Unique strategies. Long-term vision. Acadia Realty Trust Annual Report 2004 Financial Highlights 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 69 properties totaling approximately 9.6 million square feet, located primarily in the Northeast, Mid-Atlantic and Midwest United States. In thousands Total Revenues Funds from Operations 2 Real Estate Owned, at Cost Common Shares Outstanding Operating Partnership Units Outstanding 2004 20031 2002 1 2001 1 20001 $ 72,856 $ 30,004 $ 422,177 31,341 $ 67,847 $ 27,664 $ 414,138 27,409 $ 67,055 $ 30,162 $ 400,538 25,257 $ 58,517 $ 13,487 $385,103 28,698 $ 60,628 $ 31,789 $374,422 28,150 392 1,139 3,163 5,250 6,804 1 Amounts for 2000 through 2003 have been restated to reflect the activity and balances from continuing operations only. 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. 2 We 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 analyzing 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 (losses) from sales of depreciated 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 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 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 (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. See Management’s Discussion and Analysis of Financial Condition and Results of Operations – Funds from Operations for the reconciliation of net income to FFO. To Our Shareholders 2004 was a year of significant achievement for Acadia. The following four key components of our business strategy all contributed to our strong performance: ■ Refining and maximizing the value of our portfolio ■ Creating a highly profitable external growth platform ■ Maintaining a solid, safe balance sheet and highly flexible and liquid financial position ■ Assembling a management team with the expertise and Elmwood Park Shopping Center, Elmwood Park, NJ passion to deliver results. Our continuous goal since inception has been to maximize shareholder value through the aggressive implementation of these key areas. Solid Core Portfolio Throughout 2004, we continually refined the composition of our portfolio through the aggressive leasing, redevelopment, and disposition of assets. Our leasing and redevelop- ment team did a tremendous job last year increasing our occupancy by 4.7% to 92.3% — an all-time high for Acadia. Additionally, we were able to improve our same store Net Operating Income (NOI) by 3.9% — a difficult feat given the amount of income in our port- Kenneth F. Bernstein President and CEO Brandywine Town Center, Brandywine, PA folio that is derived from long-term, fixed rate leases. Looking to 2005, we will continue to refine the portfolio by maintaining well located, high barrier-to-entry locations that can drive long-term growth and stability. Acadia Realty Trust 2004 Annual Report Page 1 External Growth Platform One of the fundamental drivers for increasing shareholder value is our ability to increase earnings through profitable external growth initiatives. We are fortunate to have an invest- ment team that has consistently proven themselves as well as institutional investors who believe in our ability to generate superior returns and who provide us access to highly accre- tive, discretionary capital for our acquisition program. In 2004, we launched Acadia Strategic Opportunity Fund II (“Fund II”) with $300M of dis- cretionary equity. Through Fund II, we are focusing on two very important strategic Acadia’s Average Five-Year Total Returns vs. Shopping Center REIT Sector Acadia Peers 40% 35% 30% 25% 20% 15% initiatives. The first is our Urban/In-fill program. Retailers are beginning to recognize that Crescent Plaza, Brockton, MA many of the nation’s urban markets are underserved from a retail standpoint; we aim to capitalize on this trend by investing in redevelopment projects in dense, urban areas where tenant demand has greatly surpassed the supply of available sites. No urban market exem- plifies this supply/demand dynamic more than New York City. Thus in 2004, we teamed up with P/A Associates to launch the New York City portion of our Urban/In-fill platform. Last year we acquired two redevelopments in New York and in 2005 we expect to initiate addi- tional projects that fit our criteria. The second growth vehicle is our Retailer Controlled Property Venture (“RCP Venture”). The goal of this venture is to acquire interests in underlying real estate owned or controlled by Gateway Shopping Center, South Burlington, VT major retailers and working with the retailers to maximize the value of their real estate. The investment community is beginning to realize that