Acadia Realty Trust
Annual Report 2003

Plain-text annual report

A C A D I A R E A LT Y T R U S T A N N UA L R E P O R T 2 0 0 3 M A K I N G A Y E A R O F E X T R A O R D I N A R Y A C H I E V E M E N T Before Redevelopment... ...During... ...After Redevelopment Making Change has been the key to our success. Following the formation of Acadia in 1998, we launched a multi-year plan focused on building the three core components of our business. Five years later, we have achieved our goals in these three key areas through aggressive change: ■ We have built a strong Core Portfolio of shopping centers. Please Open ■ We have built a solid Balance Sheet. ■ We have built a highly accretive External Growth Platform. At Acadia, we Plan Change. We operate in a competitive and dynamic industry that requires proactive and flexible strategies. Making Change has been fundamental to our past success — it remains the key to our Future Success. On the cover: Making change within our portfolio — The redevelopment of the Gateway Shopping Center in South Burlington, Vermont, included the demolition of 90% of this formerly outdated, partially enclosed mall anchored by an undersized Grand Union supermarket. In its place, we built a contemporary, open-air shopping center anchored by a 72,000 square foot state-of-the-art Shaw’s supermarket. Making Change has been the key to our success. Following the formation of Acadia in 1998, we launched a multi-year plan focused on building the three core components of our business. Five years later, we have achieved our goals in these three key areas through aggressive change: ■ We have built a strong Core Portfolio of shopping centers. Please Open ■ We have built a solid Balance Sheet. ■ We have built a highly accretive External Growth Platform. At Acadia, we Plan Change. We operate in a competitive and dynamic industry that requires proactive and flexible strategies. Making Change has been fundamental to our past success — it remains the key to our Future Success. On the cover: Making change within our portfolio — The redevelopment of the Gateway Shopping Center in South Burlington, Vermont, included the demolition of 90% of this formerly outdated, partially enclosed mall anchored by an undersized Grand Union supermarket. In its place, we built a contemporary, open-air shopping center anchored by a 72,000 square foot state-of-the-art Shaw’s supermarket. Cumulative returns versus major indices 250 % 200 % 150 % 100 % 50 % 0 % BALANCE SHEET Acadia Morgan Stanley REIT Index S&P 500 F I V E Y E A R S O F E X T R A O R D I N A R Y P E R F O R M A N C E A N D R E T U R N S Acadia SOLID (cid:1) PORTFOLIO MAR Redevelop the Ledgewood Mall and re-anchor with a new Wal-Mart. NOV Two centers with former Grand Union supermarkets are MAY Acquire the Gateway Shopping Center for $6.5 million with plan re-anchored with Stop & Shop and A&P supermarkets. SEP Target opens in a 158,000 square foot, two-level store at the Abington Towne Center. to completely redevelop. DEC Start redevelopment of the Abington Towne Center — OCT Wal-Mart opens at the Methuen Shopping Center at triple JUN Redevelop 239 Greenwich Avenue, a main street historic property, and anchor with a Chico’s fashion store as well as 21 luxury apartment units. OCT Commence redevelopment of Methuen Shopping Center — new Wal-Mart to replace Caldor. Non-core property dispositions — three properties sold for $9.2 million in 1999. to re-anchor with a new Target store. the rent of former Caldor. Non-core property dispositions continue with sale of the Northwood Centre for $31.5 million in 2000. Non-core property dispositions — four properties sold for $71.4 million in 2001. Commence the complete redevelopment of the Elmwood Park Shopping Center, including the demolition of the attached former Grand Union headquarters office building. NOV Redevelopment of the Elmwood Park Shopping Center is complete FEB with the opening of a new 48,000 Pathmark supermarket and a new 15,000 Walgreens drug store. Non-core property dispositions — 20 properties sold for $74.3 million in 2002. GROWTH INITIATIVE (cid:1) STRONG (cid:1) FEB Reinstate the dividend (formerly suspended by Mark Centers) at $0.48 per share. DEC 1.3 million shares repurchased during 2000 at an average cost of $5.75 per share under share repurchase plan. JUL 317,000 shares repurchased year-t0-date at an average cost of $6.20 under share repurchase plan. MAR Dividend is increased 8% to $0.52 per share. OCT Acadia forms a new $300 million acquisition joint venture (“AKR Fund I”) with four of its key institutional investors. SEP AKR Fund acquires three supermarket-anchored shopping cen- ters for $26.7 million. JUN Commence a share repurchase plan which allows for total share repurchases of up to $10 million. 400,000 shares were repurchased during 1999 at an average cost of $5.02 per share. 67% debt to total market capitalization; fixed-charge coverage of 2.3x [EBITDA/(interest + preferred distributions)]. 60% debt to total market capitalization; fixed-charge coverage of 2.2x. 56% debt to total market capitalization; fixed-charge coverage of 2.5x. 51% debt to total market capitalization; fixed-charge coverage of 2.9x. OCT While some of the Company’s larger institutional shareholders participated in AKR Fund I, others expressed a desire for liquidity. Accordingly, Acadia purchases 5.5 million shares in a tender offer at $6.05 per share ($33.4 million). Crescent Plaza is re-anchored with Home Depot replacing a former Bradlees department store. JUN New 72,000 square foot Shaw’s supermarket opens at the Gateway Shopping Center redevelopment project. NOV New Loudon Center is redeveloped with Bon-Ton department store replacing former Ames. DEC Plaza 422 redeveloped and re-anchored with Home Depot, also replacing a former Ames. JAN AKR Fund I acquires a one million square foot portfolio of 25 Kroger and Safeway supermarkets for $47.0 million. FEB AKR Fund I acquires a one million square foot portfolio located in Wilmington, Delaware (the “Brandywine Portfolio”) for $88.0 million. FEB Dividend is increased 11.5% to $0.58 per share. DEC Dividend is increased 10% to $0.64 per share. 39% debt to total market capitalization; fixed-charge coverage of 3.0x. Morgan Stanley REIT Index 1999 2000 2001 2002 2003 AUG 1998 RD Capital, Inc. acquires control of Mark Centers Trust and renames Acadia Realty Trust. New management arranges $100 million cash equity infusion and contributes $265 million of property. $70.5 million of the cash was used to deleverage the balance sheet. 1998-2002 Commence our non-core property disposition initiative. JAN Advisors are engaged to review strategic alternatives. JAN Kenneth Bernstein is appointed Chief Executive Officer. OCT The Company and its advisors conclude to continue with the ongoing business plan as the best means to maximize shareholder value. Non-core disposition is completed. A total of 28 properties consisting of 4.6 million square feet of retail square footage and 800 apartment units are sold for an aggregate $186.4 million. Total debt retired from the balance sheet as a result of the initiative is $103.3 million. Board appoints Lee S. Wielansky as Lead Independent Trustee. The Board also adopts various new corporate governance initiatives. Douglas Crocker II, former CEO of Equity Residential, and Lorrence T. Kellar, former Head of Kroger Co. Finance and Real Estate, elected to the Board. LOOKING AHEAD TO 2004 JAN JAN Commence the redevelopment of its Town Line Plaza — to re-anchor with Super Stop & Shop supermarket. Establish a new venture ($300 million of equity) with Klaff Realty and Lubert-Adler to invest in surplus or underutilized properties owned or controlled by retailers. S&P 500 F I N A N C I A L H I G H L I G H T S 2003 2002 2001 1 2000 1 1999 1 In thousands Total Revenues Funds from Operations 2 Real Estate Owned, at Cost Common Shares Outstanding Operating Partnership Units Outstanding $ 69,445 $ 69,347 $ 61,282 $ 63,450 $ 58,933 $ 27,664 $ 30,162 $ 13,487 $ 31,789 $ 31,160 $427,628 $ 413,878 $398,416 $ 387,729 $389,111 27,409 1,139 25,257 3,163 28,698 5,250 28,150 6,804 25,724 10,484 1Amounts for 1999 through 2001 have been restated to reflect the activity and balances from continuing operations only. A significant component of our business plan since 1998 was the disposition of non-core properties. We sold 28 properties under this initiative, which was completed during 2002. Consistent with Statement of Financial Accounting Standards No. 144, 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. 2We consider funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental 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 ana- lyzing our performance. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (or losses) from sales of property and depreciation and amortization. However, our 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 by generally accepted accounting principles (“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 our performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, we define FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. We have historically added back impairments in real estate in calculating FFO, in accordance with prior NAREIT guidance. However, NAREIT, based on discussions with the SEC, has provided revised guidance that provides that impairments should not be added back to net income in calculating FFO. As such, historical FFO has been restated consistent with this revised guidance. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Funds from Operations for the reconciliation of net income to FFO. Ledgewood Mall, Ledgewood, NJ Elmwood Park Shopping Center, Elmwood Park, NJ Our properties are anchored by necessity-based and value-oriented retailers like Shaw’s and Super Stop & Shop supermarkets, Wal-Mart and Target department stores, and Walgreens drugstores. Acadia Realty Trust (NYSE: AKR), headquartered in White Plains, NY, 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 necessity-based and value-oriented retail. Acadia currently owns, or has ownership interests in, and operates 62 properties totaling approximately nine million square feet, located primarily in the Northeast, Mid- Atlantic and Midwest United States. A Y E A R O F E X T R A O R D I N A R Y A C H I E V E M E N T 2003 was a year of extraordinary achievement and a critical turning point for Acadia and its shareholders. We continued to maximize the value of our existing portfolio with several exciting redevelopments, and further enhanced our asset base with two significant portfolio acquisitions. 2003 was also the year in which our stock price significantly appreciated — gaining important recognition in the investment com- munity for the successful completion of our multi-year turnaround. It has been the culmination of several years of hard work, tough decisions, solid execution and development of long-term relationships. In 2003, Acadia’s stock was one of the best performing in the REIT industry, with a total return of 76%. As pleased as I am with this return, I am more proud of the fact that over the past five years, our total return averaged 28% per year, making us one of the top per- forming shopping center REIT stocks over that more extended period. Although we certainly care about quarter-to- quarter success, looking forward, our primary objective is to provide our shareholders with superior risk adjusted returns on a long-term basis. As we have said in the past, the key to achieving this goal is to effectively execute our three-pronged core strategy of focusing on creating and maintaining a solid portfolio, a strong balance sheet, and a profitable exter- nal growth program. Combining this strategy with a dedicated and experienced manage- ment team has enabled us to deliver on the business plan we initiated over five years ago. S O L I D P O RT F O L I O. While 2002 was a year of aggressive, non-core dispositions, 2003 was a year in which we refined and enhanced the quality of our portfolio. We launched and/or completed several important redevelopments, most notably the Gateway Shopping Center, the Plaza 422 and the New Loudon Shopping Center. In total, over the course of our multi- year program, we have redeveloped and/or re-anchored over 50% of our current portfolio. Whether it was turning an underperforming Ames department store into a new Home Depot anchored center, or converting an enclosed mall anchored by an undersized Grand Union supermarket into a new state- of-the-art Shaw’s supermarket, our redevelop- ments and re-anchorings have driven growth in both the cash flow as well as the overall value of our properties. ST R O N G B A L A N C E S H E E T. The second key foundation of our company’s strategy has been the highly disciplined maintenance of a strong balance sheet. Along with conservative debt levels and minimal exposure to floating rate debt, we have one of the safest dividend payout ratios in our sector at 61 % for 2003. To our shareholders this means that, while other companies may be considering cutting their dividend, our dividend is safe and has the opportunity to continue to grow as our earn- ings grow. Even after raising our dividend 33% over the past three years, we still have one of the most conservative dividends in our sector. EXTERNAL GROWTH. The final component to providing stability and growth is our external growth initiative. We have been extremely fortunate to have the backing of several pro- minent institutional investors to fuel our acquisition program. The ability to utilize a highly accretive discretionary investment fund as our acquisition platform provides our shareholders with a way to maximize their return on invested capital and create powerful earnings growth without having to weaken our balance sheet or continually go to the public markets to raise capital. We believe that effective capital recycling, along with leveraging our skills and relationships, provides for a more powerful external growth program than simply acquiring, or “aggregat- ing” assets. We have never believed in growth for growth’s sake alone. Through our acquisition fund, Acadia Strategic Opportunity Fund (“AKR Fund I”), we acquired two important portfolios in 2003. These two portfolios, the Brandywine portfolio and the Kroger/Safeway portfolio, helped contribute approximately 10% to our earnings in 2003. This growth is strong evidence that selective acquisitions, correctly structured, can drama- tically enhance the earnings of a company of our size. As of year-end, we had acquired three portfolios in AKR Fund I. The fund is already providing a 16% current return on the equity invested with the majority of the income com- ing from creditworthy tenants such as Target Department Store, Lowe’s Home Improvement, Kroger Supermarket, Bed Bath & Beyond, and Safeway Supermarket. In addition, substan- tially all of the mortgage debt is fixed rate, thus reducing exposure to the risk of rising interest rates. Along with the exciting acquisitions discussed above, we also laid the groundwork for our retailer-controlled property venture (“RCP Venture”), which we announced in January of 2004. The focus of the RCP Venture is to acquire real estate or leasehold interests controlled by retailers who are either in need of capital or wish to maximize the value of their real estate assets. We formed this ven- ture with two of the dominant players in this field of the real estate industry: the Klaff Organization and its long time investment partner, Lubert-Adler. We will jointly capitalize the RCP Venture with $300 million of equity, with $60 million coming from either Acadia or AKR Fund I. We expect this venture to be both highly profitable and complementary to our core competency. STRONG MANAGEMENT TEAM. The only way to successfully execute our aggressive value- added approach is with a strong management team. Our goal is to bring intelligence, inten- sity and integrity to all that we do. We have assembled a team with the experience and depth to continue to drive Acadia’s progress. While markets will go up and down, the quality, integrity and creativity of our man- agement team is what will ensure the long- term success of our company. STRONG RELATIONSHIPS. I am a firm believer in the merits of hard work and the building of relationships as the foundation of success. Over the last five years we have built on existing long-term relationships as well as developed new partners within all our major constituent groups including retailers, devel- opers, entrepreneurs, lenders and investors. For instance, our success in the releasing and redevelopment of our Plaza 422 property was the direct result of the strong tenant relationships that our Director of Leasing, Joe Povinelli, and his team have formed with Home Depot over the many years that they have worked in the industry. As a result of our strong multi-year and multi-deal relation- ships with several developers and entrepre- neurs, we have been fortunate enough to be presented with opportunities that were far more attractive and profitable than the aver- age investments which were widely marketed to us as well as many of our competitors. We believe that we have built a reputation as a company that sellers and developers can part- ner with and rely upon to successfully complete complex and profitable transactions. We also consider ourselves fortunate to have achieved the recognition and support of the investment community. We have earned the trust necessary for this support by diligently working to present clear, digestible informa- tion in all of our public documents and filings. And it has resulted in investors’ strong sup- port for our stock. Our focus going forward will be to remain disciplined, opportunistic and strategic. We realize that Acadia will not be all things to all people. We have a strong view that bigger is not better — better is better. Profits are not made simply by size, but rather by stick- ing to the fundamentals and creating value for our shareholders. K E N N E T H F. B E R N ST E I N P R E S I D E N T A N D C E O Acadia’s Annual Dividend Acadia’s Five-Year Total Returns vs. Shopping Center REIT Sector Greenridge Shopping Center, Scranton, PA Abington Towne Center, Abington, PA K E N N E T H F. B E R N ST E I N P R E S I D E N T A N D C E O $0.64 $0.58 $0.48 $0.52 2001 2002 2003 2004* *Increase effective with the dividend for the fourth quarter 2003, paid January 15, 2004. 