgage debt as of December 31, 2002 was $16.5 mil- to purchase land in Bethel, Connecticut, to the Target lion. Interest on the debt, which matures in October Corporation for $2.4 million. The joint venture received a 2007, has been effectively fixed at 7.2% through variable $1.6 million note receivable for the net purchase price to fixed-rate swap agreements. and additional reimbursements due from the buyer, which was paid in full subsequent to December 31, 2002. The Company’s share of net proceeds totaled $1.4 million after closing and other related costs. Off Balance Sheet Arrangements The Company has two off balance sheet joint ventures for the purpose of investing in operating properties as follows: Refer to the discussion of ASOF under “Uses of Liquidity” for additional detail related to the Company’s invest- ment in and commitments to ASOF. The Company owns a 22% interest in ASOF for which it also uses the equity method of accounting. The Company’s effective pro rata share of ASOF fixed-rate mortgage debt as of December 31, 2002 was $2.8 million at a weighted average interest rate of 8.1%. The Company’s effective pro rata share of ASOF variable-rate mortgage debt as of December 31, 2002 was $1.3 million at an interest rate of 3.4%. Maturi- The Company owns a 49% interest in two partnerships ties on these loans range from October 2007 to June 2023. which own the Crossroads Shopping Center (“Cross- roads”). 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. Contractual obligation Future debt maturities on joint venture mortgage debt1 Operating lease obligations Total Refer to the accompanying consolidated financial statements for a complete discussion of the Company’s obligations under various operating leases. The following table sets forth information as it relates to the Company’s contractual obligations under off balance sheet arrangements (amounts in millions): Payments due by period Total $20.6 20.7 $ 41.3 Less than 1 year $ 0.4 0.5 $ 0.9 1 to 3 years $ 0.9 1.1 3 to 5 years $16.9 1.1 More than 5 years $ 2.4 18.0 $ 2.0 $ 18.0 $20.4 1These amounts represent the Company’s pro-rata share of joint venture debt. Historical Cash Flow The following discussion of historical cash flow com- pares the Company’s cash flow for the year ended December 31, 2002 (“2002”) with the Company’s cash flow for the year ended December 31, 2001 (“2001”). Cash and cash equivalents were $45.2 million and $33.9 million at December 31, 2002 and 2001, respec- tively. The increase of $11.3 million was a result of the following increases and decreases in cash flows (amounts in millions): Years Ended December 31, 2002 2001 Variance Net cash provided by operating activities $ 24.9 $ 20.5 $ 4.4 Net cash provided by (used in) 24.6 investing activities (11.2) 35.8 Net cash used in financing activities Net cash provided by (58.8) (7.0) (51.8) discontinued operations 20.5 10.2 10.3 10 Acadia Realty Trust 2002 Annual Report The variance in net cash provided by operating activities the results of which form the basis for making judg- resulted from an increase of $7.0 million in operating ments about carrying value of assets and liabilities income before non-cash expenses in 2002, which was that are not readily apparent from other sources. primarily due to $3.9 million of lease termination income Actual results may differ from these estimates under received in 2002 and lower interest expense due to lower different assumptions or conditions. The Company average interest rates on the portfolio mortgage debt. believes the following critical accounting policies affect This increase was partially offset by a net decrease in its significant judgments and estimates used in the cash provided by changes in operating assets and liabil- preparation of its consolidated financial statements. ities of $2.6 million, primarily rents receivable. The variance in net cash provided by (used in) investing activities was primarily the result of an increase of $41.0 million received in 2002 from the collection of purchase money notes from the sale of properties, offset by an increase of $2.1 million in expenditures for real estate acquisitions, development and tenant installation costs in 2002 and an additional $2.9 million investment in an unconsolidated partnership in 2002. The increase in net cash used in financing activities resulted primarily from $33.4 million of cash used in 2002 for the Company’s Tender Offer and a decrease of $43.6 million of cash provided by additional borrow- ings in 2002. This was partially offset by $16.8 million of additional cash used in 2001 for the repayment of debt and $5.1 million used in 2001 for the redemption of Common OP Units. 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 carrying 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 years ended December 31, 2002 and 2001, impairment losses of $197,000 and $15.9 million were recognized related to sold properties. Management does not believe that the value of the remaining prop- erties held for sale or properties in use are impaired as of December 31, 2002. The increase in net cash provided by discontinued oper- ations resulted from additional cash used in 2001 for Bad Debts the repayment of debt. This increase was offset by a The Company maintains an allowance for doubtful decrease in operating income before non-cash expenses accounts for estimated losses resulting from the inabil- in 2002, a decrease in net sales proceeds received in ity of tenants to make payments on arrearages in billed 2002 and a decrease in cash provided by additional rents, as well as the likelihood that tenants will not have borrowings in 2002. Critical Accounting Policies Management’s discussion and analysis of financial the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of December 31, 2002, the Company had recorded an allowance for doubtful accounts of $2.3 million. If the financial condition of the Company’s tenants were to condition and results of operations is based upon the deteriorate, resulting in an impairment of their ability to Company’s consolidated financial statements, which make payments, additional allowances may be required. have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, rev- Inflation The Company’s long-term leases contain provisions enues and expenses. The Company bases its estimates designed to mitigate the adverse impact of inflation on historical experience and assumptions that are on the Company’s net income. Such provisions include believed to be reasonable under the circumstances, clauses enabling the Company to receive percentage Acadia Realty Trust 2002 Annual Report 11 Management’s Discussion and Analysis continued rents based on tenants’ gross sales, which generally for a cost associated with an exit or disposal activity increase as prices rise, and/or, in certain cases, escalation be recognized when the liability is incurred. This state- clauses, which generally increase rental rates during ment also establishes that fair value is the objective the terms of the leases. Such escalation clauses are for initial measurement of the liability. SFAS No. 146 is often related to increases in the consumer price index effective for exit or disposal activities that are initiated or similar inflation indexes. In addition, many of the after December 31, 2002. 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 The impact of the adoption of SFAS No. 146 is not expected to have a material impact on the Company’s financial position or results of operations. leases require the tenants to pay their share of operating In December 2002, the FASB issued SFAS No. 148, expenses, including common area maintenance, real “Accounting for Stock-Based Compensation — Transi- estate taxes, insurance and utilities, thereby reducing tion and Disclosure, an amendment of FASB Statement the Company’s exposure to increases in costs and oper- No. 123” (“SFAS No. 148”). SFAS No. 148 amends SFAS ating expenses resulting from inflation. No. 123, “Accounting for Stock-Based Compensation” Recently Issued Accounting Pronouncements In April 2002, the Financial Accounting Standards Board to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee com- pensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about (“FASB”) issued Statement of Financial Accounting Stan- the effects on reported net income of an entity’s dards (“SFAS”) No. 145, “Rescission of FASB Statements accounting policy decisions with respect to stock-based No. 4, 44, and 64, Amendment of FASB Statement employee compensation. Effective January 1, 2002, the No. 13, and Technical Corrections” (“SFAS No. 145”). This Company adopted the fair value method of recording statement eliminates the requirement to report gains stock-based compensation contained in SFAS No. 123, and losses from extinguishment of debt as extraordinary which is considered the preferable accounting method unless they meet the criteria of APB Opinion 30. SFAS for stock-based employee compensation. As such, all No. 145 also requires sale-leaseback accounting for cer- vested stock options granted after December 31, 2001 tain lease modifications that have economic effects that will be reflected as compensation expense in the are similar to sale-leaseback transactions. The changes Company’s consolidated financial statements over the related to lease accounting are effective for transactions vesting period based on the fair value at the date the occurring after May 15, 2002 and the changes related stock-based compensation was granted. Under SFAS to debt extinguishment are effective for fiscal years No. 123, companies may elect to choose from three beginning after May 15, 2002. The impact of adopting alternative transition methods as it relates to the adop- the provisions related to lease accounting did not have tion of the fair value basis method of accounting for a material impact on the Company’s financial position employee stock options. The Company has elected the or results of operations. The impact of adopting the prospective method whereby compensation expense provisions related to debt extinguishment is not expected will be recognized only for those options issued after to have a material impact on the Company’s financial December 31, 2001. position or results of operations. In November 2002, the