some of the most valuable retail real estate is controlled by retailers. Our RCP Venture with Klaff Realty and Lubert-Adler enables us to participate in this highly profitable business. Both our Urban/In-fill program and our RCP Venture were implemented in 2004 and will make important contributions to our bottom line in 2005 and for years to come. Strong Balance Sheet In 2004, we announced a healthy 7.8% dividend increase. Over the past years we have been able to increase our dividend on a cumulative basis, by 44%. In 2004, we continued to main- Safeway Center, San Ramon, CA tain a highly disciplined approach to our capital structure with a debt to market capitalization ratio of 30%. Furthermore, with the anticipation of rising interest rates, we Bloomfield Town Square, Bloomfield Hills, MI increased our fixed rate debt to 94%, while still maintaining an average interest rate of 5.9%. In addition, our liquidity has never been stronger. With lines of credit and access to the dis- cretionary capital available through Fund II, we are very well positioned to move quickly to acquire properties that meet our strict underwriting criteria. Finally and most telling, due to our fiscal discipline, we continue to maintain a conserva- tive dividend payout ratio, giving our investors further assurance that we not only have a high-quality dividend stream, but one with room to grow. Strong Management Team I have always believed that it is extremely critical for any successful company to build a smart, passionate, and expe- rienced management team. When our employees walk into our offices each day, they read a sign that says “integrity, intensity and intelligence.” At Acadia, we foster an environ- ment that not only maximizes performance, but affords our associates the opportunity to learn and grow within the company. I am in awe of the energy and dedication of our team, and honored to lead them. Complementing our strong management team is a New Loudon Center, Latham, NY (suburb of Albany) thoughtful, engaged and very independent board. As a shareholder, I am grateful for the important contribution that each member has made to our success. Last year, Acadia was able to achieve our objectives and as a result, we continued to provide strong results for our shareholders, as evidenced by a total return of 36% in 2004. More importantly, over the past five years, we have been able to generate total returns for our shareholders averaging 37% per year, putting our performance in the upper echelon of the REIT universe. I am extremely proud of our many accomplishments in 2004, and look forward to implementing strategies to continually adapt to the ever- changing retail real estate environment and to create maximum value for our shareholders. On behalf of our team, I would like to thank you for your continued confi- Pacesetter Park Shopping Center, Pomona, NY dence and support. Kenneth F. Bernstein President and CEO Acadia Realty Trust 2004 Annual Report Page 3 Continual refinement and improvement W W e have built a solid portfolio totaling more than 8.4 million square feet of retail assets primarily anchored by necessity-based or value-oriented retail- ers. Our objective is to optimize the portfolio composition with an increasing emphasis on shopping centers located in dense, high barrier-to-entry markets. Over the long-term, those centers situated in highly pop- ulated areas tend to outperform their more rural peers. The overall occupancy rate within our wholly- owned portfolio, at year-end 2004 was 92.3% representing a 4.7% increase in occupancy over the previous year — our highest occupancy level since the formation of Acadia in 1998. During 2004, our occu- pancy gains helped drive our “same store” NOI by almost 4%. Enhancing our core portfolio An example of our 2004 accomplishments in these areas include the redevelopment of our Rocky Hill, Connecticut property as shown below. We replaced a former A & P supermarket at Town Line Plaza with a 66,000 square foot Super Stop & Shop grocery store. Not only did we realize a 28% increase in rent, but also created a much stronger shopping center tenant mix. This 206,000 square foot shopping center is also co- anchored by Wal-Mart. Selective/Opportunistic Disposition In addition to strengthening our portfolio through proactive redevelopment and re-tenanting strategies, when appropriate, we also dispose of assets that no longer fit our portfolio strategy. For example, in 2004, we sold our East End Centre located in Wilkes-Barre, PA Through the strategic refinement of tenant mix, proactive and tenant-driven redevelopments and