250% 200% 150% 100% 50% 0% -50% Acadia Peers 2 Acadia Realty Trust 2003 Annual Report Acadia Realty Trust 2003 Annual Report 3 M A K I N G C H A N G E . . . B U I L D I N G A S T R O N G C O R E P O R T F O L I O Five Years of Continued Success After integrating the newly acquired Mark Centers Trust portfolio with existing Acadia properties in 1998, we set into action an aggres- sive strategy to build a high quality shopping center portfolio. The first component of our plan was to sell properties which did not meet our core portfolio criteria of well-located assets in high barrier-to- entry markets. At the completion of this non-core disposition initiative in 2002, we had sold 28 properties (mostly assets from the former Mark portfolio) comprising 4.6 million square feet of retail and 800 apartment units for an aggregate sales price of $186.4 million. Over the past five years, we have created significant share- holder value by “making change” at the real estate level — turning our former Ames and Grand Unions into Home Depots and Shaw’s supermarkets. To date, we have redeveloped and/or re-anchored over 50% of our current portfolio. The second key component of our port- folio strategy was, and continues to be, to redevelop and re-anchor select core assets. These activities have been the crucial factors in building our solid port- folio, and in promoting ongoing strong internal growth in our current assets. By continually assessing the physical life cycle of our assets, the competitive environments within the local markets we serve and the needs of our tenants, we proactively identify opportunities to strengthen our shopping centers through redevelopment and re-anchoring through- out our portfolio. We have built a solid portfolio through the redevelopment and re-anchoring of over 50% of our current assets over the last five years. We’ve discussed some of these in previous annual reports, including: ■ Installing a two-story Target depart- ment store in conjunction with the de-malling of the Abington Town Center outside of Philadelphia. ■ Replacing Caldor with a new Wal-Mart, tripling the rent, at our Methuen Shop- ping Center outside of Boston. ■ Demolishing an attached, multi-story Grand Union headquarters office building and replacing the undersized supermarket with an expanded Walgreen’s drugstore and a new full sized Pathmark supermarket at the Elmwood Park Shopping Center located outside of New York City. Our activity this year was on pace with that of previous years. The following are key 2003 highlights of our continued successful execution in our redevelop- ment program: HOME DEPOT REPLACES FORMER AMES AT THE PLAZA 422. Home Depot held its grand opening during 2003 at our Plaza 422 redevelopment project located in Lebanon, Pennsylvania. We recaptured an 83,000 square foot former Ames depart- ment store and demolished the structure as well as the attached enclosed mall portion of the old shopping center. We installed a new 104,000 square foot Home Depot in its place and are now collecting rent from Home Depot at a level three times that of the former Ames. We also recaptured another 48,000 square feet at the center and are actively re-tenanting this space. BON-TON DEPARTMENT STORE REPLACES ANOTHER AMES AT THE NEW LOUDON CENTER. During 2003 we installed a 66,000 square foot Bon-Ton Department Store at our New Loudon Center redevelopment proj- ect located in Latham, New York. Bon-Ton, which replaced a former Ames, is paying rent at a 15% increase over that of Ames. In addition, we leased the remaining portion of the former Ames space to Marshall’s, an existing tenant at the center, which is expanding its current 26,000 square foot store to 37,000 square feet. We are also currently installing a new 49,000 square foot Raymour and Flanigan Furniture store at this center. Following the completion of this project in mid-2004, this community shopping center will be 100% occupied. GATEWAY SHOPPING CENTER CONVERTED TO A MODERN, OPEN-AIR SHOPPING CENTER. Our redevelopment of the Gateway Shopping Center in South Burlington, Vermont, included the demolition of 90% of this formerly outdated, partially enclosed mall which was anchored by an undersized Grand Union supermarket. In its place, we built a contemporary, open-air shopping center anchored by a 72,000 square foot state-of-the-art Shaw’s supermarket which opened its doors for business during 2003. Over the last five years, we have created a solid portfolio through our non-core disposition, property redevelopment and re-anchoring programs. We now continue to harvest strong internal growth from our assets through accretive redevelop- ment, as well as an aggressive leasing program that has resulted in overall portfolio occupancy gains and increases in rents on new and renewal leases. The Gateway Shopping Center, South Burlington, VT Crescent Plaza, Brockton, MA New Loudon Center, Latham, NY Before Redevelopment... ...After Redevelopment Before Redevelopment... ...After Redevelopment Before Redevelopment... ...After Redevelopment Acadia Realty Trust 2003 Annual Report 5 A Y E A R O F E X T R A O R D I N A R Y A C H I E V E M E N T . . . 2003 Acquisitions Totaling $135 Million In 2001, we formulated an external growth strategy which focused on acquiring assets through a new joint venture formed with four of our institutional investors (“AKR Fund I”). We purchased a $27 million port- folio in 2002, consisting of three supermarket-anchored shopping cen- ters located in Cleveland and Columbus Ohio. At the beginning of 2003, we sought to acquire $100 million in new assets — an ambitious goal given the extremely competitive acquisition environment for retail properties. Another potential hurdle in meeting our acquisition target was our insistence that acquisitions be highly accretive, in terms of both earnings and net asset value. Adhering to our opportunistic yet disciplined acquisition philosophy, we not only met, but exceeded our goals for 2003 by acquiring two portfolios totaling $135 million. T W O H I G H LY A CC R E T I V E P O RT F O L I O A CQ U I S I T I O N S . During 2003, we acquired the Brandywine Portfolio, 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 $200 per square foot in the recent construction of this center, which is anchored by Target, Lowe’s and Bed Bath & Beyond. We structured this transaction with an earn-out compo- nent related to the future lease-up of a portion of this center. This offers us the opportunity to create additional value without risking capital. Not only does the 10.25% capitalization rate on this trans- action represent an attractive initial yield, but given the high-quality tenants and the earnout feature, it is an ideal blend of strong location, high credit quality and future growth potential. Market Square Shopping Center, Wilmington, DE Brandywine Town Center, Wilmington, DE Fund I, we have already put $160 million to work. Due to both our size and capital efficient model, we were able to increase our earnings growth by 10% during 2003 without overpaying or making indiscrim- inate acquisitions. Whether we acquire assets in AKR Fund I, our new RCP venture (See “Looking Forward” in this Annual Report), or subsequent AKR Funds, we intend on remaining opportunistic and disciplined in our acquisition program. 2 0 Is pleased to announce the acquisition of The Brandywine Portfolio One million square feet of retail for $86 million Acquired by AKR Fund I Managed by: Acadia Realty Trust We also acquired the Kroger-Safeway Portfolio, 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 fully amortizing the $35 million related mort- gage debt over the next six years. At the end of the lease term in 2009, AKR Fund I will control one million square feet free of debt with tremendous redevelopment and recycle opportunities — providing additional upside in addition to the attractive current yield. CREATING VALUE THROUGH EXPERTISE AND FLEXIBILITY. Both of these major trans- actions highlight our ability to use our skills, flexibility and joint venture struc- tures to create significant value within our acquisition program. Of the $300 million of purchasing power in AKR The Kroger/Safeway Portfolio is comprised of 25 Safeway and Kroger supermarket leases. Acadia has been able to generate superior investment returns on this acquisition by taking advantage of the structure of AKR Fund I. The Market Square Shopping Center and Brandywine Towne Center along with an additional component for which initial leasing is underway comprise the Brandywine Portfolio, a one-million square foot, open-air retail complex located in Wilmington, Delaware. The portion currently undergoing lease-up is to be paid for on an “earn-out” basis — reflective of the innovative and flexible “deal structuring” capabilities of Acadia. 3 Is pleased to announce the formation of a new venture between Acadia Realty Trust, Klaff Realty and Lubert-Adler for the purpose of making investments in surplus or underutilized properties owned or controlled by retailers The initial size of the Venture will be approximately $300 million in equity Managed by: Acadia Realty Trust 0 Is pleased to announce the acquisition of The Kroger Safeway Portfolio One million square feet of supermarket leases for $49 million Acquired by AKR Fund I Managed by: Acadia Realty Trust 6 Acadia Realty Trust 2003 Annual Report Acadia Realty Trust 2003 Annual Report 7 B Y A N Y S T A N D A R D O F M E A S U R E M E N T . . . Our Balance Sheet Is Strong Along with developing a strong portfolio over the last five years, we have also concentrated on building a strong balance sheet through three key areas of focus: disciplined use of debt, access to capital and reliable and growing dividends. As a result, we now have one of the strongest balance sheets in our peer group. DISCIPLINED USE OF DEBT. In 1999, our debt was 67% of our total market capitaliza- tion — it is now 39%. Similarly, our fixed- charge coverage ratio (EBITDA / Interest expense and preferred distributions) was 2.3 times in 1999 — now it is 3.0 times. We have also eliminated a substantial amount of our exposure to future increases in interest rates. Currently, 85% of our debt is fixed-rate, including our pro-rata share of joint venture debt. Our current average cost of debt is only 6%, and we have locked in long-term, low rates on $62 million, or one third of our debt, through the use of interest rate swap agreements with terms extending through 2012. BUILDING SUFFICIENT ACCESS TO CAPITAL. Along with the prudent and efficient use of debt, we have also ensured sufficient access to equity to fund our various external growth initiatives as well as our ongoing portfolio redevelopment program. One such source is the public equity market. Many REITs have tapped this source recently as their stocks are trading at healthy earnings multiples. Since Acadia is currently rewarded with one of the highest earnings multiples in our sector, we will consider using mar- ket equity when we are confident we can deploy our investors’ capital quickly and in highly accretive deals. As the public markets are cyclical, we think it is essential to arrange for alternative sources of capital. As mentioned in the previous section of this report, we formed AKR Fund I with several of our largest institutional shareholders, resulting in a strong alignment of interest between the joint venture and our shareholders. Because this capital can be accessed on a discretionary basis and is non-dilutive, even on a temporary basis, we have been able to invest it with discipline and on an opportunistic basis. As a result our invest- ments have all generated yields ranging from 15% to 20%. CONSERVATIVE DIVIDEND POLICY — GROWTH COMMENSURATE WITH EARNINGS. The final component in managing our capital is a rational dividend policy. We have grown our dividend over 30% over the last three years while maintaining one of the most reliable dividends in our sector. Our divi- dend, with a coverage ratio of 61% of funds from operations for 2003, was significantly safer than the average of our peers at 71%. We have achieved our goals in all three key balance sheet initiatives and, conse- quently, we now have a capital structure better able to withstand uncertain times and ready access to capital for our future growth. Total Market Capitalization as of December 31 27.6 32.1 32.1 7.8 0.4 2000 Common Shares Common O.P. Units Preferred O.P. Units Fixed-Rate Debt Variable-Rate Debt 6.0 33.21 58.2 0.3 2.4 2003 Acadia versus Shopping Center REIT Sector Using any of the balance sheet metrics commonly used in our industry, Acadia ranks among the strongest in our peer group. Acadia Peers 100% 90% 80% 70% 60% 50% FFO Payout Ratios Debt Service Coverage Ratio Debt to Total Market Capitalization (includes preferred equity and pro-rata JV debt) 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% Better Worse 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Better Worse Better Worse 8 Acadia Realty Trust 2003 Annual Report 1Fixed-rate debt includes $86.7 million of notional principal fixed through interest rate swap transactions and conversely, variable-rate debt excludes this amount. Acadia Realty Trust 2003 Annual Report 9 L O O K I N G F O R W A R D . . . C O N T I N U I N G T O M A K E C H A N G E Acadia New Retail Venture — Additional Pipeline for External Growth In January 2004, we added an external growth platform with the formation of a new retailer-controlled property venture (the “RCP Venture”). Our focus is to acquire properties, leases and designation rights associated with retailers. To maximize the opportunity for success, we have teamed up with one of the dominant players in the distressed retail business. The initial size of the RCP Venture will be approximately $300 million in equity, with Acadia, either directly or through its fund(s), investing a total of 20% of the equity. As a component to this trans- action, Acadia also acquired the rights to provide asset management, leasing, disposition, development and construc- tion services for an existing portfolio of retail properties. Over the past five years, we have created significant shareholder value turning our Caldor, Ames and Grand Unions into Wal- Marts, Home Depots and Shaw’s. Through the RCP Venture, we look forward to creat- ing further shareholder value in this arena on a more proactive basis. Retailer-con- trolled real estate will be a continuing source of attractive investment opportuni- ties, consistent with our value-added focus. TOWN LINE PLAZA ADDED TO REDEVELOP- MENT PIPELINE. Also in January 2004, we announced another redevelopment pipeline addition. We are now re-anchor- ing the Town Line Plaza, located in Rocky Hill, Connecticut, with a new Super Stop & Shop supermarket, replacing a former GU Markets. The existing building is being demolished and will be replaced with a 66,000 square foot Super Stop & Shop. The new supermarket anchor is paying rent, even during construction, at a 33% increase over that of the former tenant. CONTINUED CORPORATE GOVERNANCE INITIATIVES. During 2003, we enacted several corporate governance initiatives. These included naming Lee Wielansky to the position of Independent Lead Trustee as well as adding Douglas Crocker II and Lorrence Kellar as independent members to our Board of Trustees. In addition, our Audit, Compensation and Nominating/ Corporate Governance committees are now comprised entirely of independent trustees. We also created and published charters for each of the committees as well as a Senior Officer Code of Conduct, a Whistleblower Policy and a Code of Business Ethics. In 2004, we continued our corporate governance initiatives by nominating Suzanne Hopgood and Wendy Luscombe to our Board as Independent Trustees. Their election at our next Annual Meeting of Shareholders would result in a Board comprised of six fully independent trustees and Mr. Bernstein, our President and CEO, who together will guide Acadia in making change during 2004 and beyond. New Loudon Center, Latham, NY Abington Towne Center, Abington, PA Walnut Hill Plaza, Woonsocket, RI As part of the redevelopment of the Town Line Plaza, we are replacing the existing anchor with a new 66,000 square foot Super Stop & Shop supermarket. 