FASB issued FASB Interpretation In June 2002, the FASB issued SFAS No. 146, “Accounting No. 45, “Guarantor’s Accounting and Disclosure Require- for Costs Associated with Exit or Disposal Activities” ments for Guarantees, Including Indirect Guarantees (“SFAS No. 146”). SFAS No. 146 nullifies Emerging Issues of Indebtedness of Others” (“FIN 45”). FIN 45 requires Task Force Issue No. 94-3 and requires that a liability that upon issuance of a guarantee a guarantor must 12 Acadia Realty Trust 2002 Annual Report recognize a liability for the fair value of an obligation material impact on the Company’s consolidated financial assumed under a guarantee. FIN 45 also requires condition or results of operations taken as a whole. additional disclosures by a guarantor in its interim and The Company’s joint ventures are summarized in the annual financial statements about the obligations notes to the consolidated financial statements appear- associated with guarantees issued. The recognition ing in this Annual Report. provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclo- sure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the effects Quantitative and Qualitative Disclosures About Market Risk The Company’s primary market risk exposure is to of the recognition provision of FIN 45, but does not changes in interest rates related to the Company’s expect the adoption to have a material impact on the mortgage debt. See the consolidated financial state- Company’s financial position or results of operations. ments and notes thereto included in this Annual In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). Report for certain quantitative details related to the Company’s mortgage debt. In general, a variable interest entity is a corporation, Currently, the Company manages its exposure to fluctu- partnership, trust, or any other legal structure used for ations in interest rates primarily through the use of business purposes that either (a) does not have equity fixed-rate debt, interest rate swap agreements and investors with voting rights or (b) has equity investors LIBOR caps. As of December 31, 2002, the Company had that do not provide sufficient financial resources for the total mortgage debt of $202.4 million of which $58.1 entity to support its activities. A variable interest entity million, or 29% was fixed-rate and $144.3 million, or often holds financial assets, including loans or receiv- 71%, was variable-rate based upon LIBOR plus certain ables, real estate or other property. A variable interest spreads. As of December 31, 2002, the Company had entity may be essentially passive or it may engage in entered into five interest rate swap transactions to activities on behalf of another company. Until now, a hedge the Company’s exposure to changes in interest company generally has included another entity in its rates with respect to $87.1 million of LIBOR based variable consolidated financial statements only if it controlled rate debt, effectively increasing the fixed-rate portion the entity through voting interests. FIN 46 changes of its total outstanding debt as of December 31, 2002 that by requiring a variable interest entity to be con- to 72%. The Company also has two interest rate swaps solidated by a company if that company is subject to hedging the Company’s exposure to changes in interest a majority of the risk of loss from the variable interest rates with respect to $16.5 million of LIBOR based vari- entity’s activities or entitled to receive a majority of the able rate debt related to its investment in Crossroads. entity’s residual returns or both. FIN 46’s consolidation As of December 31, 2002, ASOF fixed the treasury rate requirements apply immediately to variable interest on $30.0 million of contemplated financing in connec- entities created or acquired after January 31, 2003. The tion with the Brandywine Town Center acquisition. consolidation requirements apply to older entities in The Company’s pro-rata share was $6.7 million of notional the first fiscal year or interim period beginning after value based on its 22% interest in ASOF. June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. The Company has adopted FIN 46 effective January 31, 2003. The Company does not anticipate that the adoption of FIN 46 will have a The following table sets forth information as of Decem- ber 31, 2002 concerning the Company’s long-term debt obligations, including principal cash flows by scheduled maturity and weighted average interest rates of matur- ing amounts (amounts in millions): Acadia Realty Trust 2002 Annual Report 13 Management’s Discussion and Analysis continued Consolidated mortgage debt: Year 2003 2004 2005 2006 2007 Thereafter Scheduled Amortization $3.6 3.5 2.4 2.0 1.1 2.5 $15.1 Maturities $ 16.1 3.5 75.8 — 56.7 35.2 Total $ 19.7 7.0 78.2 2.0 57.8 37.7 $187.3 $202.4 Mortgage debt in unconsolidated partnerships (at Company’s pro rata share): Year 2003–2006 2007 Thereafter Scheduled Amortization Maturities $ 1.8 0.4 2.4 $4.6 $ — 16.0 — $16.0 Total $ 1.8 16.4 2.4 $20.6 Weighted Average Interest Rate 3.4% 7.9% 3.2% N/A 4.1% 7.9% Weighted Average Interest Rate N/A 6.9% N/A Of the Company’s total outstanding debt, $19.6 million increase by $572,000 annually for a 100-basis-point will become due by 2004. As the Company intends on increase in interest rates. The Company may seek addi- refinancing some or all of such debt at the then-existing tional variable-rate financing if and when pricing and market interest rates which may be greater than the other commercial and financial terms warrant. As current interest rate, the Company’s interest expense such, the Company would consider hedging against would increase by approximately $196,000 annually if the interest rate risk related to such additional variable- the interest rate on the refinanced debt increased by rate debt through interest rate swaps and protection 100 basis points. Furthermore, interest expense on the agreements, or other means. Company’s variable debt as of December 31, 2002 would 14 Acadia Realty Trust 2002 Annual Report 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 and subsidiaries (the “Company”) as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the respon- sibility 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, 2002 and 2001, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States. As discussed in the Notes to the Consolidated Financial Statements, in 2002, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” and No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure.” New York, New York February 25, 2003 Acadia Realty Trust 2002 Annual Report 15 Consolidated Balance Sheets December 31, 2002 2001 In thousands, except per share amounts Assets Real Estatei Land Buildings and improvements Construction in progress Less: accumulated depreciation Net Real Estate Cash and cash equivalents Cash in escrow Investments in unconsolidated partnerships Rents receivable, net Notes receivable Prepaid expenses Deferred charges, net Other assets Assets of discontinued operations $ 54,890 352,359 6,629 413,878 85,062 328,816 45,168 3,447 6,164 6,959 6,795 2,042 10,360 1,184 — $ 54,340 336,950 7,126 398,416 72,805 325,611 33,947 2,597 5,169 5,524 34,757 1,613 11,635 1,884 71,202 $410,935 $493,939 Liabilities and Shareholders’ Equity Mortgage notes payable Accounts payable and accrued expenses Dividends and distributions payable Due to related parties Deferred gain on sale of properties Derivative instruments Other liabilities Liabilities of discontinued operations 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 25,257,178 and 28,697,666 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Deficit Total shareholders’ equity $202,361 8,528 3,744 174 1,212 5,470 2,998 — 224,487 22,745 2,380 25,125 25 170,851 (6,874) (2,679) 161,323 $410,935 The accompanying notes are an integral part of these consolidated financial statements. 16 Acadia Realty Trust 2002 Annual Report $ 211,444 4,973 4,119 107 — 357 3,389 51,636 276,025 37,387 1,429 38,816 29 189,378 (1,206) (9,103) 179,098 $493,939 Consolidated Statements of Income In thousands, except per share amounts Revenuesi Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Other Total revenues Operating Expensesi Property operating Real estate taxes General and administrative Depreciation and amortization Abandoned project costs Total operating expenses Operating income Equity in earnings of unconsolidated partnerships Interest expense Minority interest Income from continuing operations Discontinued operations: Operating income from discontinued operations Impairment of real estate Gain on sale of properties Minority interest Income from discontinued operations Years Ended December 31, 2002 2001 2000 $48,488 $ 47,086 $46,448 1,079 11,419 3,945 536 3,880 69,347 12,274 8,447 10,173 14,804 274 45,972 23,375 628 (11,017) (2,426) 10,560 1,165 (197) 9,662 (1,791) 8,839 1,196 10,884 — 589 1,527 1,577 11,096 1,957 656 1,716 61,282 63,450 11,597 8,427 9,025 13,605 — 42,654 18,628 504 (12,370) (1,466) 5,296 3,972 (15,886) 17,734 (1,025) 4,795 12,146 8,199 8,391 13,136 — 41,872 21,578 645 (15,877) (1,952) 4,394 5,711 — 13,742 (3,940) 15,513 Income before extraordinary item and cumulative effect of change in accounting principle Extraordinary item — loss on early extinguishments of debt Cumulative effect of change in accounting principle Net income 19,399 10,091 19,907 — — (140) (149) — — $ 19,399 $ 9,802 $ 19,907 The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2002 Annual Report 17 Consolidated Statements of Income continued In thousands, except per share amounts Basic Earnings per Sharei Income from continuing operations Income from discontinued operations Extraordinary item Cumulative effect of change in accounting principle Basic earnings per share Diluted Earnings per Sharei Income from continuing operations Income from discontinued operations Extraordinary item Cumulative effect of change in accounting principle Diluted earnings per share The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2002 2001 2000 $0.42 0.35 — — $ 0.77 $0.42 0.34 — — $0.76 $ 0.19 0.17 — (0.01) $ 0.16 0.59 — — $ 0.35 $ 0.75 $ 0.19 0.17 — (0.01) $ 0.16 0.59 — — $ 0.35 $ 0.75 18 Acadia Realty Trust 2002 Annual Report Consolidated Statements of Shareholders’ Equity Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity Deficit In thousands, except per share amounts Balance, December 31, 1999 25,724,315 $26 $168,641 — $ (16,180) $ 152,487 Conversion of 3,679,999 OP Units to Common Shares by limited partners of the Operating Partnership Dividends declared ($0.48 per Common Share) Repurchase of Common Shares Reissuance of Common Shares Income before minority interest Minority interest’s equity Balance, December 31, 2000 Conversion of 826,884 OP Units to Common Shares by limited partners of the Operating Partnership Repurchase of 8,000 OP Units from limited partner of the Operating Partnership Dividends declared ($0.48 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 Conversion of 2,086,736 OP Units to Common Shares by limited partners of the Operating Partnership Dividends declared ($0.52 per Common Share) Repurchase of Common Shares Forfeiture of restricted Common Shares Unrealized loss on valuation of swap agreements Income before minority interest Minority interest’s equity Balance, December 31, 2002 3,679,999 — (1,339,905) 86,063 — — 28,150,472 3 — (1) — — — 28 26,999 — (7,691) 443 — — 188,392 826,884 1 5,815 8 (3,832) (1,964) 239 720 — — — 189,378 14,901 — (33,414) (14) — — (316,800) 37,110 — — — — 2,086,736 — (5,523,974) (3,250) — — — — — — — — — — — 29 2 — (6) — — — — Balance, December 31, 2001 28,697,666 — — — — — — — — — — — — — (1,206) — — (1,206) — — — — — 27,002 (12,830) — — 25,799 (5,892) (12,830) (7,692) 443 25,799 (5,892) (9,103) 179,317 — — 5,816 8 (9,802) — — (13,634) (1,964) 239 — 720 — 12,023 (2,221) (1,206) 12,023 (2,221) (9,103) 179,098 — 14,903 (12,975) — — — 22,327 (2,928) (12,975) (33,420) (14) (5,668) 22,327 (2,928) — — — (5,668) — — 25,257,178 $ 25 $ 170,851 $(6,874) $ (2,679) $ 161,323 The accompanying notes are an integral part of these consolidated financial statements Acadia Realty Trust 2002 Annual Report 19 Consolidated Statements of Cash Flows In thousands, except per share amounts Cash Flows from Operating Activities Income from continuing operations after extraordinary item and cumulative effect of change in accounting principle Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization Minority interests Abandoned project costs Equity in earnings of unconsolidated partnerships Provision for bad debts Stock-based compensation Extraordinary item Cumulative effect of change in accounting principle Changes in assets and liabilities Funding of escrows, net Rents receivable Prepaid expenses Other assets Accounts payable and accrued expenses Due to related parties Other liabilities Years Ended December 31, 2002 2001 2000 $ 10,560 $ 5,007 $ 4,394 14,804 2,426 274 (628) 447 — — — (850) (1,882) (429) 346 174 67 (391) 13,605 1,466 — (504) 741 239 140 149 89 937 251 (273) (1,739) (4) 417 13,136 1,952 — (645) 330 443 — — 1,082 (1,676) 81 (657) 637 130 (10) Net cash provided by operating activities 24,918 20,521 19,197 Cash Flows from Investing Activities Expenditures for real estate and improvements Contribution to unconsolidated partnership Distributions from unconsolidated partnerships Collections on purchase money notes Payment of deferred leasing costs Net cash provided by (used in) investing activities The accompanying notes are an integral part of these consolidated financial statements. (14,134) (2,956) 1,049 41,042 (355) 24,646 (10,685) (10,969) (36) 1,252 — (1,730) (11,199) — 1,324 — (1,520) (11,165) 20 Acadia Realty Trust 2002 Annual Report Consolidated Statements of Cash Flows continued In thousands, except per share amounts Cash Flows from Financing Activities Principal payments on mortgages Proceeds received on mortgage notes Payment of deferred financing and other costs Dividends paid Distributions to minority interests in Operating Partnership Distributions on preferred Operating Partnership Units Distributions to minority interests in majority-owned partnership Purchase of minority interest in majority-owned partnerships Redemption of Operating Partnership Units Repurchase of Common Shares Net cash used in financing activities Cash flows from discontinued operations: Net cash provided by discontinued operations Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of year Less: Cash of discontinued operations Cash and cash equivalents, end of year Supplemental Disclosure of Cash Flow Information: Cash paid during the period for interest, net of amounts capitalized of $931, $372, and $439, respectively Notes received in connection with sale of properties Disposition of real estate through assignment of debt Years Ended December 31, 2002 2001 2000 $ (16,841) $ (33,599) $ (122,711) 7,758 (812) (13,131) (2,023) (199) (139) — — (33,420) (58,807) 20,464 11,221 33,947 45,168 — 51,350 (847) (13,569) (2,985) (199) (90) (30) (5,114) (1,964) 103,250 (1,415) (12,545) (4,617) (173) (45) — — (7,692) (7,047) $ (45,948) 10,174 12,449 21,689 34,138 191 25,408 (12,508) 34,675 22,167 478 $ 45,168 $ 33,947 $ 21,689 $ 12,346 $ 19,047 $ 25,035 $ 22,425 $ 42,438 $ 34,757 — $ — $ 22,051 The accompanying notes are an integral part of these consolidated financial statements.\ Acadia Realty Trust 2002 Annual Report 21 Notes to Consolidated Statements December 31, 2002 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”) which specializes in the acquisition, redevelopment and operation of shopping centers which are anchored by grocery and value-oriented retail. All of the Company’s assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the “Operating Partnership”) and its major- ity owned partnerships. As of December 31, 2002, the Company controlled 89% of the Operating Partnership as the sole general partner. As the general partner, the Company is entitled to share, in proportion to its percent- age interest, in the cash distributions and profits and to certain limited partners in connection with an obli- gation from the RDC Transaction. The payment was due upon the commencement of rental payments from a designated tenant at one of the properties acquired in the RDC Transaction. As of December 31, 2002, the Company operated 35 properties, which it owned or had an ownership inter- est in, consisting of 32 neighborhood and community shopping centers, one enclosed shopping mall and two 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 partnerships, 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. losses of the Operating Partnership. The limited part- Use of Estimates ners represent entities or individuals who contributed their interests in certain properties or partnerships to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Com- mon 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 The preparation of the financial statements in conform- ity with accounting principles generally accepted in the United States (“GAAP”) 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. of beneficial interest of the Company (“Common Shares”). Properties This structure is commonly referred to as an umbrella Real estate assets are stated at cost less accumulated 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 Com- depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Construction in progress includes costs for significant shopping center expansion and redevelopment. Depre- ciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for buildings and the shorter of the useful life or lease term for improvements, furniture, fixtures and equipment. Expenditures for maintenance and repairs are charged to operations as incurred. mon OP Units, the RDC Funds beneficially owned 72% Effective January 1, 2002, the Company adopted the of the Common Shares as of the closing of the RDC provisions of SFAS No. 144 as further described in this Transaction. Subsequent to December 31, 2002, the note under “Recent Accounting Pronouncements.” Company issued OP Units and cash valued at $2,750 The Company reviews its long-lived assets used in 22 Acadia Realty Trust 2002 Annual Report operations for impairment when there is an event, or estimated to be uncollectible. Rents receivable at change in circumstances that indicates impairment December 31, 2002 and 2001 are shown net of an in value. The Company records impairment losses and allowance for doubtful accounts of $2,284 and $2,376, reduces the carrying value of properties when indicators respectively. of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying 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 Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. fair value, and for properties held for sale, the Company Cash in Escrow reduces its carrying value to the fair value less costs to sell. During the year ended December 31, 2002, an impairment loss of $197 was recognized related to a property that was sold as of December 31, 2002. For the year ended December 31, 2001, an impairment loss of $14,756 was recognized related to a property sold 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 certain loan agreements. subsequent to December 31, 2001. In addition, an Income Taxes impairment loss of $1,130 was 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 held for sale or properties in use are impaired as of December 31, 2002. Deferred Costs Fees and costs paid 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 obtaining financing have been deferred and are being amortized over the term of the related debt obligation. 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 December 31, 2002 and 2001, unbilled rents receivable relating to straight-lining of rents were $5,302 and $4,828, respectively. 