through selective and opportunistic dispositions, we are con- tinually improving the composition of the portfolio to create the platform for quality-oriented FFO growth. at a 5.6% capitalization rate. The profitable pruning of riskier or low-growth prop- erties helps contribute to both our earnings growth as well as the overall quality of our portfolio. Before Redevelopment After Redevelopment Town Line Plaza, Rocky Hill, CT. Replaced existing anchor with a new 66,000 square foot Super Stop & Shop. Acadia Realty Trust 2004 Annual Report Page 5 Acadia Realty Trust 2004 Annual Report Page 6 Fordham Place — High profile, mixed-use redevelopment in the heart of The Bronx, NY. Urban/In-fill: Stacked in our favor 239 Greenwich Avenue, Greenwich, CT 33,000 square foot multi-level property anchored by Restoration Hardware. Fordham Place, Bronx, NY In September 2004, we purchased 400 East Fordham Road in The Bronx, NY, in conjunction with our partners, P/A Associates. This six-story property, a multi-level retail and commercial building, is located on Fordham Road, the strongest retail market in The Bronx and the third strongest retail market in New York City. The mar- ket boasts over 650,000 people in a two-mile radius and retail sales in excess of $500 million. The property is currently anchored by a Sears department store. We intend to redevelop the property into a multi-level pro- ject including retail and some office, thus creating a dominant retail presence in this vibrant market. Pelham Manor, NY In October of 2004, Acadia signed a long-term ground Abington Towne Center, Philadelphia, PA Multi-level 157,000 square foot Target. O O ne of our key value-added strategies is an excit- ing Urban/In-fill acquisition and redevelopment program. We believe that the redevelopment of high barrier-to-entry, urban real estate provides our investors and shareholders with a very attractive investment opportunity on a risk-adjusted basis. We are targeting the acquisition of those properties where our redevelopment capability provides the opportunity for national, big-box retailers to enter these substan- tially underserved markets. According to the Inter- national Council of Shopping Centers, the average retail square footage per capita in the United States is now in excess of 20 square feet per person. In contrast, the per capita retail square footage in the boroughs of New York is slightly over 5 square feet per capita. National retailers are recognizing that the strong sales potential in these markets outweighs the difficulties in finding locations and doing business in an urban environment, even if they have to compromise on what were previously deemed “sacred” issues, such as parking fields and store configuration. Our competitive advantage in this arena lies in our familiarity with the redevelop- ment process and our tenant relationships. lease to redevelop a 16-acre site currently improved with warehouse space. The property is located on the border of New York City and Westchester County, approxi- mately 10 miles from Manhattan. The redevelopment contemplates demolition of the existing warehouse buildings, which will be replaced by a 200,000+ square foot, multi-anchor community retail center. Pelham Manor Shopping Plaza, Pelham Manor, NY (suburb of NYC). Redevelopment rendering. Rethinking the “big box” + Our RCP venture is an important part of our acquisition strategy RCP AKR ROI [Retailer Controlled Property] [Acadia Realty Trust] [Positive Return on Investment] O O ur second growth strategy, the RCP Venture, formed in 2004 in conjunction with our partners at Klaff Realty and Lubert-Adler, was created to acquire real estate owned by retailers, or jointly developing sites with those retailers in order to maximize value. These opportunities may come from financially healthy retailers or through the bankruptcy process. With the abundance of capital and investor groups competing for stable, cash-flowing shopping centers, strip center prices are continuing to increase, making projected returns less attractive. While there may be too much capital chasing too few deals with respect to shopping centers in general, there are far fewer buyers with the ability and levels of capital necessary to com- pete for the more complex transactions that are characteristic of our RCP Venture. Making opportunistic acquisitions tenant relationships and our redevelopment expertise. Recently, Acadia announced that its RCP Venture was a participant in the acquisition of the 257-store Mervyn’s department store chain from the Target Corporation. We look forward to continuing to