10 Acadia Realty Trust 2003 Annual Report Acadia Realty Trust 2003 Annual Report 11 M I M I I L I L I N I N O H O H Headquarters Regional Offices Neighborhood and Community Shopping Centers Joint Venture Property P A P A N Y N Y N J N J D E D E V T V T M A M A C T C T R I R I R E T A I L P R O P E R T I E S 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 Blackman Plaza Wilkes-Barre, PA Bradford Towne Centre Towanda, PA Elmwood Park Shopping Center Elmwood Park, NJ Ledgewood Mall Ledgewood, NJ Marketplace of Absecon Absecon, NJ The Branch Plaza Smithtown, NY Crossroads Shopping Center White Plains, NY New Loudon Center Latham, NY Pacesetter Park Shopping Center Pomona, NY Soundview Marketplace Port Washington, NY Village Commons Shopping Center Smithtown, NY Amherst Marketplace Amherst, OH Granville Center Columbus, OH Mad River Station Dayton, OH Sheffield Crossing Sheffield, OH 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 M U L T I - F A M I LY P R O P E R T I E S GHT and Colony Apartments Columbia, MO Village Apartments Winston-Salem, NC Abington Towne Center Abington, PA H E A D Q U A R T E R S White Plains, NY T R U S T E E S A N D C O R P O R AT E O F F I C E R S T R U S T E E S Kenneth F. Bernstein President and Chief Executive Officer Douglas Crocker II Former Chief Executive Officer, Equity Residential Martin L. Edelman, Esq. Of Counsel to Paul, Hastings, Janofsky & Walker, LLP Alan S. Forman Director of Investments Office Yale University Lorrence T. Kellar Vice President of Retail Development, Continental Properties Marvin J. Levine, Esq. Of Counsel to Wachtel & Masyr, LLP Lawrence J. Longua Sr. Vice President Newmark & Company Real Estate, Inc. Lee S. Wielansky Chairman of the Board and Chief Executive Officer Midland Development Group Inc. S E N I O R O F F I C E R S 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 Operations Michael Nelsen Sr. Vice President, Chief Financial Officer Joseph Povinelli Sr. Vice President, Director of Leasing 12 Acadia Realty Trust 2003 Annual Report S H A R E H O L D E R I N F O R M A T I O N C O R P O R A T E H E A D Q U A R T E R S Acadia Realty Trust 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 I N T E R N E T A D D R E S S Visit us online at www.acadiarealty.com for more information about Acadia Realty Trust and its real estate portfolio. The 2003 Annual Report is available online, as well as current news and quarterly financial and operational supplementary information. L E G A L C O U N S E L Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 A N N U A L M E E T I N G The annual meeting will be held on May 6, 2004 at 10:00 am at the offices of Paul, Hastings, Janofsky & Walker, LLP, Park Avenue Tower, 75 East 55th Street, New York, NY 10022. I N V E S T O R R E L A T I O N S Jon Grisham Vice President Tel: 914.288.8100 email: jgrisham@acadiarealty.com I N D E P E N D E N T A U D I T O R S Ernst & Young LLP 5 Times Square New York, NY 10036 S T O C K E X C H A N G E New York Stock Exchange Symbol: AKR T R A N S F E R A G E N T A N D R E G I S T R A R 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 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. D I V I D E N D R E I N V E S T M E N T 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. Dayton,OH Mad River Station Smithtown,NY Village Commons Shopping Center Pomona,NY Pacesetter Park Shopping Center Tel:914.288.8100 White Plains,NY 10605 Suite 260 1311 Mamaroneck Avenue 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Pacesetter Park Shopping Center Pomona, NY Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH For further information contactInvestor Relations. New York,NY 10038 Plaza Level 59 Maiden Lane Attn:Dividend ReinvestmentDept. American Stock Transfer & TrustCompany agentat800.937.5449 ext.6820or write to: Acadia Realty Trust’s dividend reinvestment of additional shares.To participate,contact voluntary cash payments toward the purchase automatically reinvestdividends as well as make mentplan thatenables its shareholders to Acadia Realty Trustoffers a dividend reinvest- DIVIDEND REINVESTMENT outcharge by contacting Investor Relations. Exchange Commission may be obtained with- Form 10-K filed with the Securities and A copy of the Company’s annual reportand email:info@amstock.com website:www.amstock.com Tel:877.777.0800 New York,NY 10038 Plaza Level 59 Maiden Lane American Stock Transfer & TrustCompany REGISTRAR TRANSFER AGENT AND Symbol:AKR New York Stock Exchange STOCK EXCHANGE New York,NY 10036 5 Times Square Ernst& Young LLP INDEPENDENT AUDITORS email:jgrisham@acadiarealty.com Tel:914.288.8100 Vice President Jon Grisham INVESTOR RELATIONS 75 East55th Street,New York,NY 10022. Janofsky & Walker,LLP,Park Avenue Tower, 2004 at10:00 am atthe offices of Paul,Hastings, The annual meeting will be held on May 6, ANNUAL MEETING New York,NY 10022 75 East55th Street Park Avenue Tower Walker,LLP Paul,Hastings,Janofsky & LEGAL COUNSEL supplementary information. news and quarterly financial and operational Reportis available online,as well as current and its real estate portfolio.The 2003 Annual more information aboutAcadia Realty Trust Visitus online atwww.acadiarealty.comfor INTERNET ADDRESS Tel:914.288.8100 White Plains,NY 10605 Suite 260 1311 Mamaroneck Avenue Acadia Realty Trust CORPORATE HEADQUARTERS SHAREHOLDER INFORMATION A C A D I A R E A LT Y T R U S T S E L E C T E D F I N A N C I A L S 2 0 0 3 M A K I N G A Y E A R O F E X T R A O R D I N A R Y A C H I E V E M E N T Before Redevelopment... ...During... ...After Redevelopment C O N T E N T S 1 Management’s Discussion and Analysis 13 Report of Independent Auditors 14 Consolidated Balance Sheets 15 Consolidated Statements of Income 17 Consolidated Statements of Shareholders’ Equity 18 Consolidated Statements of Cash Flows 20 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 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements (including the related notes thereto) of Acadia Realty Trust (the “Company”) appearing elsewhere in this Annual Report. Certain statements contained in this Annual Report may contain forward-looking statements within • Focus on maximizing the return on its existing port- folio through leasing and property redevelopment activities. The Company’s redevelopment program is a significant and ongoing component of managing its existing portfolio and focuses on selecting well-located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevelopment. the meaning of Section 27A of the Securities Act of 1933 • Pursue above-average returns though a disciplined and Section 21E of the Securities and Exchange Act of and opportunistic acquisition program. The primary 1934 and as such may involve known and unknown conduits for the Company’s acquisition program are risks, uncertainties and other factors which may cause through its existing acquisition joint venture, ASOF, our actual results, performance or achievements to be as well as the new venture established to invest in materially different from future results, performance surplus or underutilized properties owned or controlled or achievements expressed or implied by such forward- by retailers as discussed in the Company’s Annual looking statements. Forward-looking statements, which Report on Form 10-K. are based on certain assumptions and describe the Company’s future plans, strategies and expectations are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on the oper- ations and future prospects of the Company include, but are not limited to those set forth under the head- ing “Risk Factors” in the Company’s Annual Report on Form 10-K. These risks and uncertainties should be con- sidered in evaluating any forward-looking statements contained or incorporated by reference herein. Overview • Maintain a strong balance sheet, which provides the Company with the financial flexibility to fund both property redevelopment and acquisition opportunities. Results of Operations C O M PA R I S O N O F T H E Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 3 ( “ 2 0 0 3 ” ) T O T H E Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 2 ( “ 2 0 0 2 ” ) Total revenues increased $98,000 to $69.4 million for 2003 compared to $69.3 million for 2002. Minimum rents increased $1.7 million, or 3%, to $50.2 million for 2003 compared to $48.5 million for 2002. This increase was attributable to an increase in rents following the redevelopment of the Elmwood Park The Company currently operates 62 properties, which it and Gateway shopping centers and an increase in rents owns or has an ownership interest in, consisting of 58 from re-tenanting activities and renewals of tenant neighborhood and community shopping centers, one leases across the portfolio. These increases were par- enclosed mall, one mixed-use property (retail/residen- tially offset by a decrease in rents following Ames tial) and two multi-family properties, which are located Department Stores’ bankruptcy. primarily in the Northeast, Mid-Atlantic and Midwest- ern regions of the United States and, in total, comprise approximately nine million square feet. The Company receives income primarily from the rental revenue from its properties, including recoveries from tenants, offset by operating and overhead expenses. In total, expense reimbursements increased $2.1 million, or 19%, from $11.4 million for 2002 to $13.5 million for 2003. CAM expense reimbursements increased $1.6 million, or 34%, from $4.7 million in 2002 to $6.3 million in 2003. This resulted primarily from tenant reimbursements of higher snow removal costs following the harsh The Company focuses on three primary areas in execut- winter of 2003 as well as tenant reimbursements of ing its business plan as follows: higher insurance costs throughout the portfolio. Real estate tax reimbursements increased $457,000 primarily Acadia Realty Trust 2003 Annual Report 1 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued as a result of the variance in real estate tax expense as Plaza redevelopment project. In addition, depreciation discussed below. 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. expense increased following the Elmwood Park redevel- opment project being placed in service during the fourth quarter of 2002 and the Gateway project being placed in service during the first quarter of 2003. Amortization expense decreased $443,000, which was primarily Other income increased $97,000, or 3%, from $3.9 million attributable to the write-off of deferred leasing costs in 2002 to $4.0 million in 2003. This was primarily due during 2002 related to certain tenant leases. to a lump sum additional rent payment of $1.2 million received from a former tenant during 2003 in connec- tion with the re-anchoring of the Branch Plaza and an increase of $527,000 in management fee income received from ASOF in 2003. These increases were par- tially offset by a decrease in interest income during 2003 due to lower interest earning assets, including cash investments and notes receivable, as well as the decline in interest rates. Total operating expenses increased $6.6 million, or 14%, to $52.6 million for 2003, from $46.0 million for 2002. Property operating expenses increased $2.9 million, or 24%, to $15.2 million for 2003 compared to $12.3 million for 2002. This was a result of higher snow removal costs due to the harsh winter of 2003 and higher insurance costs throughout the portfolio. Real estate taxes increased $352,000, or 4%, from $8.4 million in 2002 to $8.8 million in 2003. This increase was attributable to higher real estate taxes experienced generally throughout the portfolio and a 2002 adjust- ment of accrued real estate taxes for an acquired prop- erty. These increases were primarily offset by a real estate Interest expense of $11.2 million for 2003 increased $214,000, or 2%, from $11.0 million for 2002. This was primarily attributable to a decrease of $528,000 in capitalized interest in 2003 and a $198,000 increase in interest expense as a result of higher average interest rates on the portfolio debt for 2003. These increases were offset by a $512,000 decrease resulting from lower average outstanding borrowings during 2003. Income from discontinued operations decreased $7.9 million due to the timing of property sales in 2002. C O M PA R I S O N O F T H E Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 2 ( “ 2 0 0 2 ” ) T O T H E Y E A R E N D E D D E C E M B E R 3 1 , 2 0 0 1 ( “ 2 0 0 1 ” ) Total revenues increased $8.0 million, or 13%, to $69.3 million for 2002 compared to $61.3 million for 2001. 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 increases for existing tenants offset by a decrease in rents following certain tenant bankruptcies. tax refund agreed to in 2003 related to the appeal of Percentage rents decreased $117,000, or 10%, to $1.1 million taxes paid in prior years at the Greenridge Plaza. for 2002 compared to $1.2 million for 2001. This decrease General and administrative expense increased $561,000, or 6%, from $10.2 million for 2002 to $10.7 million for was primarily attributable to certain tenant bankruptcies and tenants experiencing lower sales volume. 2003. This increase was primarily attributable to stock- In total, expense reimbursements increased $535,000, based compensation. These increases were offset by or 5%, from $10.9 million for 2001 to $11.4 million for additional costs paid in 2002 related to the Company’s 2002. Common area maintenance (“CAM”) expense tender offer and repurchase of its Common Shares. reimbursements, which comprise the majority of the Depreciation and amortization increased $3.1 million, or 21%, from $14.8 million for 2002 to $17.9 million for 2003. Depreciation expense increased $3.5 million. This was a result of the write-off of $2.7 million of unamor- tized tenant improvement costs related to the buyout and termination of the former anchor at the Town Line 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 due to increased portfolio occupancy in 2002. 2 Acadia Realty Trust 2003 Annual Report Lease termination income of $3.9 million in 2002 was Interest expense of $11.0 million for 2002 decreased primarily the result of the settlement of the Company’s $1.4 million, or 11%, from $12.4 million for 2001. Of the claim against a former tenant. decrease, $1.6 million was the result of a lower average 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 ASOF, $1.0 mil- lion in interest earned on purchase money notes from interest rate on the portfolio mortgage debt and $559,000 was due to higher capitalized interest in 2002. These decreases were offset by a $822,000 increase in interest expense for 2002 due to higher average outstanding borrowings during 2002. the sales of properties in 2002 and an increase in inter- The $149,000 cumulative effect of a change in account- est income due to higher interest earning assets in 2002. ing principle in 2001 was a transition adjustment related Total operating expenses increased $3.2 million, or 7%, to $46.0 million for 2002, from $42.8 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 these policies. In addition, there was an increase in non-recurring repairs and maintenance expense experi- 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. General and administrative expense increased $1.2 million, or 13%, from $9.0 million for 2001 to $10.2 million for 2002. 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. Depreciation and amortization increased $1.1 million, or 8%, from $13.7 million for 2001 to $14.8 million for 2002. Depreciation expense increased $591,000. This was principally a result of increased depreciation expense related to capitalized tenant installation costs during 2001 and 2002 and the write-off of tenant improvement costs related to certain tenant leases. Amortization expense increased $468,000, which was primarily attrib- utable to the write-off of deferred leasing costs related to certain tenant leases and increased loan amortization expense related to financing activity in 2002. to the valuation of LIBOR caps recognized in connection with the January 1, 2001 adoption of SFAS No. 133. Income from discontinued operations increased $3.1 million due to the timing of property sales in 2002 and 2001. F U N D S F R O M O P E R A T I O N S The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental 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 perform- ance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (or losses) from sales of property and depreciation and amortiza- tion. 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 by generally accepted accounting principles (“GAAP”) and is not indicative of cash avail- able 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. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated property, plus depreciation and amortiza- tion, and after adjustments for unconsolidated partner- ships and joint ventures. The Company historically had added back impairments in real estate in calculating Acadia Realty Trust 2003 Annual Report 3 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued FFO, in accordance with prior NAREIT guidance. However, FFO. As such, historical FFO has been restated consistent NAREIT, based on discussions with the SEC, has provided with this revised guidance. The reconciliations of net revised guidance that provides that impairments income to FFO for the years ended December 31, 2003, should not be added back to net income in calculating 2002, 2001, 2000 and 1999 are as follows: 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 interest 1 (Gain) loss on sale of properties Cumulative effect of change in accounting principle YEARS ENDED DECEMBER 31, 2003 2002 2001 2000 1999 $ 7,853 $19,399 $ 9,802 $ 19,907 $ 7,195 16,957 2,107 747 — — 15,305 662 2,928 (8,132) — 18,422 627 2,221 19,325 625 5,674 (17,734) (13,742) 149 — 18,949 626 3,106 1,284 — Funds from operations $27,664 $ 30,162 $ 13,487 $ 31,789 $ 31,160 Notes: 1Represents income attributable to Common Operating Partnership Units and does not include distributions paid on Preferred OP Units. Liquidity and Capital Resources U S E S O F L I Q U I D I T Y The Company’s principal uses of its liquidity are expected to be for distributions to its shareholders and OP unit- holders, debt service and loan repayments, and prop- erty investment which includes the funding of its joint venture commitments, acquisition, redevelopment, expansion and re-tenanting activities. Distributions In order to qualify as a REIT for Federal income tax Acadia Strategic Opportunity Fund, LP (“ASOF”) In September of 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, for the purpose of acquiring a total of approximately $300.0 million of community and neigh- borhood shopping centers on a leveraged basis. Since the formation of ASOF, the Company has used it as the primary vehicle for the acquisition of assets. The Company is the manager and general partner purposes, the Company must currently distribute at of ASOF with a 22% interest. In addition to a pro-rata least 90% of its taxable income to its shareholders. return on its invested equity, the Company is entitled For the first three quarters during 2003, the Company to a profit participation based upon certain investment paid a quarterly dividend of $0.145 per Common Share return thresholds. Cash flow is to be distributed pro- and Common OP Unit. In December of 2003, the Board rata to the partners (including the Company) until they of Trustees approved and declared a 10% increase in the have received a 9% cumulative return on, and a return Company’s quarterly dividend to $0.16 per Common of all capital contributions. Thereafter, remaining cash Share and Common OP Unit for the fourth quarter of flow is to be distributed 80% to the partners (including 2003 which was paid January 15, 2004. On February 26, the Company) and 20% to the Company. The Company 2004, the Board of Trustees approved and declared a also earns a fee for asset management services equal quarterly dividend of $0.16 per Common Share and to 1.5% of the total equity commitments, as well as Common OP Unit payable April 15, 2004 to sharehold- market-rate fees for property management, leasing ers and OP unitholders of record as of March 31, 2004. and construction services. 