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 federal income taxation on that portion of its income that qualifies as REIT taxable income to the extent 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 accompanying consolidated financial statements. The Company is subject to state income or franchise taxes in certain states in which some of its properties are located. These state taxes, which in total are not significant, are included in gen- eral and administrative expenses in the accompanying consolidated financial statements. Recent Accounting Pronouncements In October, 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Account- ing Standards (“SFAS”) No. 144, “Accounting for the Percentage rents are recognized in the period when Impairment and Disposal of Long-Lived Assets” (“SFAS the tenant sales breakpoint is met. Reimbursements from tenants for real estate taxes, insurance and other property operating expenses are recognized as revenue in the period the expenses are incurred. No. 144”), 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 Seg- ment of a Business, and Extraordinary, Unusual and An allowance for doubtful accounts has been provided Infrequently Occurring Events and Transactions.” against certain tenant accounts receivable that are Acadia Realty Trust 2002 Annual Report 23 Notes to Consolidated Statements continued SFAS No. 144 retains the fundamental provisions of “Accounting for Stock-Based Compensation” to provide SFAS No. 121 for (a) recognition and measurement of the alternative methods of transition for an entity that impairment of long-lived assets to be held and used voluntarily changes to the fair value based method and (b) measurement of long-lived assets to be disposed of accounting for stock-based employee compensation. of by sale, but broadens the definition of what constitutes It also amends the disclosure provisions of SFAS No. 123 a discontinued operation and how the results of a discon- to require prominent disclosure about the effects on tinued operation are to be measured and presented. The reported net income of an entity’s accounting policy Company adopted this statement on January 1, 2002. decisions with respect to stock-based employee com- In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (“SFAS No. 145”). This statement eliminates the require- ment to report gains and losses from extinguishment of debt as extraordinary unless they meet the criteria of APB Opinion 30. SFAS No. 145 also requires sale-lease- back accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. The changes related to lease accounting are effective for transactions occurring after May 15, 2002 and the changes related to debt extinguishment are effective for fiscal years beginning after May 15, 2002. The impact of adopting the provisions related to lease accounting did not have a material impact on pensation. Effective January 1, 2002, the Company adopted the fair value method of recording stock-based compensation contained in SFAS No. 123. As such, all vested stock options granted after December 31, 2001 will be reflected as compensation expense in the Company’s consolidated financial statements over the vesting period based on the fair value at the date the stock-based compensation was granted. Under SFAS No. 123, companies may elect to choose from three alternative transition methods as it relates to the adop- tion of the fair value basis method of accounting for employee stock options. The Company has elected the prospective method whereby compensation expense will be recognized only for those options issued after December 31, 2001. the Company’s financial position or results of operations. The following table illustrates the effect on net income The impact of adopting the provisions related to debt and earnings per share if the Company had applied the extinguishment is not expected to have a material fair value based method of accounting for stock-based impact on the Company’s financial position or results employee compensation for vested stock options of operations. In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (“SFAS No. 146”). SFAS No. 146 nullifies Emerging Issues Task Force Issue No. 94-3 and requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The impact of the adoption of SFAS No. 146 is not expected to have a material impact on the Company’s financial position or results of operations. granted prior to January 1, 2002. See note 11 – “Share Incentive Plan” for the assumptions utilized in valuing the vested stock options: Years Ended December 31, 2002 2001 2000 $19,399 $ 9,802 $19,907 19,363 9,699 19,038 Net income: As reported Pro forma Basic earnings per share: As reported Pro forma $ 0.77 0.76 $ 0.35 0.34 $ 0.75 0.72 In December 2002, the FASB issued SFAS No. 148, Diluted earnings per share: “Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123” (“SFAS No. 148”). SFAS No. 148 amends SFAS No. 123, As reported Pro forma $ 0.76 $ 0.35 0.34 0.76 $ 0.75 0.72 24 Acadia Realty Trust 2002 Annual Report In November 2002, the FASB issued FASB Interpretation regardless of when the variable interest entity was No. 45, “Guarantor’s Accounting and Disclosure Require- established. The Company has adopted FIN 46 effective ments for Guarantees, Including Indirect Guarantees January 31, 2003. The Company does not anticipate of Indebtedness of Others” (“FIN 45”). FIN 45 requires that the adoption of FIN 46 will have a material impact that upon issuance of a guarantee a guarantor must on the Company’s consolidated financial condition or recognize a liability for the fair value of an obligation results of operations taken as a whole. The Company’s assumed under a guarantee. FIN 45 also requires addi- interests in joint ventures are summarized in note 4. tional disclosures by a guarantor in its interim and annual financial statements about the obligations associated with guarantees issued. The recognition provisions of FIN 45 are effective for any guarantees issued or modified after December 31, 2002. The disclo- sure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002. The Company is currently evaluating the effects of the recognition provision of FIN 45, but does not expect the adoption to have a material impact on the Company’s financial position or results of operations. Comprehensive income Comprehensive income for the years ended December 31, 2002 and 2001 totaled $13,731 and $8,596, respectively, and was comprised of net income of $19,399 and $9,802, respectively, and other comprehensive loss related to the changes in the fair value of derivative instruments of $5,668 and $1,206, respectively. For the year ended December 31, 2000, the Company had no items of other comprehensive income requiring additional disclosure. The following table sets forth the change in accumulated other comprehensive loss for the years ended Decem- In January 2003, the FASB issued Interpretation No. 46 “Consolidation of Variable Interest Entities” (“FIN 46”). In general, a variable interest entity is a corporation, partnership, trust, or any other legal structure used for ber 31, 2002 and 2001: Beginning balance business purposes that either (a) does not have equity Unrealized loss on valuation of investors with voting rights or (b) has equity investors derivative instruments that do not provide sufficient financial resources for the entity to support its activities. A variable interest Ending balance 2002 2001 $ 1,206 $ — 5,668 1,206 $6,874 $ 1,206 entity often holds financial assets, including loans or As of December 31, 2002, the balance in accumulated receivables, real estate or other property. A variable other comprehensive loss was comprised entirely of interest entity may be essentially passive or it may unrealized losses on the valuation of swap agreements. engage in activities on behalf of another company. Until now, a company generally has included another entity in its consolidated financial statements only if it controlled the entity through voting interests. FIN 46 changes that by requiring a variable interest entity to be consolidated by a company if that company is sub- ject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority Reclassifications Certain 2001 and 2000 amounts were reclassified to conform to the 2002 presentation. Note 2i Acquisition and Disposition of Properties of the entity’s residual returns or both. FIN 46’s consoli- A significant component of the Company’s business dation requirements apply immediately to variable plan has been the disposition of non-core real estate interest entities created or acquired after January 31, assets. Under this initiative, the Company sold a total 2003. The consolidation requirements apply to older of two apartment complexes and 23 shopping centers entities in the first fiscal year or interim period begin- during 2002, 2001 and 2000. ning after June 15, 2003. Dispositions relate to the sale of shopping centers, Certain of the disclosure requirements apply in all multi-family properties and land. Gains from these financial statements issued after January 31, 2003, sales are generally recognized using the full accrual Acadia Realty Trust 2002 Annual Report 25 Notes to Consolidated Statements continued method in accordance with SFAS No. 66, “Accounting On October 11, 2002, the Company sold the Manahawkin for Sales of Real Estate,” providing that certain criteria Village Shopping Center and Valmont Plaza for $16,825 relating to the terms of sale are met. to a single unaffiliated buyer. The Company received Consistent with SFAS No. 144, the results of operations of sold properties is reported separately as discontinued operations for the years ended December 31, 2002, 2001 and 2000. Revenues from discontinued operations for the years ended December 31, 2002, 2001 and 2000 totaled $6,295, $24,178 and $33,308, respectively. Assets and liabilities of the sold properties have been classified separately in the Company’s consolidated balance sheet as of December 31, 2001 and are summarized in the December 31, 2001 following table: Assets Net real estate Cash and cash equivalents Cash in escrow Rents receivable, net Prepaid expenses Deferred charges, net Other assets Total assets Liabilities Mortgage notes payable Accounts payable and accrued expenses Other liabilities Total liabilities Net assets of discontinued operations 2002 Acquisitions and Dispositions On November 8, 2002, the Company and an unaffiliated joint venture partner completed the sale of a contract to purchase land in Bethel, Connecticut, to the Target Corporation for $2,431. The joint venture received a $1,632 note receivable for the net purchase price and $62,909 191 2,649 1,590 695 2,496 672 71,202 50,163 732 741 51,636 $ 19,566 two purchase money notes in connection with the sale. The first for $11,000 was repaid in full on November 8, 2002. The second for $1,600, matures October 11, 2003, requires monthly interest of 5% to February 1, 2003, and 10% thereafter. As part of the transaction, the Com- pany repaid $3,084 of mortgage debt secured by the Valmont Plaza. The $4,049 of mortgage debt secured by the Manahawkin Village Shopping Center was repaid in full on September 27, 2002, prior to the sale. The Company recorded a $166 gain on the sale. On April 24, 2002, the Company sold a multi-property portfolio for $52,700. The portfolio consists of 17 retail properties, which are cross-collateralized in a securitized loan program and in the aggregate contain approximately 2.3 million square feet. As part of the transaction, the buyer assumed the outstanding mortgage debt of $42,438. The Company retained a senior, preferred interest in the acquiring entity in the amount of $6,262, which earned an initial annual preferred return of 15%. On December 31, 2002, the Company’s interest was pur- chased at par by an affiliate of the purchaser of the port- folio. The Company recorded an $8,134 gain on the sale. 