4 Acadia Realty Trust 2003 Annual Report To date, ASOF has purchased a total of 30 assets in Kroger/Safeway Portfolio In January of 2003, ASOF three separate transactions. Details of the transactions formed a joint venture (the “Kroger/Safeway JV”) with completed during 2003 are as follows: an affiliate of real estate developer and investor AmCap Brandywine Portfolio In January of 2003, ASOF acquired a major open-air retail complex located in Wilmington, Delaware. The approximately 1.0 million square foot value-based retail complex consists of the following two properties: Incorporated (“AmCap”) for the purpose of acquiring a portfolio of twenty-five supermarket leases. The portfo- lio, which aggregates approximately 1.0 million square feet, consists of 25 anchor-only leases with Kroger (12 leases) and Safeway supermarkets (13 leases). The majority of the properties are free-standing and all Market Square Shopping Center is a 103,000 square are triple-net leases. The Kroger/Safeway JV acquired foot community shopping center which is 100% leased the portfolio subject to long-term ground leases with and anchored by a T.J. Maxx and a Trader Joe’s gourmet terms, including renewal options, averaging in excess food market. Brandywine Town Center is a two phase open-air value retail center. The first phase (“Phase I”) is approximately 450,000 square feet and 99% occupied, with tenants including Lowe’s, Bed Bath & Beyond, Regal Cinema, Michaels, Petsmart, Old Navy, Annie Sez, Thomasville Furniture and Dick’s Sporting Goods. The second phase (“Phase II”) consists of approximately 420,000 square feet of existing space, of which Target occupies 138,000 square feet. The balance of Phase II is currently not occupied. The initial investment for the portfolio was approximately $86.3 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 obtained in conjunction with the acquisition and is collateralized by a portion of the Brandywine Town Center. The balance of the purchase price was funded by ASOF, of which the Company’s share was $4.3 million. ASOF will also pay additional amounts in conjunction with the lease-up of the current vacant space in Phase II (the “Earn-out”). The additional investment, depending on the Earn-out, is projected to be between $42.0 million and $62.0 million, of which the Company’s share would be between $9.3 million and $13.8 million. To the extent ASOF places additional mortgage debt upon the lease- up of Phase II, the required equity contribution for the Earn-out would be less. The Earn-out is structured such that ASOF has no time requirement or payment obliga- tion for any portion of currently vacant space which it is unable to lease. of 80 years, which are master leased to a non-affiliated entity. The base rental options for the supermarket leases at the end of their primary lease term in approx- imately seven years (“Primary Term”) are at an average of $5.13 per square foot. Although there is no obligation for the 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 Kroger/Safeway JV acquired the portfolio for $48.9 million (inclusive of closing and other related acquisition costs), which included the assumption of an aggregate of $34.5 million of existing fixed-rate mortgage debt, which is at a blended fixed interest rate of 6.6% and is fully amortizing over the Primary Term. The individual mortgages are secured by each individual property and are not cross-collateralized. ASOF invested 90%, or $11.3 million, of the equity capitalization, of which the Com- pany’s share was $2.5 million. AmCap contributed 10%, or $1.2 million. Cash flow is to be distributed to the Kroger/Safeway JV partners until they have received an 11% cumulative return and a full return of all contribu- tions. Thereafter, remaining cash flow is to be distributed 75% to ASOF and 25% to AmCap. The Kroger/Safeway JV agreement also provides for additional allocations of cash based on ASOF achieving certain minimum invest- ment returns to be determined on a “look-back” basis. Venture with Klaff Realty, L.P. (“Klaff”) On January 27, 2004, the Company entered into a venture (the “Venture”) with Klaff and Klaff’s long time capital partner Lubert-Adler Management, Inc. (“Lubert- Acadia Realty Trust 2003 Annual Report 5 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued Adler”) for the purpose of making investments in surplus project to its redevelopment pipeline as follows: or underutilized properties owned by retailers. The initial size of the Venture is expected to be approximately $300 million in equity based on anticipated investments of approximately $1 billion. The Venture is currently exploring investment opportunities, but has not yet made any commitments. Each participant in the Venture has the right to opt out of any potential investment. The Company and its current acquisition fund, ASOF, as well as possible subsequent joint venture funds sponsored by the Company, anticipate investing 20% of the equity of the Venture. Cash flow is to be distributed to the partners until they have received a 10% cumulative return and a full return of all contributions. Thereafter, Gateway Shopping Center — The redevelopment of the Gateway Shopping Center, formerly a partially enclosed mini-mall with an undersized Grand Union, included the demolition of 90% of the existing building and the construction of a new anchor supermarket. The center has been converted into a new open-air community shopping center anchored with a 72,000 square foot Shaw’s supermarket which opened during March of 2003. Approximately 11,000 square feet of small shop space remains to be leased at the property. Total costs for this project, including the original acquisition costs, aggregated $17.9 million. remaining cash flow is to be distributed 20% to Klaff Plaza 422 — Home Depot held its grand opening during (“Klaff’s Promote”) and 80% to the partners (including fourth quarter of 2003 at the Plaza 422 redevelopment Klaff). Profits earned on up to $20.0 million of the project located in Lebanon, Pennsylvania. The expansion Company’s contributed capital is not subject to Klaff’s of the former 83,000 square foot Ames space to a Promote. The Company will also earn market-rate fees 104,000 square foot Home Depot included the recapture for property management, leasing and construction and demolition of the formerly enclosed portion of this services on behalf of the Venture. center. The Company is now collecting triple the base The Company has also acquired Klaff’s rights to provide asset management, leasing, disposition, development and construction services for an existing portfolio of retail properties and/or leasehold interests comprised of approximately 10 million square feet of retail space located throughout the United States (the “Klaff Prop- erties”). The acquisition involves only Klaff’s rights rent of that which was paid by Ames. In connection with the redevelopment project, the Company also recaptured another 48,000 square feet of space, for which re-leasing is currently underway. The majority of redevelopment costs were paid directly by Home Depot. The Company’s share of costs for this project totaled $402,000. associated with operating the Klaff Properties and New Loudon Center — The Bon Ton Department Store does not include equity interests in assets owned by also opened for business during the fourth quarter of Klaff or Lubert-Adler. The Operating Partnership issued 2003 as part of the redevelopment of the New Loudon $4.0 million of Preferred OP Units to Klaff in considera- Center located in Latham, New York. Occupying 66,000 tion of this acquisition. Other In March 2004, the Company invested $4.1 million in a loan secured by a shopping center property. Property Redevelopment and Expansion The Company’s redevelopment program focuses on selecting well-located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevelopment. During 2003, the Company substantially completed the redevelopment of three shopping centers and added an additional square feet formerly occupied by an Ames department store, Bon Ton is paying base rent at a 15% increase over that of Ames. In addition, the Company has leased the balance of the former Ames space to Marshall’s, an existing tenant at the center, which will be expanding its current 26,000 square foot store to 37,000 square feet. The Company will also install a new 49,000 square foot Raymour and Flanigan Furniture store at this center. Following the completion of this project in mid-2004, this community shopping center will be 100% occupied. Costs incurred to date by the Company for this project totaled $418,000. The remaining costs to complete this redevelopment project are to be paid directly by the above tenants. 6 Acadia Realty Trust 2003 Annual Report Town Line Plaza — This project, located in Rocky Hill, S O U R C E S O F L I Q U I D I T Y Connecticut, was added to the Company’s redevelop- The Company intends on using ASOF and the Venture ment pipeline in December of 2003. The Company is as the primary vehicle for future acquisitions. Sources re-anchoring the center with a new Super Stop & Shop of capital for funding the Company’s joint venture com- supermarket, replacing a former GU Markets supermar- mitments, other property acquisitions, redevelopment, ket. The existing building is being demolished and will expansion and re-tenanting, as well as future repurchases be replaced with a 66,000 square foot Super Stop & of Common Shares are expected to be obtained prima- Shop. The new supermarket anchor is paying gross rent rily from cash on hand, additional debt financings and at a 33% increase over that of the former tenant with future sales of existing properties. As of December 31, no interruption in rent payments. Costs to date for this 2003, the Company had a total of approximately project totaled $1.7 million. All remaining redevelopment $51.1 million of additional capacity with six lenders, costs associated with this project, which is anticipated of which the Company is required to draw $12.7 million to be completed during the first quarter of 2005, are to by December 2004, or forego the ability to draw these be paid by Stop & Shop. Additionally, for the year ending December 31, 2004, the Company currently estimates that capital outlays of approximately $3.0 million to $7.0 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 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 repurchase up to $20.0 million of the Company’s outstanding Common Shares. Through March 12, 2004, the Company had repurchased 1,899,486 Common Shares (net of 152,199 shares reissued) at a total cost of $11.6 million. The pro- gram may be discontinued or extended at any time and there is no assurance that the Company will purchase the full amount authorized. funds at any time during the remaining term of the loans. Of the remaining capacity, approximately $3.0 million is subject to additional leasing requirements at the collateral properties, which the Company has not yet satisfied. The Company also had cash and cash equivalents on hand of $14.7 million at December 31, 2003 as well as nine properties that are currently unencumbered and therefore available as potential collateral for future borrowings. The Company antici- pates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements. Financing and Debt At December 31, 2003, mortgage notes payable aggre- gated $190.4 million and were collateralized by 22 proper- ties and related tenant leases. Interest on the Company’s outstanding mortgage indebtedness ranged from 2.6% to 8.1% with maturities that ranged from April 2005 to June 2013. Taking into consideration $86.7 million of notional principal under variable to fixed-rate swap agreements currently in effect, $156.4 million of the portfolio, or 82%, was fixed at a 6.6% weighted average interest rate and $34.0 million, or 18% was floating at a 2.9% weighted average interest rate. There is no debt maturing in 2004, and $57.8 million is scheduled to mature in 2005 at a weighted average interest rate of 2.9%. As the Company does not anticipate having suffi- cient cash on hand to repay such indebtedness, it will need to refinance this indebtedness or select other alternatives based on market conditions at that time. Acadia Realty Trust 2003 Annual Report 7 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued The following summarizes the financing and refinanc- On October 27, 2003, the Company paid off maturing ing transactions since December 31, 2002: loans totaling $7.4 million, which were secured by two In January 2003, the Company drew down $5.0 million of the Company’s properties. of an available $10.0 million facility with a bank and Effective December 1, 2003, the Company amended an used the proceeds to partially pay down the outstand- $8.6 million loan with a bank. An additional $5.0 million ing principal on another loan with the same lender. has been made available under the loan as well as In March 2003, the Company repaid a $3.6 million loan with a life insurance company. extending the maturity of the loan until December 1, 2008 with two one-year extension options. In addition, the interest rate has been reduced to LIBOR plus 140 In April 2003, the Company extended an existing $7.4 basis points. The loan, which is secured by one of the million revolving facility with a bank through March 1, Company’s properties, requires the monthly payment of 2008. As of December 31, 2003, there were no outstand- interest and fixed principal commencing January 1, 2004. ing amounts under this loan. In January 2004, the Company entered into a forward On May 30, 2003, the Company refinanced a $13.3 million starting swap agreement which commences April 1, loan with a bank, increasing the outstanding principal 2005. The swap agreement, which extends through to $16.0 million. The loan, which is secured by one of January 1, 2011, provides for a fixed rate of 4.345% on the Company’s properties, requires monthly payment of $37.7 million of notional principal. interest at the fixed-rate of 5.2%. Payments of principal amortized over 30 years commences June 2005 with the loan maturing in May 2013. In February 2004, the Company entered into three forward starting swap agreements as follows: Commencement Date 10/2/2006 10/2/2006 6/1/2007 Maturity Date 10/1/2011 1/1/2010 3/1/2012 Notional Principal $11.4 million $4.6 million $8.4 million Rate 4.895% 4.710% 5.140% These swap agreements have been executed in con- of $158.4 million which generated net sale proceeds templation of the finalization of the extension and to the Company of $82.5 million. modification of certain mortgage loans currently being negotiated, although there can be no assurance that such extensions will be finalized. Asset Sales Asset sales are an additional source of liquidity for the Company. A significant component of the Company’s business has been its multi-year plan to dispose of non-core real estate assets. The Company began this initiative following the RDC Transaction and completed it in 2002. Non-core assets were identified based on factors including property type and location, tenant mix and potential income growth as well as whether a property complemented other assets within the Com- pany’s portfolio. The Company sold 28 non-core assets in connection with this initiative comprising a total of approximately 4.6 million square feet of retail proper- ties and 800 multi-family units, for a total sales price Additionally the Company completed the following two land sales in 2003 and 2002: In January 2002, the Company with a joint venture partner, purchased a three-acre site located in the Bronx, New York for $3.1 million. Simultaneously, the Company sold approximately 46% of the land to a self-storage facility for $3.3 million. The Company’s share of net proceeds totaled $1.4 million. The Com- pany currently plans to build and lease a 15,000 square foot retail building on the remaining parcel. On November 8, 2002, a joint venture between 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 $2.4 million. The joint venture received a $1.6 million note receivable for the net purchase price and additional 8 Acadia Realty Trust 2003 Annual Report reimbursements due from the buyer, which was paid In addition, the Company has non-cancelable ground in full during 2003. The Company’s share of the net leases at three of its shopping centers. The Company proceeds totaled $1.4 million. Contractual Obligations and Other Commitments At December 31, 2003, maturities on the Company’s mortgage notes ranged from April 2005 to June 2013. also leases space for its White Plains corporate office for a term expiring in 2010. The following table summarizes the Company’s debt maturities, excluding scheduled monthly amortization payments, and obligations under non-cancelable operating leases of December 31, 2003: amounts in millions Payments due by period Contractual obligation Future debt maturities Operating lease obligations Total Total $176.1 23.1 $199.2 Less than 1 year $ — 1.0 $ 1.0 1 to 3 years $57.8 2.0 3 to 5 years $69.3 2.0 More than 5 years $49.0 18.1 $59.8 $ 71.3 $ 67.1 Off Balance Sheet Arrangements The Company has two off balance sheet joint ventures for the purpose of investing in operating properties variable-rate mortgage debt as of December 31, 2003 was $1.3 million at an interest rate of 3.1%. Maturities on these loans range from October 2007 to January 2023. as follows: The Company owns a 49% interest in two partnerships Historical Cash Flow which own the Crossroads Shopping Center (“Cross- The following discussion of historical cash flow com- roads”). The Company accounts for its investment in pares the Company’s cash flow for the year ended Crossroads using the equity method of accounting as December 31, 2003 (“2003”) with the Company’s cash it has a non-controlling investment in Crossroads, but flow for the year ended December 31, 2002 (“2002”). exercises significant influence. As such, the Company’s financial statements reflect its share of income from, but not the assets and liabilities of, Crossroads. The Company’s pro rata share of Crossroads mortgage debt as of December 31, 2003 was $16.2 million. Interest on the debt, which matures in October 2007, has been Cash and cash equivalents were $14.7 million and $45.2 million at December 31, 2003 and 2002, respectively. The decrease of $30.5 million was a result of the following increases and decreases in cash flows: Years Ended December 31, 2003 2002 Variance effectively fixed at 7.2% through variable to fixed-rate amounts in millions swap agreements. Reference is made to the discussion of ASOF under “Uses of Liquidity” in this Item 7 for additional detail related to the Company’s investment in and commit- ments to ASOF. The Company owns a 22% interest Net cash provided by operating activities $ 19.1 $ 24.9 $ (5.8) Net cash provided by (used in) investing activities (19.4) 24.6 (44.0) in ASOF for which it also uses the equity method of Net cash used in accounting. The Company’s pro rata share of ASOF financing activities (30.2) (58.8) 28.6 fixed-rate mortgage debt as of December 31, 2003 was $24.0 million at a weighted average interest rate of 6.4%. The Company’s pro rata share of ASOF Net cash provided by discontinued operations — 20.5 (20.5) 9 Acadia Realty Trust 2003 Annual Report 9 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued The variance in net cash provided by operating activities was primarily due to $3.9 million of lease termination V A L U A T I O N O F P R O P E R T Y H E L D F O R U S E A N D S A L E income received in 2002 which was not repeated in 2003. On a quarterly basis, the Company reviews the carrying In addition, there was a net decrease in cash provided by changes in operating assets and liabilities of $2.0 million, primarily rents receivable. The variance in net cash (used in) provided by investing activities was primarily the result of an additional $37.8 million collected on purchase money notes in 2002, a $2.5 million earn-out payment related to a redevelop- ment project in 2002, an additional $3.1 million invested in ASOF in 2003 and $1.2 million of additional expendi- tures for real estate acquisitions, development and tenant installation costs during 2003. The decrease in net cash used in financing activities resulted primarily from $33.4 million of cash used in 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 properties which were held for sale and subsequently sold. Management does not believe 2002 for the Company’s repurchase of Common Shares that the values of any properties in its portfolio are offset by $2.8 million of additional cash used in 2003 impaired as of December 31, 2003. for the net repayment of debt. B A D D E B T S The decrease in net cash provided by discontinued oper- The Company maintains an allowance for doubtful ations was primarily a result of $2.9 million in net cash accounts for estimated losses resulting from the provided by operating activities at the discontinued inability of tenants to make payments on arrearages properties in 2002 and net proceeds in 2002 from the in billed rents, as well as the likelihood that tenants sale of such properties. Critical Accounting Policies Management’s discussion and analysis of financial condition and results of operations is based upon the Company’s consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires man- will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of December 31, 2003, the Company had recorded an allowance for doubtful accounts of $2.4 million. If the financial condition of the Company’s tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. agement to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and Inflation expenses. The Company bases its estimates on historical The Company’s long-term leases contain provisions experience and assumptions that are believed to be rea- designed to mitigate the adverse impact of inflation sonable under the circumstances, the results of which on the Company’s net income. Such provisions include form the basis for making judgments about carrying clauses enabling the Company to receive percentage value of assets and liabilities that are not readily rents based on tenants’ gross sales, which generally apparent from other sources. Actual results may differ increase as prices rise, and/or, in certain cases, escalation from these estimates under different assumptions or clauses, which generally increase rental rates during conditions. The Company believes the following critical the terms of the leases. Such escalation clauses are accounting policies affect the significant judgments often related to increases in the consumer price index and estimates used by the Company in the preparation or similar inflation indexes. In addition, many of the of its consolidated financial statements. Company’s leases are for terms of less than ten years, 10 Acadia Realty Trust 2003 Annual Report which permits the Company to seek to increase rents is not anticipated that the effect on the Company’s upon re-rental at market rates if current rents are below Consolidated Financial Statements would be material. the then existing market rates. Most of the Company’s leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company’s exposure to increases in costs and oper- ating expenses resulting from inflation. Recently Issued Accounting Pronouncements In December 2003, the Financial Accounting Statements Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Enti- ties” (“FIN 46R”). FIN 46R replaces FASB Interpretation No. 46,“Consolidation of Variable Interest Entities,” which was issued in January 2003. In general, a variable inter- est entity (“VIE”) is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A VIE often holds financial assets, including loans or receivables, real estate or other property. A VIE may be essentially passive or it may 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 requir- ing a VIE to be consolidated by a company if that com- In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability because that financial instrument embodies an obligation of the issuer. For the Company, SFAS 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeem- able financial instruments, SFAS 150 will be effective for the Company on January 1, 2005. The effective date has been deferred indefinitely for certain other types of mandatorily redeemable financial instruments. The adoption of SFAS No. 150 had no impact on the Company’s consolidated financial statements. The Company currently is a majority-owner of a finite life partnership which is included in the consolidated accounts of the Company. The application of SFAS 150 as it relates to finite life entities has been deferred indefinitely. Based on the estimated value of the property owned by the partner- ship at December 31, 2003, the Company estimates that the minority interest in this partnership would be enti- tled to approximately $2,080 upon the dissolution of the partnership. pany is subject to a majority of the risk of loss from April 2003, the FASB issued Statement of Financial the VIE’s activities or entitled to receive a majority of Accounting Standards (“SFAS”) No. 149, “Amendment the entity’s residual returns or both. The Company will of Statement 133 on Derivative Instruments and Hedg- be required to adopt FIN 46R in the first fiscal period ing Activities.” This statement amends and clarifies beginning after March 15, 2004. Upon adoption of FIN financial reporting for derivative instruments, includ- 46R, the assets, liabilities and non-controlling interests ing certain derivative instruments embedded in other of the VIE initially would be measured at their carrying contracts and for hedging activities under FASB State- amounts with any difference between the net amount ment No. 133, “Accounting for Derivative Instruments added to the balance sheet and any previously recog- and Hedging Activities.” SFAS No. 149 is generally effec- nized interest being recognized as the cumulative effect tive for contracts entered into or modified after June 30, of an accounting change. If determining the carrying 2003 and for hedging relationships designated after June amounts is not practicable, fair value at the date FIN 30, 2003. The adoption of SFAS No. 149 had no impact on 46R first applies may be used to measure the assets, the Company’s consolidated financial statements. liabilities and non-controlling interest of the VIE. It Acadia Realty Trust 2003 Annual Report 11 M A N A G E M E N T ’ S D I S C U S S I O N A N D A N A LY S I S continued Quantitative and Qualitative Disclosures About Market Risk The Company’s primary market risk exposure is to changes in interest rates related to the Company’s mortgage debt. See the consolidated financial state- ments and notes thereto included in this Annual Report on Form 10-K for certain quantitative details related to the Company’s mortgage debt. spreads. As of December 31, 2003, the Company was a party to five interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $86.7 million of LIBOR based variable- rate debt, effectively increasing the fixed-rate portion of its total outstanding debt as of December 31, 2003 to 82%. The Company also has two interest rate swaps hedging the Company’s exposure to changes in interest rates with respect to $16.2 million of LIBOR based vari- Currently, the Company manages its exposure to fluctu- able rate debt related to its investment in Crossroads. ations in interest rates primarily through the use of fixed-rate debt, interest rate swap agreements and LIBOR caps. As of December 31, 2003, the Company had total mortgage debt of $190.4 million of which $69.8 million, or 37% was fixed-rate and $120.6 million, or 63%, was variable-rate based upon LIBOR plus certain Consolidated mortgage debt: The following table sets forth information as of Decem- ber 31, 2003 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): Year 2004 2005 2006 2007 2008 Thereafter Scheduled Amortization $3.6 Maturities $ — 2.8 2.4 1.4 1.2 2.9 57.8 — 61.3 8.0 49.0 Total 3.6 $ 60.6 2.4 62.7 9.2 51.9 $14.3 $ 176.1 $ 190.4 Mortgage debt in unconsolidated partnerships (at Company’s pro rata share): Year 2004–2006 2007 2008 Thereafter Scheduled Amortization Maturities $ 4.2 1.2 1.0 3.6 $10.0 $ — 16.0 6.7 7.4 $ 30.1 Total $ 4.2 17.2 7.7 11.0 $ 40.1 Weighted Average Interest Rate N/A 3.9% N/A 3.7% 2.6% 7.1% Weighted Average Interest Rate N/A 6.9% 4.7% 7.1% Of the Company’s total outstanding debt, $57.8 million will become due in 2005. As the Company intends on refinancing some or all of such debt at the then-existing market interest rates which may be greater than the current interest rate, the Company’s interest expense would increase by approximately $578,000 annually if the interest rate on the refinanced debt increased by 100 basis points. Furthermore, interest expense on the Company’s variable debt as of December 31, 2003 would increase by $340,000 annually for a 100 basis point increase in interest rates. The Company may seek addi- tional variable-rate financing if and when pricing and other commercial and financial terms warrant. As such, the Company would consider hedging against the interest rate risk related to such additional variable- rate debt through interest rate swaps and protection agreements, or other means. 12 Acadia Realty Trust 2003 Annual Report R E P O R T O F I N D E P E N D E N T A U D I T O R S 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, 2003 and 2002, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial state- ments 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 presen- tation. 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 at December 31, 2003 and 2002, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States. New York, New York March 12, 2004 Acadia Realty Trust 2003 Annual Report 13 C O N S O L I D A T E D B A L A N C E S H E E T S I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Assets R E A L E S T A T E I 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 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 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 27,409,141 and 25,257,178 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Deficit Total shareholders’ equity December 31, 2003 2002 $ 54,890 366,879 5,859 427,628 101,090 326,538 14,663 3,342 13,630 10,394 3,586 3,127 11,173 1,731 $ 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 $ 388,184 $ 410,935 $190,444 5,804 4,619 48 — 4,044 3,806 208,765 7,875 1,810 9,685 27 177,891 (5,505) (2,679) 169,734 $ 388,184 $ 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. 14 Acadia Realty Trust 2003 Annual Report C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S R E V E N U E S I Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Other Total revenues O P E R A T I N G E X P E N S E S I 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 Gain on sale of land 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, 2003 2002 2001 $ 50,168 $ 48,488 $ 47,086 1,102 13,539 — 749 3,977 69,445 15,170 8,799 10,734 17,909 — 52,612 16,833 2,411 (11,231) 1,187 (1,347) 7,853 — — — — — 1,079 11,419 3,945 536 3,880 1,196 10,884 — 589 1,527 69,347 61,282 12,274 8,447 10,173 14,804 274 45,972 23,375 628 (11,017) 1,530 (2,999) 11,517 1,165 (197) 8,132 (1,218) 7,882 11,597 8,427 9,025 13,745 — 42,794 18,488 504 (12,370) — (1,466) 5,156 3,972 (15,886) 17,734 (1,025) 4,795 Income before extraordinary item and cumulative effect of change in accounting principle Cumulative effect of change in accounting principle Net income 7,853 — 19,399 — 9,951 (149) $ 7,853 $ 19,399 $ 9,802 The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2003 Annual Report 15 C O N S O L I D A T E D S T A T E M E N T S O F I N C O M E continued I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S B A S I C E A R N I N G S P E R S H A R E I Income from continuing operations Income from discontinued operations Cumulative effect of change in accounting principle Basic earnings per share D I L U T E D E A R N I N G S P E R S H A R E I Income from continuing operations Income from discontinued operations 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, 2003 2002 2001 $0.30 — — $0.30 $0.29 — — $0.29 $ 0.46 0.31 — $ 0.77 $ 0.45 0.31 — $ 0.76 $ 0.18 0.18 (0.01) $ 0.35 $ 0.18 0.18 (0.01) $ 0.35 16 Acadia Realty Trust 2003 Annual Report C O N S O L I D A T E D S T A T E M E N T S O F S H A R E H O L D E R S ’ E Q U I T Y Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders' Equity Deficit I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Balance, December 31, 2000 28,150,472 $ 28 $188,392 $ — $ (9,103) $ 179,317 826,884 1 5,815 Balance, December 31, 2001 28,697,666 Conversion of 826,884 OP Units to Common Shares by limited partners of the Operating Partnership Repurchase of 8,000 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 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 Conversion of 2,058,804 OP Units to Common Shares by limited partners of the Operating Partnership Conversion of 632 Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee restricted share award Settlement of vested options Dividends declared ($0.595 per Common Share) Employee exercise of 250 options Unrealized gain on valuation of swap agreements Common Shares purchased under Employee Stock Purchase Plan Income before minority interest Minority interest’s equity Balance, December 31, 2003 — — (316,800) 37,110 — — — — 2,086,736 — (5,523,974) (3,250) — — — 25,257,178 2,058,804 82,267 7,832 — — 250 — 810 — — — — — — — — (1,206) — — (1,206) — — — — (5,668) — — (6,874) — — — — — — — — 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) (2,679) (12,975) (33,420) (14) (5,668) 22,327 (2,928) 161,323 — 14,900 — — — 632 410 (750) (7,853) — (16,013) 2 1,369 — 1,369 — — — — 8,600 (747) 8 8,600 (747)) — — — — — — — — 29 2 — (6) — — — — 25 2 — — — — — — — — — 8 (3,832) (1,964) 239 720 — — — 189,378 14,901 — (33,414) (14) — — — 170,851 14,898 632 410 (750) (8,160) 2 — 8 — — 27,409,141 $ 27 $ 177,891 $ (5,505) $ (2,679) $ 169,734 The accompanying notes are an integral part of these consolidated financial statements Acadia Realty Trust 2003 Annual Report 17 C O N S O L I D A T E D S T A T E M E N T S O F C A S H F L O W S I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Cash Flows from Operating Activities Income from continuing operations after cumulative effect $ 7,853 $ 11,517 $ 5,007 Years Ended December 31, 2003 2002 2001 of change in accounting principle Adjustments to reconcile income from continuing operations to net cash provided by operating activities: Depreciation and amortization Gain on sale of land Minority interests Abandoned project costs Equity in earnings of unconsolidated partnerships Provision for bad debts Stock-based compensation 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/from related parties Other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Expenditures for real estate and improvements Payment of accrued expense related to redevelopment project Contributions to unconsolidated partnerships 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. 17,909 (1,187) 1,347 — (2,411) 523 — — 105 (3,958) (1,085) (891) 218 (126) 785 14,804 (1,530) 2,999 274 (628) 447 — — (850) (1,882) (429) 346 174 67 (391) 13,745 — 1,466 — (504) 741 239 149 89 937 251 (273) (1,739) (4) 417 19,082 24,918 20,521 (13,531) (2,488) (6,032) 1,602 3,232 (2,183) (19,400) (14,134) (10,685) — (2,956) 1,049 41,042 (355) 24,646 — (36) 1,252 — (1,730) (11,199) 18 Acadia Realty Trust 2003 Annual Report I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Cash Flows from Financing Activities Principal payments on mortgage notes payable Proceeds received on mortgage notes payable 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 partnerships Purchase of minority interest in majority-owned partnerships Settlement of vested options Redemption of Operating Partnership Units Repurchase of Common Shares Common Shares issued under Employee Stock Purchase Plan Net cash used in financing activities Cash flows from discontinued operations: Net cash provided by discontinued operations (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Less: Cash of discontinued operations Cash and cash equivalents, end of year Years Ended December 31, 2003 2002 2001 $ (32,917) $ (16,841) $ (33,599) 21,000 (241) (14,896) (1,207) (199) (985) — (750) — — 8 (30,187) — (30,505) 45,168 14,663 — 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) — (7,047) 10,174 12,449 21,689 34,138 191 $ 14,663 $ 45,168 $ 33,947 S U P P L E M E N T A L D I S C L O S U R E O F C A S H F L O W I N F O R M A T I O N : Cash paid during the period for interest, net of amounts capitalized of $403, $931, and $372, respectively Notes received in connection with sale of properties Disposition of real estate through assumption of debt $ 11,242 $ 12,346 $ 19,047 $ $ — — $ 22,425 $ 34,757 $ 42,438 $ — The accompanying notes are an integral part of these consolidated financial statements.