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 $3,563 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 through- out the term. As part of the transaction, the Company agreed to reimburse the purchaser 50% of a former tenant’s rent, or $22 a month, for a period of 18 months. The Company recorded a loss of $166 on the sale. On January 10, 2002, the Company and an unaffiliated joint venture partner purchased a three-acre site located in the Bronx, New York, for $3,109. Simultaneously, the joint venture sold approximately 46% of the land to a additional reimbursements due from the buyer, which self-storage facility for $3,300, recognizing a $1,530 gain was paid in full subsequent to December 31, 2002. As of on the sale of which the Company’s share was $957. December 31, 2002, the Company had deferred the gain The joint venture currently plans to develop the remain- of $1,212 pending collection on the note. ing parcel. 26 Acadia Realty Trust 2002 Annual Report 2001 Dispositions 2000 Dispositions On December 21, 2001, the Company sold the Glen Oaks On December 14, 2000, the Company sold the North- Apartments, a 463 unit multi-family property located in wood Centre, located in Tallahassee, Florida, for $31,500 Greenbelt, Maryland for $35,100, resulting in an $8,546 resulting in a $15,616 gain on the sale. gain on the sale. As part of the transaction, the Company received a promissory note (which was secured by an irrevocable letter of credit) for $34,757, which was sub- sequently paid in January 2002. On December 11, 2000, the Company sold approximately 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 Company On October 4, 2001, the Company sold the Tioga West retained ownership of approximately 50,000 square shopping center, a 122,000-square-foot shopping center feet of the main building, as well as the outparcels located in Tunkhannock, Pennsylvania, for $3,200 result- (14,000 square feet) and related parking areas. ing in a $908 gain on the sale. On August 25, 2000, the Company sold 13 acres at the On August 27, 2001 the Company sold the Wesmark Union Plaza, located in New Castle, Pennsylvania, for Plaza, a 207,000-square-foot shopping center located $1,900 resulting in an $839 loss on the sale. in Sumter, South Carolina, for $5,750, recognizing a $1,245 gain on the sale. The Company sold its interest in the Marley Run Apart- ments for $27,400 on May 15, 2001, recognizing a $7,035 gain on the sale. Net proceeds from the sale were used to redeem 680,667 Common OP Units at $7.00 per unit. The redemption price represented 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 prop- erty who contributed it to the Company in connection with the RDC Transaction. Pursuant to the RDC Transac- tion, 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 contribution of the property. As part of the redemption as discussed above, the Common OP Unit holders waived their rights to this tax reimburse- ment, which the Company estimated to be in excess of $2.00 per Common OP Unit. Note 3i Segment Reporting The Company has two reportable segments: retail properties and multi-family properties. The accounting policies of the segments are the same as those described 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 repor- table segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. The table on the opposite page sets forth certain seg- ment information for the Company as of and for the years ended December 31, 2002, 2001, and 2000 (does not include unconsolidated partnerships): Acadia Realty Trust 2002 Annual Report 27 2002 2001 2000 Retail Multi-Family All Retail Multi-Family All Retail Multi-Family Properties Properties Other Total Properties Properties Other Total Properties Properties All Other Total $ 58,498 $ 6,969 $3,880 $69,347 $ 52,756 $6,870 $1,656 $ 61,282 $ 54,501 $ 6,816 $2,133 $ 63,450 17,030 3,691 — 20,721 16,662 3,362 — 20,024 17,330 3,015 — 20,345 41,468 3,278 3,880 48,626 36,094 3,508 1,656 41,258 37,171 3,801 2,133 43,105 13,287 9,390 1,201 1,627 316 — 14,804 12,154 11,017 10,468 1,097 1,902 354 — 13,605 12,370 11,823 14,099 983 1,778 375,482 38,396 — 413,878 361,075 37,341 — 398,416 351,648 36,081 330 — — 13,136 15,877 387,729 368,547 36,224 6,164 410,935 453,034 35,736 5,169 493,939 481,257 35,570 6,784 523,611 Revenues Property operating expenses and real estate taxes Net property income before depreciation and amortization Depreciation and amortization Interest expense Real estate at cost Total assets Gross leasable area 5,079 1,207 Expenditures for real estate and improvements 13,134 1,000 — — 6,286 5,079 1,207 — 6,286 5,079 1,207 14,134 9,425 1,260 — 10,685 10,217 752 — — 6,286 10,969 REVENUES Total revenues for reportable segments $ 70,413 Elimination of intersegment management fee income (1,066) Total consolidated revenues PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES Total property operating expenses and real estate taxes for reportable segments $ 69,347 $ 21,778 Elimination of intersegment management fee expense (1,057) Total consolidated expense $ 20,721 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 General and administrative Equity in earnings of unconsolidated partnerships Interest expense Income from discontinued operations Minority interest Income before extraordinary item and cumulative effect of change in accounting principle $ 48,626 (14,804) (10,447) 628 (11,017) 8,839 (2,426) $ 62,273 (991) $ 61,282 $ 21,015 (991) $ 20,024 $ 41,258 (13,605) (9,025) 504 (12,370) 4,795 ( 1,466) $ 64,402 (952) $ 63,450 $ 21,297 (952) $ 20,345 $ 43,105 (13,136) (8,391) 645 (15,877) 15,513 ( 1,952) $ 19,399 $ 10,091 $ 19,907 28 Acadia Realty Trust 2002 Annual Report Notes to Consolidated Statements continued Note 4i Investment in Unconsolidated Partnerships Crossroads The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II Joint Venture (collec- tively, “Crossroads”) which collectively own a 311,000- square-foot shopping center in White Plains, New York. The Company accounts for its investment in Crossroads Statements of Income Total revenue Operating and other expenses Interest expense Depreciation and amortization using the equity method. Summary financial informa- Net income Years Ended December 31, 2002 2001 2000 $7,091 $ 7,174 $ 7,242 2,150 2,722 2,159 1,895 2,620 2,699 547 538 532 $1,672 $ 1,857 $ 2,116 tion of Crossroads and the Company’s investment in and share of income from Crossroads follows: December 31, 2002 2001 $ 7,603 3,536 $ 7,997 3,715 $ 11,139 $ 11,712 Balance Sheets Assets: Rental property, net Other assets Total assets Liabilities and partners’ equity Company’s share of net income Amortization of excess investment (see below) $ 934 $ 910 $ 1,037 392 392 392 Income from partnerships $ 542 $ 518 $ 645 The unamortized excess of the Company’s investment over its share of the net equity in Crossroads at the 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 $ 33,575 $ 34,133 Acadia Strategic Opportunity Fund, LP (“ASOF”) Other liabilities Partners’ equity Total liabilities and partners’ equity Company’s investment 5,832 2,759 In 2001, the Company formed a joint venture, ASOF, (28,268) (25,180) with four of its institutional investors for the purpose $ 11,139 $ 11,712 $ 3,241 $ 5,147 of acquiring real estate assets. The Company is the sole general partner with a 22% interest in the joint venture and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds. The Company also earns market-rate fees for asset management as well as for property manage- ment, construction and leasing services. On September 19, 2002, ASOF acquired three supermarket-anchored shopping centers. The Company accounts for its invest- ment in ASOF using the equity method. Summary financial information of ASOF and the Company’s investment in and share of income from ASOF follows: Acadia Realty Trust 2002 Annual Report 29 Notes to Consolidated Statements continued December 31, 2002 2001 Note 5i Deferred Charges $ 1,224 $ — of properties. The loan agreements contain customary Balance Sheets Assets: Rental property, net Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity Total liabilities and partners’ equity Company’s investment in ASOF $28,046 5,977 $ 34,023 $ 18,450 2,418 13,155 $ 34,023 $ 2,923 $ — 98 $ 98 $ — — 98 $ 98 $ 22 Year ended December 31, 2002 Period from September 28, 2001 (inception) to December 31, 2001 Statements of Operations Total revenue Operating and other expenses Management and other fees Interest expense Depreciation and amortization 342 1,391 350 145 — 402 — — Net loss $(1,004) $(402) Company’s share of net income (loss) $ 86 $ (14) 30 Acadia Realty Trust 2002 Annual Report Deferred charges consist of the following as of December 31, 2002 and 2001: Deferred financing costs Deferred leasing and other costs Accumulated amortization 2002 2001 $ 6,150 $ 5,338 13,302 13,252 19,452 18,590 (9,092) (6,955) $ 10,360 $ 11,635 Note 6i Mortgage Loans At December 31, 2002, mortgage notes payable aggre- gated $202,361 and were collateralized by 25 properties and related tenant leases. Interest rates ranged from 2.9% to 8.1%. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2011. Certain loans are cross- collateralized and cross-defaulted as part of a group representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. On November 22, 2002, the Company closed on a $20,000 revolving credit facility with a bank. The facility, which is secured by one of the Company’s properties and matures November 22, 2007, requires the monthly payment of interest only at the rate of LIBOR plus 170 basis points subject to a total floor of 3.3%. As of December 31, 2002, no amounts have been drawn under this facility and future draws are subject to meeting certain conditions including a loan-to-value limit and debt service coverage ratio. The Company also pays a 15 basis point fee per annum for the unused portion of the facility on a quarterly basis. On September 27, 2002, the Company repaid a $4,049 loan with a life insurance company in connection with the sale of a property on October 11, 2002. On September 26, 2002, the Company refinanced a June 1, 2007. Subject to other conditions including loan- maturing $9,485 loan with a life insurance company. to-value limit and debt service coverage ratio, the Com- The loan, which is secured by one of the Company’s pany may draw an additional $1,329 under this facility. properties, requires monthly payment of interest at the rate of LIBOR plus 173 basis points and principal amortized over 25 years and matures October 1, 2005. On April 16, 2002, the Company closed on a $9,350 loan with a bank. The debt, which is secured by one of the Company’s properties and matures May 1, 2007, initially On June 25, 2002, the Company refinanced a maturing requires the monthly payment of interest at the rate $13,368 loan with a life insurance company, increasing of LIBOR plus 300 basis points and principal amortized the outstanding principal to $13,750. The loan, which is over 25 years. Following the completion of certain con- secured by one of the Company’s properties, requires the struction at the property, the rate decreases to LIBOR monthly payment of interest at a rate of 6.5% and princi- plus 175 basis points. The Company has drawn $6,300 pal amortized over 25 years and matures July 1, 2007. under this facility to repay $6,178 to the previous lender On June 17, 2002, the Company repaid a $7,231 loan, which was secured by one of the Company’s properties, with a bank. on the property and for loan closing costs. Upon com- pletion of the planned construction at this property and subject to other conditions, including loan-to-value limit and debt service coverage ratio, the Company may On May 31, 2002, the Company refinanced a maturing draw the remaining $3,050 available under this facility. $9,061 loan with a bank. The loan, which is secured by one of the 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 On March 15, 2002, the Company extended its existing loan with a bank through March 15, 2007 and drew down an additional $1,000. As of December 31, 2002, $4,942 was outstanding under this loan. Acadia Realty Trust 2002 Annual Report 31 Notes to Consolidated Statements continued The following table summarizes the Company’s mortgage indebtedness as of December 31, 2002 and 2001: DECEMBER 31, 2002 2001 Interest Rate Maturity Encumbered Payment Terms Properties Monthly MORTGAGE NOTES PAYABLE — VARIABLE-RATE Sun America Life Insurance Company Fleet Bank, N.A. Metropolitan Life Insurance Company First Union National Bank Washington Mutual Sun America Life Insurance Company Fleet Bank, N.A. Washington Mutual Fleet Bank, N.A. Fleet Bank, N.A. Fleet Bank, N.A. $ — $ 13,521 8,853 8,731 — — 3.19% (LIBOR + 1.75%) 08/01/03 7,577 13,388 56,950 9,446 12,187 15,637 4,942 6,300 9,108 7,700 3.69% (LIBOR + 2.00%) 13,512 2.89% (LIBOR + 1.45%) 58,149 3.25% (LIBOR + 1.75%) 9,682 3.54% (LIBOR + 1.73%) 12,350 3.19% (LIBOR + 1.75%) 16,000 3.35% (LIBOR + 1.85%) 4,051 3.17% (LIBOR + 1.75%) — 4.42% (LIBOR + 3.00%) 9,106 3.56% (LIBOR + 1.75%) Total variable-rate debt 144,266 152,924 MORTGAGE NOTES PAYABLE — FIXED-RATE Huntoon Hastings Capital Corp. Anchor National Life Insurance Company Sun America Life Insurance Company Mellon Mortgage Company Metropolitan Life Insurance Company Bank of America, N.A. Total fixed-rate debt Notes: — 7.93% 6.46% — 8.13% 7.55% — 3,570 13,648 — 24,495 16,382 6,194 3,676 — 7,305 24,820 16,525 58,095 58,520 $202,361 $211,444 — (1) (3) (4) (5) (6) (7) (8) (9) (10) (11) — (12) (13) — (14) (15) $ — (2) (2) (2) (2) (2) (2) (2) (2) (16) (2) — 33(2) 92(2) — 197(2) 117(2) 11/01/03 01/01/05 04/01/05 10/01/05 01/01/07 01/01/07 03/15/07 05/01/07 06/01/07 — 01/01/04 07/01/07 — 11/01/10 01/01/11 (1) Soundview Marketplace (6) Village Apartments (2) Monthly principal and interest (3) Greenridge Plaza Luzerne Plaza (4) 239 Greenwich Avenue (5) New Loudon Center Ledgewood Mall Route 6 Plaza Bradford Towne Centre Berlin Shopping Center (7) Branch Shopping Center Abington Towne Center Methuen Shopping Center (8) Walnut Hill Plaza Bloomfield Town Square (9) Town Line Plaza (10) Gateway Shopping Center (11) Smithtown Shopping Center (12) Pittston Plaza (13) Merrillville Plaza (14) Crescent Plaza East End Centre (15) GHT Apartments/ Colony Apartments (16) Interest only until Shaw’s commences paying rent; monthly principal and interest thereafter. 32 Acadia Realty Trust 2002 Annual Report The scheduled principal repayments of all mortgage Minority Interests indebtedness as of December 31, 2002 are as follows: Minority interest in Operating Partnership represents the $ 19,694 limited partners’ interest of 3,162,980 and 5,249,717 units 2003 2004 2005 2006 2007 Thereafter 6,968 78,235 1,981 57,777 37,706 $202,361 Note 7i Shareholders’ Equity and Minority Interests Common Shares In February 2002, the Company completed a “modified Dutch Auction” tender offer (the “Tender Offer”) whereby the Company purchased 5,523,974 Common Shares, comprised of 4,136,321 Common Shares and 1,387,653 Common OP Units converted to Common Shares, at a purchase price of $6.05. The aggregate purchase price paid was $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 in the Operating Partnership (“Common OP Units”) at December 31, 2002 and 2001, respectively, and 2,212 units of preferred limited partnership interests designated as Series A Preferred Units (“Preferred OP Units”) issued November 16, 1999 in connection with the acquisition of all the partnership interests of the limited partnership which owns the Pacesetter Park Shopping Center. The Preferred OP Units, which have a stated value of $1,000 each, are entitled to a quarterly preferred distribution 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 sev- enth 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. During 2002, various limited partners converted a total of 699,084 Common OP Units into Common Shares on a one-for-one basis. Institute by granting a conditional waiver of the provi- Minority interests at December 31, 2002 and 2001 also sion in the Company’s Declaration of Trust that prohibits include an aggregate amount of $2,380 and $1,429 ownership positions in excess of 4% of the Company. respectively, which represent third party interests in The waiver was limited to this particular transaction. three of the properties in which the Company has a Following this, Yale owned 8,421,759 Common Shares, majority ownership position. or 34% of the Company’s outstanding Common Shares. Additionally, as a condition to approving the waiver, Note 8i Yale agreed to establish a voting trust whereby all shares Related Party Transactions owned by Yale University in excess of 30% of the Com- pany’s outstanding Common Shares, will be voted in the same proportion as all other shares voted, excluding Yale. As of December 31, 2002, in addition to the Common Shares purchased in connection with the Tender Offer, the Company had repurchased 1,931,682 Common Shares (net of 119,923 Common Shares reissued) at a total cost of $11,001 under the expanded share repurchase program that allows for the repurchase of up to $20,000 of the Company’s outstanding Common Shares. The repur- chased shares are reflected as a reduction of par value and additional paid-in capital. The Company currently manages one property in which a shareholder of the Company has an ownership interest 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 properties owned by related parties that earned fees of 3.25% and 3.5% of tenant collections, respectively. Management fees earned by the Company under these contracts aggregated $229, $391, and $853 for the years ended December 31, 2002, 2001 and 2000 respectively, and are included in other revenue in the accompanying consolidated statements of income. Acadia Realty Trust 2002 Annual Report 3333 Notes to Consolidated Statements continued The Company also earns certain management and Minimum future rentals above include a total of $21,452 service fees in connection with its investment in ASOF for two tenants (with six leases), which have filed for bank- (note 4). Such fees earned by the Company aggregated ruptcy protection. None of these leases have been rejected $1,082 and $338 for the year ended December 31, 2002 nor affirmed. During the years ended December 31, 2002, and 2001 respectively, and are included in other revenue 2001 and 2000, no single tenant collectively accounted in the accompanying consolidated statements of income. for more than 10% of the Company’s total revenues. As of December 31, 2002, the Company was obligated Note 10i to issue OP Units and cash valued at $2,750 to certain limited partners in connection with the RDC Transaction, The payment was due upon the commencement of rental payments from a designated tenant at one of the properties acquired in the RDC Transaction. Subsequent to December 31, 2002, Mr. Dworman, Chairman of the Company’s Board of Trustees, received 34,841 of these OP Units through various affiliated entities. Lease Obligations The Company leases land at three of its shopping cen- ters, which are accounted for as operating leases and generally provide the Company with renewal options. The leases terminate during the years 2020 to 2066. One of these leases provides the Company with options to renew for additional terms aggregating from 20 to 44 years. Future minimum rental payments required Included in the Common OP Units converted to Com- for leases having remaining non-cancelable lease terms mon Shares during 2002, were 5,000 Common OP Units converted by Mr. Dworman, who then transferred them to a 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 tendered and sold 492,271 Common OP Units (after converting these to Common Shares on a one-for-one