\ Acadia Realty Trust 2003 Annual Report 19 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S D E C E M B E R 3 1 , 2 0 0 3 In thousands, except per share amounts Note 1i Organization, Basis of Presentation 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, 2003, the Company controlled 96% 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 losses of the Operating Partnership. The limited partners 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 with an obligation 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, 2003, the Company operated 62 properties, which it owned or had an ownership inter- est in, consisting of 60 neighborhood and community shopping centers and two multi-family properties, located primarily in the Northeast, Mid-Atlantic and Midwest regions of the United States. P R I N C I P L E S O F C O N S O L I D A T I O N 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. U S E O F E S T I M A T E S 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. their units on a one-for-one basis for common shares P R O P E R T I E S of beneficial interest of the Company (“Common Shares”). Real estate assets are stated at cost less accumulated This structure is commonly referred to as an umbrella depreciation. Expenditures for acquisition, development, 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 giv- construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially com- plete. Construction in progress includes costs for sig- nificant shopping center expansion and redevelopment. Depreciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for build- ings 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. ing effect to the conversion of the Common OP Units, The Company reviews its long-lived assets used in oper- the RDC Funds beneficially owned 72% of the Common ations for impairment when there is an event, or change Shares as of the closing of the RDC Transaction. During in circumstances that indicates impairment in value. February of 2003, the Company issued OP Units and cash The Company records impairment losses and reduces valued at $2,750 to certain limited partners in connection the carrying value of properties when indicators of 20 Acadia Realty Trust 2003 Annual Report impairment are present and the expected undiscounted C A S H I N E S C R O W cash flows related to those properties are less than Cash in escrow consists principally of cash held for their carrying amounts. In cases where the Company real estate taxes, property maintenance, insurance, does not expect to recover its carrying costs on proper- minimum occupancy and property operating income ties held for use, the Company reduces its carrying cost requirements at specific properties as required by certain to fair value, and for properties held for sale, the Com- loan agreements. pany 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 $15,886 was recognized related to properties sold subsequent to December 31, 2001. Management does not believe that the values of its properties within the portfolio are impaired as of December 31, 2003. D E F E R R E D C O S T S I N C O M E T A X E S 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 (the “Code”). To maintain REIT status for federal income tax purposes, the Company is generally required to distribute to its stockholders at least 90% of its REIT taxable income as well as comply with certain other requirements as defined by the Code. The Company is not subject to federal corporate income tax to the extent Fees and costs paid in the successful negotiation of that it distributes 100% of its REIT taxable income each leases have been deferred and are being amortized year. Accordingly, no provision has been made for Fed- on a straight-line basis over the terms of the respective eral income taxes for the Company in the accompany- leases. Fees and costs incurred in connection with ing consolidated financial statements. The Company obtaining financing have been deferred and are being is subject to state income or franchise taxes in certain amortized over the term of the related debt obligation. states in which some of its properties are located. R E V E N U E R E C O G N I T I O N Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight- These state taxes, which in total are not significant, are included in general and administrative expenses in the accompanying consolidated financial statements. line basis over the term of the respective leases. As of S T O C K - B A S E D C O M P E N S A T I O N December 31, 2003 and 2002, unbilled rents receivable Prior to 2002, the Company accounted for stock options relating to straight-lining of rents were $5,873 and under Accounting Principles Board Opinion No. 25, $5,302, respectively. Percentage rents are recognized in the period when the tenant sales breakpoint is met. “Accounting for Stock Issued to Employees” and related interpretations. Effective January 1, 2002, the Company adopted the fair value method of recording stock-based compensation contained in SFAS No. 123, “Accounting Reimbursements from tenants for real estate taxes, insur- for Stock-Based Compensation” (“SFAS No. 123”). As such, ance and other property operating expenses are recog- all stock options granted after December 31, 2001 are nized as revenue in the period the expenses are incurred. reflected as compensation expense in the Company’s An allowance for doubtful accounts has been provided against certain tenant accounts receivable that are esti- mated to be uncollectible. Rents receivable at December 31, 2003 and 2002 are shown net of an allowance for doubtful accounts of $2,420 and $2,284, respectively. C A S H A N D C A S H E Q U I V A L E N T S The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. consolidated financial statements over their vesting period based on the fair value at the date the stock-based compensation was granted. As provided for in SFAS No. 123, the Company elected the “prospective method” for the adoption of the fair value basis method of account- ing for employee stock options. Under this method, the recognition provisions will be applied to all employee awards granted, modified or settled after January 1, 2002. Acadia Realty Trust 2003 Annual Report 21 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued The following table illustrates the effect on net income beginning after March 15, 2004. Upon adoption of FIN and earnings per share if the Company had applied 46R, the assets, liabilities and non-controlling interests the fair value based method of accounting for stock- of the VIE initially would be measured at their carrying based employee compensation for vested stock options amounts with any difference between the net amount granted prior to January 1, 2002. See Note 11 – “Share added to the balance sheet and any previously recog- Incentive Plan” for the assumptions utilized in valuing nized interest being recognized as the cumulative effect the below vested stock options: of an accounting change. If determining the carrying Years Ended December 31, 2003 2002 2001 $ 7,853 $19,399 $9,802 7,829 19,363 9,699 Net income: As reported Pro forma Basic earnings per share: As reported Pro forma $ 0.30 $ 0.77 0.29 0.76 $ 0.35 0.34 Diluted earnings per share: As reported Pro forma $ 0.29 $ 0.76 0.29 0.76 $ 0.34 0.34 R E C E N T A C C O U N T I N G P R O N O U N C E M E N T S In December 2003, the Financial Accounting Statements Board (“FASB”) issued FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Enti- ties” (“FIN 46R”). FIN 46R replaces FASB Interpretation No. 46,“Consolidation of Variable Interest Entities,” which was issued in January 2003. In general, a variable interest entity (“VIE”) is a corporation, partnership, trust, or any other legal structure used for business purposes that either (a) does not have equity investors with voting rights or (b) has equity investors that do not provide sufficient financial resources for the entity to support its activities. A VIE often holds financial assets, includ- ing loans or receivables, real estate or other property. A VIE may be essentially passive or it may 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 amounts is not practicable, fair value at the date FIN 46R first applies may be used to measure the assets, liabilities and non-controlling interest of the VIE. It is not anticipated that the effect on the Company’s Con- solidated Financial Statements would be material. In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement establishes how an issuer classifies and measures certain financial instruments that have characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability because that financial instrument embodies an obligation of the issuer. For the Company, SFAS 150 was effective for instruments entered into or modified after May 31, 2003 and otherwise will be effective as of January 1, 2004, except for mandatorily redeemable financial instruments. For certain mandatorily redeemable finan- cial instruments, SFAS 150 will be effective for the Com- pany on January 1, 2005. The effective date has been deferred indefinitely for certain other types of manda- torily redeemable financial instruments. The adoption of SFAS No. 150 had no impact on the Company’s consol- idated financial statements. The Company currently is a majority-owner of a finite life partnership which is included in the consolidated accounts of the Company. The application of SFAS 150 as it relates to finite life entities has been deferred indefinitely. Based on the estimated value of the property owned by the partner- ship at December 31, 2003, the Company estimates that the minority interest in this partnership would be entitled to approximately $2,080 upon the dissolution of the partnership. by requiring a VIE to be consolidated by a company if In April 2003, the FASB issued Statement of Financial that company is subject to a majority of the risk of loss Accounting Standards (“SFAS”) No. 149, “Amendment from the VIE’s activities or entitled to receive a majority of Statement 133 on Derivative Instruments and Hedging of the entity’s residual returns or both. The Company Activities.” This statement amends and clarifies financial will be required to adopt FIN 46R in the first fiscal period reporting for derivative instruments, including certain 22 Acadia Realty Trust 2003 Annual Report derivative instruments embedded in other contracts A significant component of the Company’s business and for hedging activities under FASB Statement plan in prior years was also the disposition of non-core No. 133, “Accounting for Derivative Instruments and real estate assets. Under this initiative, which was Hedging Activities.” SFAS No. 149 is generally effective completed in 2002, the Company sold a total of two for contracts entered into or modified after June 30, apartment complexes and 23 shopping centers. 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 had no impact on the Company’s consolidated financial statements. C O M P R E H E N S I V E I N C O M E The following table sets forth comprehensive income for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 Dispositions relate to the sale of shopping centers, multi-family properties and land. Gains from these sales are generally recognized using the full accrual method in accordance with SFAS No. 66, “Accounting for Sales of Real Estate,” providing that certain criteria relating to the terms of sales are met. The results of operations of sold properties is reported $ 7,853 $19,399 $ 9,802 separately as discontinued operations for the years ended Net income Other comprehensive income (loss)1 1,369 (5,668) (1,206) Comprehensive income $9,222 $ 13,731 $ 8,596 1Relates to the changes in the fair value of derivative instru- ments accounted for as hedges. The following table sets forth the change in accumu- lated other comprehensive loss for the years ended December 31, 2003, 2002 and 2001: 2003 2002 2001 December 31, 2002 and 2001. Revenues from discontin- ued operations for the years ended December 31, 2002 and 2001 totaled $6,295 and $24,178, respectively. 2 0 0 2 A C Q U I S I T I O N S A N D D I S P O S I T I O N S 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 $1,540 after closing and other related costs. The joint venture received a $1,632 note receivable for the net purchase price and additional reimburse- Beginning balance $6,874 $ 1,206 $ — ments due from the buyer and deferred recognition of Unrealized (gain) loss on valuation of derivative instruments Ending balance (1,369) 5,668 1,206 $ 5,505 $6,874 $1,206 the gain on sale in accordance with SFAS No. 66. The note was paid in full on January 10, 2003, and as such, the Company’s share of the deferred gain, or $634, was recognized in 2003. On October 11, 2002, the Company sold the Manahawkin As of December 31, 2003, the balance in accumulated Village Shopping Center and Valmont Plaza for $16,825 other comprehensive loss was comprised solely of to two entities affiliated with each other. The Company unrealized losses on the valuation of swap agreements. received two purchase money notes in connection with R E C L A S S I F I C A T I O N S Certain 2002 and 2001 amounts were reclassified to conform to the 2003 presentation. Note 2i Acquisition and Disposition of Properties Currently the primary vehicle for the Company’s acqui- sition activity is its acquisition joint venture, Acadia Strategic Opportunity Fund (Note 4). the sale. The first for $11,000 was repaid in full on Novem- ber 8, 2002. The second for $1,600, was repaid in full on April 11, 2003. As part of the transaction, the Company 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 Acadia Realty Trust 2003 Annual Report 23 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued loan program and in the aggregate contain approxi- The Company sold its interest in the Marley Run Apart- mately 2.3 million square feet. As part of the transaction, ments for $27,400 on May 15, 2001, recognizing a $7,035 the buyer assumed the outstanding mortgage debt of gain on the sale. Net proceeds from the sale were used $42,438. The Company retained a senior, preferred inter- to redeem 680,667 Common OP Units at $7.00 per unit. est in the acquiring entity in the amount of $6,262, which The redemption price represented a premium of $0.35 earned an initial annual preferred return of 15%. On over the market price of the Company’s Common Shares December 31, 2002, the Company’s interest was purchased as of the redemption date. These redeemed Common at par by an affiliate of the purchaser of the portfolio. OP Units were held by the original owners of the prop- The Company recorded an $8,134 gain on the sale. erty who contributed it to the Company in connection 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 throughout 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, through July 15, 2003. The Company 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. recorded a loss of $166 on the sale. Note 3i On January 10, 2002, the Company and an unaffiliated Segment Reporting 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 self-storage facility for $3,300, recognizing a $1,530 gain on the sale of which the Company’s share was $957. The joint venture currently plans to develop the remaining parcel. 2 0 0 1 D I S P O S I T I O N S 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, amortiza- tion and certain nonrecurring items. The reportable segments are managed separately due to the differing On December 21, 2001, the Company sold the Glen Oaks nature of the leases and property operations associated Apartments, a 463 unit multi-family property located in with the retail versus residential tenants. The following Greenbelt, Maryland for $35,100, resulting in an $8,546 table sets forth certain segment information for the gain on the sale. As part of the transaction, the Company Company, reclassified for discontinued operations, as of received a promissory note (which was secured by an and for the years ended December 31, 2003, 2002, and irrevocable letter of credit) for $34,757, which was sub- 2001 (does not include unconsolidated partnerships): sequently paid in January 2002. On October 4, 2001, the Company sold the Tioga West shopping center, a 122,000 square foot shopping center located in Tunkhannock, Pennsylvania, for $3,200 result- ing in a $908 gain on the sale. On August 27, 2001 the Company sold the Wesmark Plaza, a 207,000 square foot shopping center located in Sumter, South Carolina, for $5,750, recognizing a $1,245 gain on the sale. 24 Acadia Realty Trust 2003 Annual Report 2003 2002 2001 Retail Multi-Family All Retail Multi-Family All Retail Multi-Family Properties Properties Other Total Properties Properties Other Total Properties Properties All Other Total $ 58,150 $ 7,318 $ 3,977 $ 69,445 $ 58,498 $ 6,969 $3,880 $ 69,347 $ 52,756 $ 6,870 $1,656 $ 61,282 19,782 4,187 — $ 23,969 $ 17,030 $ 3,691 $ — $ 20,721 $ 16,662 $ 3,362 $ — $ 20,024 $ 38,368 $ 3,131 $ 3,977 $ 45,476 $ 41,468 $ 3,278 $3,880 $ 48,626 $ 36,094 $ 3,508 $1,656 $ 41,258 $ 16,252 $ 1,336 $ 321 $ 17,909 $ 13,287 $ 1,201 $ 316 $ 14,804 $ 12,294 $ 1,097 $ 354 $ 13,745 $ 9,701 $ 1,530 $ — $ 11,231 $ 9,390 $ 1,627 $ — $ 11,017 $ 10,468 $ 1,902 $ — $ 12,370 $387,854 $39,774 $ — $ 427,628 $375,482 $38,396 $ — $413,878 $361,075 $ 37,341 $ — $398,416 $ 337,724 $36,830 $13,630 $ 388,184 $368,547 $36,224 $6,164 $410,935 $453,034 $35,736 $5,169 $493,939 5,153 1,207 — 6,360 5,079 1,207 — 6,286 5,079 1,207 — 6,286 $ 12,153 $ 1,378 $ — $ 13,531 $ 13,134 $ 1,000 $ — $ 14,134 $ 9,425 $ 1,260 — $ 10,685 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 (multi-family – 1,474 units) Expenditures for real estate and improvements REVENUES Total revenues for reportable segments $ 71,085 Elimination of intersegment management fee income (1,340) Elimination of intersegment asset management fee income (300) Total consolidated revenues PROPERTY OPERATING EXPENSES AND REAL ESTATE TAXES Total property operating expenses and real estate taxes for reportable segments $ 69,445 $ 25,126 Elimination of intersegment management fee expense (1,157) Total consolidated expense $ 23,969 RECONCILIATION TO INCOME BEFORE CUMULATIVE EFFECT OF A 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 Gain on sale of land Income from discontinued operations Minority interest Income before cumulative effect of a change in accounting principle $ 45,476 (17,909) (10,734) 2,411 (11,231) 1,187 — (1,347) $ 70,413 (1,066) — $ 69,347 $ 21,778 (1,057) $ 20,721 $ 48,626 (14,804) (10,447) 628 (11,017) 1,530 7,882 (2,999) $ 62,273 (991) — $ 61,282 $ 21,015 (991) $ 20,024 $ 41,258 (13,745) (9,025) 504 (12,370) — 4,795 ( 1,466) $ 7,853 $ 19,399 $ 9,951 Acadia Realty Trust 2003 Annual Report 25 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S 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 using the equity method. Summary financial informa- tion of Crossroads and the Company’s investment in and share of income from Crossroads follows: 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 December 31, 2003 2002 $ 7,402 $ 7,603 3,710 3,536 $ 11,112 $ 11,139 $ 32,961 $ 33,575 4,696 5,832 (26,545) (28,268) $ $ 11,112 $ 11,139 3,665 $ 3,241 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. Acadia Strategic Opportunity Fund, LP (“ASOF”) In 2001, the Company formed a joint venture, ASOF, with four of its institutional investors for the purpose 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. Decisions made by the general partner as it relates to purchasing, financing and disposition of properties are subject to the unanimous disapproval of the Advisory Committee, which is comprised of representatives from each of the four institutional investors. ASOF owns five shopping centers comprising 1.3 million square feet. In addition, ASOF and an unaffiliated joint venture party own a 1.0 million square foot supermarket portfolio consisting of 25 anchor-only leases with either Kroger or Safeway Supermarkets. Acquisitions completed during 2003 and 2002 were as follows: Kroger/Safeway Portfolio In January 2003, ASOF and an Years Ended December 31, unaffiliated joint venture party acquired a one million 2003 2002 2001 square foot supermarket portfolio consisting of 25 Statements of Operations Total revenue Operating and other expenses Interest expense Depreciation and amortization Net income $8,324 $7,091 $ 7,174 2,465 2,542 2,150 2,722 2,159 2,620 570 547 538 $2,747 $1,672 $ 1,857 Company’s share of net income Amortization of excess investment (see below) $1,377 $ 934 $ 910 392 392 392 Income from partnerships $ 985 $ 542 $ 518 anchor-only leases with either Kroger or Safeway super- markets. 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 $48,900 (inclusive of closing and other related acquisi- tion costs) included the assumption of $34,450 of existing fixed-rate debt which bears interest at a weighted-average rate of 6.6%. The mortgage debt fully amortizes over the next seven years, which is cotermi- nous with the primary lease term of the supermarket leases. ASOF invested $11,250 of the equity capitalization of which the Company’s share was $2,500. 26 Acadia Realty Trust 2003 Annual Report Brandywine Portfolio In January 2003, ASOF acquired a The Company accounts for its investment in ASOF using one million square foot portfolio for an initial purchase the equity method. Summary financial information of price of $86,287, inclusive of closing and other related ASOF and the Company’s investment in and share of acquisition costs. The portfolio consists of two shopping income from ASOF follows: centers located in Wilmington, Delaware. A portion of one of the properties is currently unoccupied for which ASOF will pay for on an “earn-out” basis only when it is leased. At closing, ASOF assumed $38,082 of fixed-rate Balance Sheets debt which bears interest at a weighted average rate of Assets: 6.2% as well as obtained an additional fixed-rate loan of Rental property, net $30,000 which bears interest at 4.7%. ASOF invested equity of $19,270 in the acquisition, of which the Company’s share was $4,282. On December 6, 2002, ASOF completed a forward interest rate lock agreement on $30,000 of anticipated mortgage debt in connection with this transaction. This forward interest rate lock agreement was settled at closing in January 2003. On September 19, 2002, ASOF acquired three supermarket- anchored shopping centers located in Ohio for a total Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity Total liabilities and partners’ equity purchase price of $26,679. ASOF assumed $12,568 of Company’s investment December 31, 2003 2002 $ 173,507 $28,046 4,763 5,977 $ 178,270 $34,023 $120,609 $18,450 11,731 45,930 2,418 13,155 $ 178,270 $34,023 $ 9,965 $ 2,923 fixed rate debt on two of the properties at a blended rate of 8.1%. A new $6,000 loan was obtained on the third property at a floating rate of LIBOR plus 200 basis points. The balance of the purchase price was funded by the joint venture, of which the Company’s share was $1,802. Statements of Operations Total revenue Operating and other expenses Management and other fees Interest expense Depreciation and amortization Minority interest Net income (loss) Company’s share of net income (loss)1 Year ended December 31, 2003 Year ended December 31, 2002 Period from September 28, 2001 (inception) to December 31, 2001 $26,008 $ 1,224 $ — 5,017 2,171 6,399 8,055 157 $ 4,209 $ 1,426 342 1,391 350 145 — $(1,004) $ 86 — 402 — — — $ (402) $ (14) 1Reflects the elimination of the Company’s pro-rata share of asset management, property management and leasing fees paid by ASOF aggregating $491, $309 and $75 for the years ended December 31, 2003, 2002 and 2001, respectively, as these fees are paid to the Company. Acadia Realty Trust 2003 Annual Report 27 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued Note 5i Deferred Charges Deferred charges consist of the following as of December 31, 2003 and 2002: Deferred financing costs 2003 2002 $ 6,392 $ 6,150 made available under the loan as well as extending the maturity of the loan until December 1, 2008 with two one-year extension options. In addition, the interest rate has been reduced to LIBOR plus 140 basis points. The loan, which is secured by one of the Company’s properties, requires the monthly payment of interest and fixed principal commencing January 1, 2004. Deferred leasing and other costs 15,485 13,302 On October 27, 2003, the Company paid off maturing 21,877 19,452 loans totaling $7,418, which were secured by two of Accumulated amortization (10,704) (9,092) $ 11,173 $10,360 Note 6i Mortgage Loans the Company’s properties. On May 30, 2003, the Company refinanced a $13,337 loan with a bank, increasing the outstanding principal to $16,000. The loan, which is secured by one of the Company’s properties, requires monthly payment of interest at the fixed-rate of 5.2%. Payments of principal At December 31, 2003, mortgage notes payable aggre- amortized over 30 years commences June 2005 with gated $190,444 and were collateralized by 22 properties the loan maturing in May 2013. and related tenant leases. Interest rates ranged from 2.6% to 8.1%. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2013. Certain loans are cross- collateralized and cross-defaulted as part of a group In April 2003, the Company extended an existing $7,400 revolving facility with a bank through March 1, 2008. As of December 31, 2003, there were no outstanding amounts under this loan. of properties. The loan agreements contain customary In March 2003, the Company repaid a $3,551 loan with representations, covenants and events of default. Certain a life insurance company. loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. Effective December 1, 2003, the Company amended an $8,599 loan with a bank. An additional $5,000 has been In January 2003, the Company drew down $5,000 of an available $10,000 facility with a bank and used the proceeds to partially pay down the outstanding princi- pal on another loan with the same lender. 28 Acadia Realty Trust 2003 Annual Report The following table summarizes the Company’s mortgage indebtedness as of December 31, 2003 and 2002: DECEMBER 31, 2003 2002 Interest Rate at December 31, 2003 Properties Monthly Maturity Encumbered Payment Terms MORTGAGE NOTES PAYABLE — VARIABLE-RATE First Union National Bank Metropolitan Life Insurance Company Washington Mutual Bank, FA Sun America Life Insurance Company Fleet National Bank Washington Mutual Bank, FA Fleet National Bank Fleet National Bank Fleet National Bank Washington Mutual Bank, FA Fleet National Bank Fleet National Bank $ — $ 13,388 7,577 — — — — — 56,950 2.94% (LIBOR + 1.75%) 04/01/05 50,686 9,191 12,009 20,083 4,865 6,256 8,992 — — 9,446 2.89% (LIBOR + 1.73%) 12,187 2.92% (LIBOR + 1.75%) 15,637 3.04% (LIBOR + 1.85%) 4,942 2.91% (LIBOR + 1.75%) 6,300 2.91% (LIBOR + 1.75%) 9,108 2.91% (LIBOR + 1.75%) — (LIBOR + 1.70%) — — 10/01/05 01/01/07 01/01/07 03/15/07 05/01/07 06/01/07 11/22/07 8,598 8,731 2.57% (LIBOR + 1.40%) 12/01/08 (10) — (LIBOR + 1.50%) 03/01/08 — — (1) (2) (3) (4) (5) (6) (7) (8) (9) Total variable-rate debt 120,680 144,266 MORTGAGE NOTES PAYABLE — FIXED-RATE Anchor National Life Insurance Company SunAmerica Life Insurance Company Metropolitan Life Insurance Company Bank of America, N.A. RBS Greenwich Capital Total fixed-rate debt — 13,425 24,113 16,226 16,000 3,570 13,648 24,495 16,382 — 69,764 58,095 $190,444 $202,361 — 6.46% 8.13% 7.55% 5.19% — 07/01/07 11/01/10 01/01/11 06/01/13 — (11) (12) (13) (14) $ — — (15) (15) (15) (15) (15) (15) (15) (15) (15) (15) — (15) (15) (15) (16) Notes: (1) New Loudon Center Ledgewood Mall Route 6 Plaza Bradford Towne Centre Berlin Shopping Center (2) Village Apartments (3) Branch Shopping Center Abington Towne Center Methuen Shopping Center (4) Walnut Hill Plaza (5) Town Line Plaza (6) Gateway Shopping Center (7) Smithtown Shopping Center (8) Elmwood Park Shopping Center; no amounts are outstanding under this $20,000 revolving facility (9) Marketplace of Absecon; no amounts are outstanding under this $7,400 revolving facility (11) Merrillville Plaza (12) Crescent Plaza East End Centre (13) GHT Apartments/Colony Apartments (14) 239 Greenwich Avenue (15) Monthly principal and interest (16) Interest only until 5/05; monthly principal and interest thereafter Bloomfield Town Square (10) Soundview Marketplace Acadia Realty Trust 2003 Annual Report 29 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued The scheduled principal repayments of all mortgage Company’s Declaration of Trust that prohibits ownership indebtedness as of December 31, 2003 are as follows: positions in excess of 4% of the Company. The waiver 2004 2005 2006 2007 2008 Thereafter $ 3,580 60,544 2,445 62,646 9,144 52,085 $190,444 Note 7i Shareholders’ Equity and Minority Interests C O M M O N S H A R E S During 2003, the Board of Trustees approved a resolution permitting one of its institutional shareholders, which currently owns 6% of the Company’s outstanding Common Shares, to acquire additional shares through open market purchases. This waiver of the Company’s Common Shares ownership limitation, which was approved in response to a request from this institutional investor, will permit this shareholder to acquire up to an additional 3.7% of the Company’s Common Shares through March 31, 2004, or an aggregate of up to 9.7% of the Company’s Common Shares. Through December 31, 2003, the Company had repur- chased 1,922,788 Common Shares (net of 131,817 Com- mon Shares reissued) at a total cost of $10,381 under the expanded share repurchase program that allows for the repurchase of up to $20,000 of the Company’s outstanding Common Shares. The repurchased shares are reflected as a reduction of par value and additional paid-in capital. In 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. Also in February 2002, the Board of Trustees voted to permit Yale University (“Yale”) to acquire 2,266,667 additional Common Shares from another shareholder was limited to this particular transaction. Following this, Yale owned 8,421,759 Common Shares, or 34% of the Company’s outstanding Common Shares. Addition- ally, as a condition to approving the waiver, Yale agreed to establish a voting trust whereby all shares owned by Yale University in excess of 30% of the Company’s outstanding Common Shares, will be voted in the same proportion as all other shares voted, excluding Yale. M I N O R I T Y I N T E R E S T S Minority interest in Operating Partnership represents the limited partners’ interest of 1,139,017 and 3,162,980 units in the Operating Partnership (“Common OP Units”) at December 31, 2003 and 2002, respectively. During 2003 and 2002, various limited partners converted a total of 2,058,804 and 2,086,736 Common OP Units into Com- mon Shares on a one-for-one basis, respectively. Ross Dworman, a trustee of the Company, received 34,841 of Common OP Units through various affiliated entities during 2003 (Note 8). Minority interest in Operating Partnership also includes 1,580 and 2,212 units of preferred limited partnership interests designated as Series A Preferred Units at December 31, 2003 and 2002, respectively (“Preferred OP Units”). The Preferred OP Units were issued in connection with the acquisition of all the partnership interests of the limited partnership which owns the Pacesetter Park Shopping Center on November 16, 1999. Certain Preferred OP Unit holders converted 632 Preferred OP Units into 84,267 Common OP Units and then into Common Shares during 2003. 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 seventh anniversary following their issuance, either the Company or the holders can call for the conversion of the Preferred OP Units at the lesser of $7.50 or the market price of the Common Shares as of the by granting a conditional waiver of the provision in the conversion date. 30 Acadia Realty Trust 2003 Annual Report Minority interests in majority-owned partnerships Note 9i represent third party interests in four properties in which the Company has a majority ownership position. Note 8i Related Party Transactions 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 2001, the Company terminated a contract to manage a property owned by a related party that earned a fee of 3.25% of tenant collections. Management fees earned by the Company under these contracts aggregated $212, $229 and $391 for the years ended December 31, 2003, 2002 and 2001 respectively, and are included in other revenues in the accompany- ing consolidated statements of income. The Company also earns certain management and service Tenant Leases Space in the shopping centers and other retail properties is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume. Minimum future rentals to be received under non-cance- lable leases for shopping centers and other retail proper- ties as of December 31, 2003 are summarized as follows: 2004 2005 2006 2007 2008 Thereafter $ 42,329 38,272 35,675 32,505 27,625 182,243 $358,649 fees in connection with its investment in ASOF (Note 4). Minimum future rentals above include a total of Such fees earned by the Company (after adjusting for $6,169 for two tenants (with six leases), which have intercompany fees) aggregated $1,689, $1,082 and $338 filed for bankruptcy protection. None of these leases for the years ended December 31, 2003, 2002 and 2001 have been rejected nor affirmed. During the years respectively, and are included in other revenues in the ended December 31, 2003, 2002 and 2001, no single accompanying consolidated statements of income. tenant collectively accounted for more than 10% of As of December 31, 2002, the Company was obligated the Company’s total revenues. to issue Common OP Units and cash valued at $2,750 Note 10i to certain limited partners in connection with the RDC Transaction. The payment was due upon the commence- ment of rental payments from a designated tenant at one of the properties acquired in the RDC Transaction. In February 2003, Mr. Dworman received 34,841 of these Common OP Units through various affiliated entities. Included in the Common OP Units converted to Common Shares during 2003 and 2002, were 2,300 and 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 con- nection with the Company’s Tender Offer, 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). 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. The Company leases space for its White Plains corporate office for a term expiring in 2010. Future minimum rental payments required for leases having remaining non-cancelable lease terms are as follows: 2004 2005 2006 2007 2008 Thereafter $ 954 973 981 995 1,055 18,106 $ 23,064 Acadia Realty Trust 2003 Annual Report 3131 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued Note 11i Share Incentive Plan During 1999, the Company adopted the 1999 Share Incentive Plan (the “1999 Plan”), which replaced both the 1994 Share Option Plan and the 1994 Non-Employee Trustees’ Share Option Plan. The 1999 Plan authorizes the issuance of options equal to up to 8% of the total Common Shares outstanding from time to time on a fully diluted basis. However, not more than 4,000,000 of the Common Shares in the aggregate may be issued pursuant to the exercise of options and no participant options, share appreciation rights, restricted shares and performance units (collectively, “Awards”) to officers, employees and trustees of the Company and consultants to the Company. The 2003 Plan is generally identical to the 1999 Plan, except that the maximum number of Common Shares that the Company may issue pursuant to the 2003 Plan is four percent of the Common Shares outstanding from time to time on a fully diluted basis. However, no participant may receive more than 1,000,000 Common Shares during the term of the 2003 Plan with respect to Awards. may receive more than 5,000,000 Common Shares dur- As of December 31, 2003, the Company has 2,068,150 ing the term of the 1999 Plan. Options are granted by options outstanding to officers and employees. These the Share Option Plan Committee (the “Committee”), fully vested options are for ten-year terms from the which currently consists of two non-employee Trustees, grant date and, except for 30,000 options which vested and will not have an exercise price less than 100% of fully as of the grant date, vested in three equal annual the fair market value of the Common Shares and a term installments which began on the grant date. In addition, of greater than ten years at the grant date. Vesting of 27,000 options have been issued to non-employee options is at the discretion of the Committee with the Trustees of which 14,600 options were vested as of exception of options granted to non-employee Trustees, December 31, 2003. which vest in five equal annual installments beginning on the date of grant. Pursuant to the 1999 Plan, non- employee Trustees receive an automatic grant of 1,000 options following each Annual Meeting of Shareholders. For the year ended December 31, 2003, the Committee granted a total of 107,834 restricted shares pursuant to the 2003 Plan to certain officers of the Company (the “Recipients”). In general, the restricted shares carry The 1999 Plan also provides for the granting of share all the rights of Common Shares including voting and appreciation rights, restricted shares and performance dividend rights, but may not be transferred, assigned units/shares. Share appreciation rights provide for the or pledged until the Recipients have a vested non- participant to receive, upon exercise, cash and/or Com- forfeitable right to such shares. Vesting with respect mon Shares, at the discretion of the committee, equal to these restricted shares, which is subject to the to the excess of the market value of the Common Shares Recipients’ continued employment with the Company at the exercise date over the market value of the Com- through the applicable vesting dates, is as follows: mon Shares at the Grant Date. The Committee will deter- mine 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 perform- i. 39,168 restricted shares, which were granted in lieu of a portion of the Recipients’ 2002 cash bonus, vested 20% on January 2, 2003 and vest 20% thereafter on each of the next four anniversaries of such date, ance shares based on the attainment of specified per- ii. 34,333 restricted shares vest 20% on January 2, 2004 formance objectives of the Company within a specified and on each of the next four anniversaries of such date, performance period. Through December 31, 2003, no share appreciation rights or performance units/shares have been awarded. iii. and 34,333 restricted shares vest 20% on January 2, 2004 and on each of the next four anniversaries of such date, provided that in addition to the Recipients’ During 2003, the Company adopted the 2003 Share continued employment through the vesting date, the Incentive Plan (the “2003 Plan”) because no Common Company’s total shareholder return, as determined by Shares remained available for future grants under the the Committee in its discretion, is 12% or more either 1999 