basis) and 107,729 Common Shares (note 7). are as follows: 2003 2004 2005 2006 2007 Thereafter $ 522 562 562 562 562 17,944 $ 20,714 Note 9i Tenant Leases Note 11i Share Incentive Plan During 1999, the Company adopted the 1999 Share Space in the shopping centers and other retail properties Incentive Plan (the “1999 Plan”), which replaced both is leased to various tenants under operating leases that usually grant tenants renewal options and generally pro- vide 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, 2002 are summarized as follows: 2003 2004 2005 2006 2007 Thereafter $ 40,975 38,717 33,934 31,205 27,996 178,974 $ 351,801 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 during 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, and will not have an exercise price less than 100% of 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 34 Acadia Realty Trust 2002 Annual Report exception of options granted to non-employee Trustees, granted after December 31, 2001 will be expensed in the which vest in five equal annual installments beginning accompanying consolidated financial statements over on the date of grant. Pursuant to the 1999 Plan, non- the vesting period based on the fair value at the date the employee Trustees receive an automatic grant of 1,000 stock-based compensation was granted. Prior to January options following each Annual Meeting of Sharehold- 1, 2002, the Company had applied the intrinsic value ers. As of December 31, 2002, the Company has issued method permitted under SFAS No. 123, as defined in 2,453,400 options to officers and employees, which are Accounting Principles Board Opinion No. 25, “Accounting for ten-year terms and vest in three equal annual install- for Stock Issued to Employees” and related Interpreta- ments beginning on the grant date. In addition, 19,000 tions, in accounting for stock-based compensation plans. options have been issued to non-employee Trustees. Accordingly, no compensation expense has been recog- The 1999 Plan also provides for the granting of Share Appreciation Rights, Restricted Shares and Performance Units/Shares. Share Appreciation Rights provide for the 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 perform- ance period. For the year ended December 31, 2001 and 2000, the Company has issued 37,110 and 84,063 nized in the accompanying consolidated financial state- ments for the years ended December 31, 2001 and 2000 related to the issuance of stock options because the exercise price of the Company’s employee stock options equaled or exceeded the market price of the underlying stock on the date of grant. Under SFAS No. 148, companies may elect to choose from three alternative transition methods as it relates to the adoption of the fair value basis method of accounting for employee stock options. The Company has elected the prospective method whereby compensation expense will be recognized only for those options issued on or after January 1, 2002. See note 1 — “Recent Accounting Pronouncements” for additional discussion related to SFAS No. 148 and the Company’s adoption of the fair value method of record- ing stock-based compensation pursuant to SFAS No. 123. Restricted Shares, respectively, to employees, which vest The Company has used the Black-Scholes option-pricing equally over three years. No awards of Restricted Shares model for purposes of estimating the fair value in were granted for the year ended December 31, 2002. determining compensation expense for options granted During the years ended December 31, 2002, 2001 and for the year ended December 31, 2002. The Company 2000, the Company recognized compensation expense has also used this model for the pro forma information of $121, $121 and $61, respectively, in connection with regarding net income and earnings per share as required Restricted Share grants. No awards of Share Apprecia- by SFAS No. 123 for options issued for the years ended tion Rights or Performance Units/Shares were granted December 31, 2001 and 2000 as if the Company had for the years ended December 31, 2002, 2001 and 2000. also accounted for these employee stock options under Effective January 1, 2002, the Company adopted the fair value method of recording stock-based compensation contained in SFAS No. 123, “Accounting for Stock-Based Compensation.” As such, all vested stock option grants the fair value method. The fair value for the options issued by the Company was estimated at the date of the grant using the following weighted-average assumptions: Acadia Realty Trust 2002 Annual Report 35 Notes to Consolidated Statements continued Risk-free interest rate Dividend yield Expected life Expected volatility Fair value at date of grant (per option) 2002 3.3% 7.0% 7.0 years 19.1% Years ended December 31, 2001 5.4% 8.4% 7.0 years 17.7% 2000 4.9% 7.8% 7.7 years 30.0% $0.27 $0.27 $0.94 Changes in the number of shares under all option arrangements are summarized as follows: Outstanding at beginning of period Granted Option price per share granted Cancelled Exercisable at end of period Exercised1 Expired Outstanding at end of period Option prices per share outstanding 2002 2,593,400 5,000 $7.10 — 2,313,436 126,000 — 2,472,400 $4.89–$7.50 Years Ended December 31, 2001 2,124,600 475,000 2000 2,071,600 55,000 $6.00–$7.00 $5.00–$5.75 — 2,418,137 6,200 — 2,593,400 $4.89–$7.50 2,000 2,108,200 — — 2,124,600 $4.89–$7.50 As of December 31, 2002 the outstanding options had a weighted average remaining contractual life of approxi- mately 6.1 years. 1Pursuant to the 1999 Plan, these options, at the Company’s election, were exercised on a cashless basis and did not result in the issuance of any additional Common Shares. In connection with such exercises, compensation expense of approximately $260, $6 and $0 was recognized for the years ended December 31, 2002, 2001 and 2000, respectively. Note 12i Note 13i Employee 401(k) Plan The Company maintains a 401(k) plan for employees Dividends and Distributions Payable under which the Company currently matches 50% On December 12, 2002, the Company declared a cash of a plan participant’s contribution up to 6% of the dividend for the quarter ended December 31, 2002 employee’s annual salary. A plan participant may con- of $0.13 per Common Share. The dividend was paid tribute up to a maximum of 15% of their compensation on February 3, 2003 to shareholders of record as of but not in excess of $11 for the year ended December 31, December 31, 2002. 2002. The Company contributed $115, $135, and $143 for the years ended December 31, 2002, 2001 and 2000, respectively. The Company has determined that the cash distributed to the shareholders is characterized as follows for fed- eral income tax purposes: 36 Acadia Realty Trust 2002 Annual Report Ordinary income Long-term capital gain Years Ended December 31, 2002 2001 2000 44% 56% 79% 21% 100% — 100% 100% 100% Note 14i Fair Value of Financial Instruments LIBOR interest rate caps that hedged $23,203 of variable- rate mortgage debt. This adjustment is reflected as a cumulative effect of change in accounting principle in the accompanying consolidated statements of income. On December 6, 2002, ASOF completed a forward interest rate lock agreement on $30,000 of anticipated mortgage debt in connection with the pending acquisi- tion of the Brandywine Town Center (note 19). The Com- pany’s effective pro rata share is 22% of this instrument. SFAS No. 107, “Disclosures About Fair Value of Financial In June of 2002, the Company completed two interest Instruments” requires disclosure on the fair value of rate swap transactions (“Swap Agreements”) to hedge financial instruments. Certain of the Company’s assets the Company’s exposure to changes in interest rates and liabilities are considered financial instruments. with respect to $25,047 of LIBOR based variable rate Fair value estimates, methods and assumptions are debt. The Swap Agreements, which are for $15,885 and set forth below. Cash and Cash Equivalents, Cash in Escrow, Rents Receivable, Notes Receivable, Prepaid Expenses, Other $9,162 of notional principal, mature on January 1, 2007 and June 1, 2007, respectively. These Swap Agreements are at a weighted average fixed interest rate of 6.2%. Assets, Accounts Payable and Accrued Expenses, Divi- On July 10, 2002, the Company entered into an interest dends and Distributions Payable, Due to Related Parties rate swap agreement to hedge its exposure to changes and Other Liabilities — The carrying amount of these in interest rates with respect to $12,288 of LIBOR based assets and liabilities approximates fair value due to the variable rate debt. The swap agreement, which matures short-term nature of such accounts. on January 1, 2007, provides for a fixed all-in interest Derivative Instruments — The fair value of these instru- rate of 5.9%. ments is based upon the estimated amounts the Com- During 2001, the Company completed two interest rate pany would receive or pay to terminate the contracts swap transactions to hedge the Company’s exposure as of December 31, 2002 and 2001 and is determined to changes to interest rates with respect to $50,000 using interest rate market pricing models. of LIBOR based variable rate debt. The first swap agree- Mortgage Notes Payable — As of December 31, 2002 and 2001, the Company has determined the estimated fair value of its mortgage notes payable are approxi- mately $208,083 and $214,970, respectively, by discounting future cash payments utilizing a discount rate equivalent ment, which extends through April 1, 2005, provides for a fixed all-in rate of 6.6% on $30,000 of notional principal. The second swap agreement, which extends through October 1, 2006, provides for a fixed all-in rate of 6.3% on $20,000 of notional principal. to the rate at which similar mortgage notes payable The Company is also a party to two swap agreements would be originated under conditions then existing. with a bank through its 49% interest in Crossroads Interest Rate Hedges On January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” 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 (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. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2002. The notional value does not represent exposure to credit, interest rate or market risks. Acadia Realty Trust 2002 Annual Report 37 Notes to Consolidated Statements continued 6.48% 6/16/07 (759) are reported on the balance sheet with a corresponding 30,000 4.80% 4/1/05 (1,915) adjustment to either accumulated other comprehensive Hedge Type Notional Value Interest Rate Maturity Fair Value 5.94% 6/16/07 $(1,543) LIBOR Swap1 $ 11,974 5,000 LIBOR Swap1 LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap 20,000 4.53% 10/1/06 (1,376) 9,108 4.47% 6/1/07 15,806 4.32% 1/1/07 LIBOR Swap Treasury Lock2 6,666 12,227 4.11% 1/1/07 3.22% 2/4/03 (601) (944) (633) (140) $ (7,911) 1Relates to the Company’s investment in Crossroads. These swaps effectively fix the interest rate on the Company’s pro rata share of mortgage debt. 2Relates to the Company’s investment in ASOF. The above amount represents the Company’s pro rata share of the notional value. held by the Company, as well as interest rate caps, floors, collars, and forwards are cash flow hedges. The unreal- ized gains and losses in the fair value of these hedges income or earnings depending on the type of hedging relationship. For cash flow hedges, offsetting gains and losses are reported in accumulated other comprehen- sive 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 $3,500 of the current balance held in accumulated other comprehensive loss. As of December 31, 2002, the derivative instruments Note 15i were reported at their fair value as derivative instru- Earnings per Common Share ments of $5,470 and as a reduction of investments in unconsolidated partnerships of $2,442. As of December 31, 2002, unrealized losses totaling $7,735 represented the fair value of the aforementioned derivatives, of which $6,874 was reflected in accumulated other comprehen- sive loss and $861 as a reduction of minority interest in Operating Partnership. For the years ended December 31, 2002 and 2001, the Company recorded an unrealized loss of $122 and $54, respectively, due to partial ineffec- tiveness on one of the swaps. The ineffectiveness resulted from differences between the derivative notional and the principal amount of the hedged variable rate debt. The Company’s interest rate hedges are designated as cash flow hedges and hedge the future cash outflows on mortgage debt. Interest rate swaps that convert variable payments to fixed payments, such as those Basic earnings per share was determined by dividing the applicable net income to common shareholders for the year by the weighted average number of Com- mon Shares outstanding during each year consistent with SFAS No. 128. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated. For the years ended December 31, 2001 and 2000 no additional shares were reflected as the impact would be anti-dilutive in such years. 38 Acadia Realty Trust 2002 Annual Report Numerator: Income from continuing operations — basic earnings per share $ 10,560 $ 5,296 $ 4,394 Years ended December 31, 2002 2001 2000 Effect of dilutive securities: Preferred OP Unit distributions Numerator for diluted earnings per share Denominator: 199 10,759 — 5,296 — 4,394 Weighted average shares — basic earnings per share 25,321 28,313 26,437 Effect of dilutive securities: Employee stock options Convertible Preferred OP Units Dilutive potential Common Shares Denominator for diluted earnings per share Basic earnings per share from continuing operations Diluted earnings per share from continuing operations 190 295 485 25,806 $ $ 0.42 0.42 — — — 28,313 $ 0.19 $ 0.19 — — — 26,437 $ $ 0.16 0.16 The effect of the conversion of Common OP Units is not reflected in the above table as they are exchangeable for Common Shares on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as minority interest in the accompanying consolidated financial statements. As such, the assumed conver- sion of these units would have no net impact on the determination of diluted earnings per share. Acadia Realty Trust 2002 Annual Report 39 Notes to Consolidated Statements continued Note 16i Summary of Quarterly Financial Information (unaudited) The separate results of operations of the Company for the years ended December 31, 2002 and 2001 are as follows: Revenue Income from continuing operations Income (loss) from discontinued operations Net income Net income per Common Share — basic: Income from continuing operations Income from discontinued operations Net income Net income per Common Share — diluted: Income from continuing operations Income from discontinued operations Net income Cash dividends declared per Common Share Weighted average Common Shares outstanding: Basic Diluted Revenue Income from continuing operations Income (loss) from discontinued operations Net income Net income (loss) per Common Share — basic and diluted Income from continuing operations Income (loss) from discontinued operations Net income (loss) Cash dividends declared per Common Share Weighted average Common Shares outstanding: Basic and diluted 2002 MARCH 31 $19,526 JUNE 30 $16,023 SEPTEMBER 30 $16,208 DECEMBER 31 $17,590 5,329 1,137 6,466 $ 0.21 0.04 0.25 $ 0.21 0.04 0.25 $ 0.13 1,770 2,052 3,822 $ 0.07 0.08 0.15 $ 0.07 0.08 0.15 $ 0.13 1,990 (108) 1,882 $ 0.08 — 0.08 $ 0.08 — 0.08 $ 0.13 1,471 5,758 7,229 $ 0.06 0.23 0.29 $ 0.06 0.22 0.28 $ 0.13 TOTAL $ 69,347 10,560 8,839 19,399 $ 0.42 0.35 0.77 $ 0.42 0.34 0.76 $ 0.52 26,376,443 26,786,454 27,775,053 25,252,842 24,974,176 24,974,176 25,173,874 25,684,405 25,320,631 25,806,035 2001 MARCH 31 $15,698 JUNE 30 $14,809 SEPTEMBER 30 $ 14,920 DECEMBER 31 $15,855 TOTAL $ 61,282 892 980 1,583 $ 0.03 0.04 0.06 $ 0.12 1,167 6,633 7,800 $ 0.04 0.24 0.28 $ 0.12 1,388 (10,657) (9,269) $ 0.04 (0.37) (0.33) $ 0.12 1,849 7,839 9,688 $ 0.07 0.27 0.34 $ 0.12 5,296 4,795 9,802 $ 0.19 0.17 0.35 $ 0.48 28,091,479 28,089,593 28,488,712 28,575,250 28,313,070 Note 17i Commitments and Contingencies associated with any potential environmental remediation at any of its formerly or currently owned properties. Under various Federal, state and local laws, ordinances The Company conducts Phase I environmental reviews and regulations relating to the protection of the envi- with respect to properties it acquires. These reviews ronment, a current or previous owner or operator of include an investigation for the presence of asbestos, real estate may be liable for the cost of removal or underground storage tanks and polychlorinated biphenyls remediation of certain hazardous or toxic substances (PCBs). Although such reviews are intended to evaluate disposed, stored, generated, released, manufactured the environmental condition of the subject property or discharged from, on, at, under, or in a property. As as well as surrounding properties, there can be no such, the Company may be potentially liable for costs assurance that the review conducted by the Company 40 Acadia Realty Trust 2002 Annual Report will be adequate to identify environmental or other prob- Note 19i lems that may exist. Where a Phase I assessment so rec- ommended, a Phase II assessment was conducted to further determine the extent of possible environmental contamination. In all instances where a Phase I or II assessment has resulted in specific recommendations for remedial actions, the Company has either taken or scheduled the recommended remedial action. To mitigate unknown risks, the Company has obtained environ- mental insurance for most of its properties, which covers only unknown environmental risks. Subsequent Events In January 2003, ASOF, in which the Company owns a 22% interest and an unaffiliated joint venture party, acquired a one-million-square-foot supermarket port- folio consisting of twenty-five anchor only leases with either Kroger or Safeway supermarkets. The portfolio was acquired through long-term ground leases with terms, including renewal options, averaging in excess of 80 years, which are master leased to a non-affiliated entity. The purchase price of $47,874 (inclusive of closing The Company believes that it is in compliance in all and other related acquisition costs) included the assump- material respects with all Federal, state and local ordi- tion of $34,450 of existing fixed-rate debt which bears nances and regulations regarding hazardous or toxic interest at a weighted-average rate of 6.6%. The mort- substances. Management is not aware of any environ- gage debt fully amortizes over the next seven years, mental liability that they believe would have a material which is coterminous with the primary lease term of the adverse impact on the Company’s financial position or supermarket leases. ASOF invested $11,250 of the equity results of operations. Management is unaware of any capitalization of which the Company’s share was $2,500. 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. In January 2003, ASOF acquired a one-million-square- foot portfolio for an initial purchase price of $89,287, including closing and other related acquisition costs. The portfolio consists of two shopping centers located in Wilmington, Delaware. A portion of one of the prop- The Company is involved in various matters of litigation erties is currently unoccupied for which ASOF will pay arising in the normal course of business. While the for on an “earnout” basis only when it is leased. At Company is unable to predict with certainty the amounts closing, ASOF assumed $38,082 of fixed-rate debt which involved, Management is of the opinion that, when such bears interest at a weighted average rate of 6.2% as well litigation is resolved, the Company’s resulting liability, if as obtained an additional fixed-rate loan of $30,000 any, will not have a significant effect on the Company’s which bears interest at 4.7%. ASOF invested equity of consolidated financial position or results of operations. $19,270 in the acquisition, of which the Company’s share was $4,282. Note 18* Extraordinary Item — Loss on Early Extinguishment of Debt The consolidated statement of operations for the year ended December 31, 2001 includes the write-off of $140 in net deferred financing fees as a result of the repay- ment of the related mortgage debt. Acadia Realty Trust 2002 Annual Report 41 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 F r o m L e f t t o R i g h t Greenridge Shopping Center Scranton, PA Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH 

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