Plan. The 2003 Plan provides for the granting of for such fiscal year or, on average, for such fiscal year 32 Acadia Realty Trust 2003 Annual Report and each other fiscal year occurring after January 2, to January 1, 2002, the Company had applied the intrinsic 2003 — in which case vesting shall occur for any value method permitted under SFAS No. 123, as defined restricted shares that did not vest in a prior fiscal in Accounting Principles Board Opinion No. 25, “Account- year based on this 12% condition. ing for Stock Issued to Employees” and related Interpre- The total value of the above restricted share awards on the date of grant was $987 which will be recognized in expense over the vesting period. During 2003, $410 was recognized in compensation expense. Unearned compensation of $577 as of December 31, 2003 will be recognized in expense as such shares vest. tations, in accounting for stock-based compensation plans. Accordingly, no compensation expense has been recognized in the accompanying consolidated financial statements for the year ended December 31, 2001 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 For the year ended December 31, 2001, the Company the date of grant. The Company elected the prospective issued 37,110 restricted shares to employees, which vest method whereby compensation expense is recognized equally over three years. No awards of restricted shares only for those options granted, modified or settled on were granted for the year ended December 31, 2002. or after January 1, 2002. During the years ended December 31, 2003, 2002 and 2001, the Company recognized compensation expenses of $516, $121 and $121, respectively, in connection with restricted share grants. No awards of share appreciation rights or performance units/shares were granted for the years ended December 31, 2003, 2002 and 2001. The Company has used the Black-Scholes option-pricing model for purposes of estimating the fair value in deter- mining compensation expense for options granted for the years ended December 31, 2003 and 2002. The Company has also used this model for the pro forma information regarding net income and earnings per Effective January 1, 2002, the Company adopted the fair share as required by SFAS No. 123 for options issued for value method of recording stock-based compensation the year ended December 31, 2001 as if the Company contained in SFAS No. 123, “Accounting for Stock-Based had also accounted for these employee stock options Compensation.” As such, stock based compensation under the fair value method. The fair value for the options awards granted after December 31, 2001 will be expensed issued by the Company was estimated at the date over the vesting period based on the fair value at the of the grant using the following weighted-average date the stock-based compensation was granted. Prior assumptions resulting in: Risk-free interest rate Dividend yield Expected life Expected volatility Fair value at date of grant (per option) Years ended December 31, 2003 4.4% 5.8% 10.0 years 18.0% $0.82 2002 3.3% 7.0% 7.0 years 19.1% $0.44 2001 5.4% 8.4% 7.0 years 17.7% $0.27 Acadia Realty Trust 2003 Annual Report 33 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued 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 Settled1 Expired Outstanding at end of year 2003 2,472,400 8,000 $9.11 – $11.66 — 2,082,750 385,250 — 2,095,150 Option prices per share outstanding $4.89– $11.66 Years Ended December 31, 2002 2,593,400 5,000 $7.10 — 2,313,436 126,000 — 2,472,400 $4.89–$7.50 2001 2,124,600 475,000 $6.00–$7.00 — 2,418,137 6,200 — 2,593,400 $4.89–$7.50 As of December 31, 2003 the outstanding options had a weighted average exercise price of $7.04 and a weighted average remaining contractual life of approximately 5.1 years. 1Pursuant to the 1999 Plan (except for 250 options exercised during 2003) these options were settled and did not result in the issuance of any additional Common Shares. Note 12i Employee Stock Purchase Plan During 2003, the Company adopted the Acadia Realty Trust Employee Stock Purchase Plan (the “Purchase Plan”), which allows eligible employees of the Company to purchase Common Shares through payroll deductions. employee’s annual salary. A plan participant may contribute up to a maximum of 15% of their compen- sation but not in excess of $12 for the year ended December 31, 2003. The Company contributed $110, $115, and $135 for the years ended December 31, 2003, 2002 and 2001, respectively. The Purchase Plan provides for employees to purchase Note 14i Common Shares on a quarterly basis at a 15% discount to the closing price of the Company’s Common Shares on either the first day or the last day of the quarter, whichever is lower. The amount of the payroll deduc- tions will not exceed a percentage of the participant’s annual compensation that the Committee establishes from time to time, and a participant may not purchase more than 1,000 Common Shares per quarter. Compen- sation expense will be recognized by the Company to the extent of the above discount to the average closing price of the Common Shares with respect to the appli- cable quarter. During 2003, 810 Common Shares were purchased by Employees under the Purchase Plan. Dividends and Distributions Payable On December 9, 2003, the Company declared a cash dividend for the quarter ended December 31, 2003 of $0.16 per Common Share. The dividend was paid on January 15, 2004 to shareholders of record as of December 31, 2003. The Company has determined that the cash distributed to the shareholders is characterized as follows for Fed- eral income tax purposes: Years Ended December 31, 2003 100% 0% 2002 2001 44% 56% 79% 21% 100% 100% 100% Note 13i Employee 401(k) Plan Ordinary income Long-term capital gain The Company maintains a 401(k) plan for employees under which the Company currently matches 50% of a plan participant’s contribution up to 6% of the 34 Acadia Realty Trust 2003 Annual Report Note 15i Income Taxes Dividends and Distributions Payable, Due to Related Parties and Other Liabilities — The carrying amount of these assets and liabilities approximates fair value The Company believes it qualifies as a REIT and there- due to the short-term nature of such accounts. fore is not liable for income taxes at the federal level or in most states for the current year as well as for future years. Accordingly, for the years ended December 31, 2003, 2002 and 2001, no provision was recorded for federal or substantially all state income taxes. The following unaudited table reconciles the Com- pany’s book net income to REIT taxable income before dividends paid deduction: No Derivative Instruments — The fair value of these instru- ments is based upon the estimated amounts the Com- pany would receive or pay to terminate the contracts as of December 31, 2003 and 2002 and is determined using interest rate market pricing models. Mortgage Notes Payable — As of December 31, 2003 and 2002, the Company has determined the estimated fair value of its mortgage notes payable are approximately Years ended December 31, 2002 Actual 2003 Estimate 2001 Actual $193,619 and $208,083, respectively, by discounting future cash payments utilizing a discount rate equivalent to the Book net income $ 7,853 $19,399 $ 9,802 rate at which similar mortgage notes payable would be originated under conditions then existing. 3,828 (6,802) 2,091 On January 1, 2001, the Company adopted SFAS No. 133, I N T E R E S T R A T E H E D G E S Book/tax difference in depreciation and amortization Book/tax difference on gains/losses from capital transactions Other book/tax differences, net REIT taxable income before dividends paid deduction — 904 2,595 (326) 1,380 815 $11,355 $ 14,881 $15,303 Note 16i Financial Instruments F A I R V A L U E O F F I N A N C I A L I N S T R U M E N T S SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” requires disclosure on the fair value of “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 LIBOR interest rate caps that hedged $23,203 of variable- rate mortgage debt. This adjustment is reflected as a cumulative effect of a change in accounting principle in the accompanying consolidated statements of income. In June of 2002, the Company completed two interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $25,047 of LIBOR based variable rate debt. These agreements, which are for $15,885 and $9,162 of notional principal, mature on January 1, 2007 and June 1, 2007, respectively and are at a financial instruments. Certain of the Company’s assets weighted average fixed interest rate of 6.2%. and liabilities are considered financial instruments. Fair value estimates, methods and assumptions are set forth below. Cash and Cash Equivalents, Cash in Escrow, Rents Receivable, Notes Receivable, Prepaid Expenses, 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 $12,288 of LIBOR based variable-rate debt. The swap agreement, which matures on January 1, 2007, provides for a fixed all-in interest Other Assets, Accounts Payable and Accrued Expenses, rate of 4.1%. Acadia Realty Trust 2003 Annual Report 35 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued During 2001, the Company completed two interest rate comprehensive loss and $229 as a reduction of minority swap transactions to hedge the Company’s exposure interest in Operating Partnership. For the years ended to changes to interest rates with respect to $50,000 December 31, 2003 and 2002, the Company recorded of LIBOR based variable rate debt. The first swap agree- in interest expense an unrealized gain (loss) of $51 and ment, which extends through April 1, 2005, provides ($122), respectively, due to partial ineffectiveness on for a fixed all-in rate of 6.55% on $30,000 of notional one of the swaps. The ineffectiveness resulted from principal. The second swap agreement, which extends differences between the derivative notional and the through October 1, 2006, provides for a fixed all-in rate principal amount of the hedged variable rate debt. of 6.28% on $20,000 of notional principal. The Company’s interest rate hedges are designated as The Company is also a party to two swap agreements cash flow hedges and hedge the future cash outflows with a bank through its 49% interest in Crossroads on mortgage debt. Interest rate swaps that convert (Note 4). These swap agreements effectively fix the variable payments to fixed payments, such as those interest rate on the Company’s pro rata share of the held by the Company, as well as interest rate caps, Crossroads mortgage debt. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2003. The notional value does not represent exposure to credit, interest rate or market risks: Hedge Type Notional Value Rate Interest Maturity Fair Value LIBOR Swap1 $ 11,974 5,000 LIBOR Swap1 5.94% 6/16/07 $ (1,217) 6.48% 6/16/07 (599) floors, collars, and forwards are cash flow hedges. The unrealized gains and losses in the fair value of these hedges are reported on the balance sheet with a corresponding adjustment to either accumulated other comprehensive income or earnings depending on the type of hedging relationship. For cash flow hedges, offsetting gains and losses are reported in accumulated other comprehensive income. Over time, the unrealized gains and losses held in accumulated other comprehen- sive income will be reclassified to earnings. This reclas- sification occurs over the same time period in which the (1,816) hedged items affect earnings. Within the next twelve 30,000 4.80% 4/1/05 (1,227) 20,000 4.53% 10/1/06 (1,091) months, the Company expects to reclassify to earnings as interest expense approximately $3,462 of the current balance held in accumulated other comprehensive loss. LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap 8,992 4.47% 6/1/07 15,605 4.32% 1/1/07 12,072 4.11% 1/1/07 (472) (748) (506) (4,044) $(5,860) 1Relates to the Company’s investments in Crossroads. These swaps effectively fix the interest rate on the Company’s pro rata share of mortgage debt. The fair values of these instruments are reflected as components of the Company’s investment in Crossroads in the accompanying consolidated financial statements. Note 17i Earnings per Common Share 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 As of December 31, 2003, the derivative instruments issuance of Common Shares that then shared in the were reported at their fair value as derivative instru- earnings of the Company. The following table sets ments of $4,044 and as a reduction of investments in forth the computation of basic and diluted earnings unconsolidated partnerships of $1,816. As of December per share from continuing operations for the periods 31, 2003, unrealized losses totaling $5,734 represented indicated. For the year ended December 31, 2001 no the fair value of the aforementioned derivatives, of additional shares were reflected as the impact would which $5,505 was reflected in accumulated other be anti-dilutive in such years. 36 Acadia Realty Trust 2003 Annual Report Numerator: Income from continuing operations — basic earnings per share $ 7,853 $ 11,517 $ 5,156 Years ended December 31, 2003 2002 2001 Effect of dilutive securities: Preferred OP Unit distributions Numerator for diluted earnings per share Denominator: 185 8,038 199 11,716 — 5,156 Weighted average shares — basic earnings per share 26,589 25,321 28,313 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 615 292 907 27,496 $ $ 0.30 0.29 190 295 485 25,806 $ 0.46 $ 0.45 — — — 28,313 $ $ 0.18 0.18 The effect of the conversion of Common OP Units is not reflected in the above table as Common OP Units 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 conversion of these units would have no net impact on the determination of diluted earnings per share. Acadia Realty Trust 2003 Annual Report 37 N O T E S T O C O N S O L I D A T E D S T A T E M E N T S continued Note 18i Summary of Quarterly Financial Information (unaudited) The quarterly results of operations of the Company for the years ended December 31, 2003 and 2002 are as follows: Revenue Income from continuing operations Income 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 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 MARCH 31 $ 18,125 3,463 — 3,463 $ 0.14 — 0.14 $ 0.14 — 0.14 $ 0.145 JUNE 30 $16,465 2,443 — 2,443 $ 0.09 — 0.09 $ 0.09 — 0.09 $ 0.145 2003 SEPTEMBER 30 $ 16,704 DECEMBER 31 $ 18,151 TOTAL $69,445 2,424 — 2,424 $ 0.09 — 0.09 $ 0.09 — 0.09 $ 0.145 (477) — (477) $ (0.02) — (0.02) $ (0.02) — (0.02) $ 0.160 7,853 — 7,853 $ 0.30 — 0.30 $ 0.29 — 0.29 $ 0.595 25,377,095 26,387,010 27,235,707 27,334,649 26,589,432 25,933,960 27,175,713 28,300,443 28,551,778 27,496,267 2002 MARCH 31 $19,526 JUNE 30 $16,023 SEPTEMBER 30 $16,208 DECEMBER 31 $17,590 6,286 180 6,466 $ 0.24 0.01 0.25 $ 0.24 0.01 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 11,517 7,882 19,399 $ 0.46 0.31 0.77 $ 0.45 0.31 0.76 $ 0.52 26,376,443 24,775,053 24,974,176 25,173,874 25,320,631 26,786,454 25,252,842 24,974,176 25,684,405 25,806,035 38 Acadia Realty Trust 2003 Annual Report Note 19i Commitments and Contingencies Under various Federal, state and local laws, ordinances and regulations relating to the protection of the envi- ronment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or The Company is involved in various matters of litigation arising in the normal course of business. While the Com- pany is unable to predict with certainty the amounts involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting liability, if any, will not have a significant effect on the Company’s consolidated financial position or results of operations. discharged from, on, at, under, or in a property. As such, Note 20i the Company may be potentially liable for costs associ- ated with any potential environmental remediation at any of its formerly or currently owned properties. The Company conducts Phase I environmental reviews with respect to properties it acquires. These reviews include an investigation for the presence of asbestos, underground storage tanks and polychlorinated biphenyls (PCBs). Although such reviews are intended to evaluate the environmental condition of the subject property as well as surrounding properties, there can be no assurance that the review conducted by the Company will be adequate to identify environmental or other problems that may exist. Where a Phase I assessment so recommended, a Phase II assessment was conducted to further determine the extent of possible environmen- tal 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. The Company believes that it is in compliance in all Subsequent Events In January 2004, the Company formed a joint venture with Klaff Realty, LP (“Klaff”) and Lubert Adler Manage- ment, Inc. for the purpose of making investments in surplus or underutilized properties owned or controlled by distressed retailers. The Company has also acquired Klaff’s rights to provide asset management, leasing, disposition, development and construction services for an existing portfolio of retail properties and/or leasehold interests comprised of approximately 10 million square feet of retail space. The rights were acquired with the issuance of $4.0 million in preferred Operating Partnership units. In January 2004, the Company entered into a forward starting swap agreement which commences April 1, 2005. The swap agreement, which extends through January 1, 2011, provides for a fixed rate of 4.345% on $37,667 of notional principal. In February 2004, the Company entered into three forward starting swap agreements as follows: Commencement Maturity Date Date Notional Principal Rate material respects with all Federal, state and local ordi- 10/2/2006 10/1/2011 $ 11,410 4.895% nances and regulations regarding hazardous or toxic substances. Management is not aware of any environ- mental liability that they believe would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which it would incur significant environ- mental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance 10/2/2006 1/1/2010 4,640 4.710% 6/1/2007 3/1/2012 8,434 5.140% These swap agreements have been executed in con- templation of the finalization of the extension and modification of certain mortgage loans currently being negotiated. that any such non-compliance, liability, claim or expen- On March 11, 2004, the Company invested approximately diture will not arise in the future. $4.1 million in a mortgage loan secured by a shopping center property. Acadia Realty Trust 2003 Annual Report 39 This page left intentionally blank 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570 Pacesetter Park Shopping Center Pomona, NY Village Commons Shopping Center Smithtown, NY Mad River Station Dayton, OH 

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