grow this platform as certain segments of the retail sector continue to consolidate. As is the case with both our RCP Venture and our Urban/In-fill program, Acadia’s acquisition team prides itself on its ability to uncover unique and highly profitable investment opportunities. Once these oppor- tunities are identified, Acadia’s experienced leasing, construction and redevelopment teams ensure timely and effective execution of these value-added acquisi- tions. Having the ability to identify and execute on these types of investments ensures that Acadia can continue to create long-term We believe that our competitive advantage in this acquisition arena lies in the value even in this highly competitive marketplace. strength and expertise of our joint venture partners, our ability to leverage existing Acadia is a participant in the acquisition of the 257-store Mervyn’s department store chain. The Mervyn’s investment consortium also includes Lubert-Adler, Klaff Realty, Cerberus, and Sun Capital. Acadia completed a $20 million equity investment in a 2.5 million square foot portfolio of properties leased to Levitz Furniture stores. Acadia Realty Trust 2004 Annual Report Page 9 Acadia versus Shopping Center REIT Sector Based on a combination of com- monly used financial metrics, Acadia ranks among the strongest in our peer group. Acadia Peers Acadia Realty Trust 2004 Annual Report Page 10 FFO Payout Ratios Debt Service Coverage Ratio Debt to Total Market Capitalization (includes preferred equity and pro-rata JV debt) 55% 60% 65% 70% 75% 80% 4.0% 3.5% 3.0% 2.5% 2.0% Weaker Stronger 1.5% Weaker Stronger 20% 25% 30% 35% 40% 45% 50% 55% Weaker Stronger Balance Sheet For many years, our strong balance sheet has served as the financial foundation for the successful operation and redevelopment of our core portfolio and as a solid platform providing ample capital for our external growth initiatives. In 2004, we further strengthened our balance sheet, which was already one of the strongest in our peer group. Proactive Management of Debt Our balance sheet continues to benefit from our disci- plined and forward-thinking use of debt. Given historically low long-term interest rates and a clear risk of rising rates in the future, we significantly reduced our variable-rate debt exposure and extended the maturities of our fixed-rate debt at favorable rates dur- Delivering disciplined growth market capitalization was 39% — now it is 30%. Another important industry leverage ratio is fixed charge cover- age (EBITDA/interest rate expense and preferred distributions). Ours is among the highest in our peer group at 3.2 times. Access to Equity In 2004, we accessed the public capital markets for approximately $28 million. We believe that it is prudent to be extremely disciplined in this area. We have also found that utilizing our strong institutional capital rela- tionships can enable us to leverage our shareholder equity much more effectively than if we were to rely solely on public capital sources. In 2004, we launched our second acquisition joint venture, Fund II, with an additional $240 million of institutional capital and $60 ing 2004. We accomplished this while maintaining a low average cost of portfolio million of internal capital. Having alternative sources of equity enables us to access debt, below 6%. sufficient equity to fuel our future growth. We have made significant progress since 2000, when our variable rate debt exceeded 25% of our total market capitalization. At the beginning of 2004, it was 6% — now it is only 2%. This very low exposure protects us from the potential earn- ings impact associated with rising rates. We accomplished this by locking in favorable long-term rates and extending maturities on $109 million, or 51% of our debt portfolio, inclusive of our pro-rata share of joint venture debt and interest rate swaps. At the beginning of 2004, our average maturity was four years — now it is seven years. In 2001, our ratio of debt to total market capitalization reached a high of 55%. We have since decreased this to almost half. At the beginning of 2004 our debt to total Maintaining a Safe and Growing Dividend Our conservative dividend policy has been essential to our continued financial strength and to our shareholders. Commencing for the fourth quarter of 2004, we raised our dividend 7.8%. More importantly, we have been able to grow our dividend by over 44%, on a cumulative basis, over the past three fiscal years, while continu- ously maintaining a conservative payout ratio. In terms of our debt and equity structure as well as our prudent dividend policy, 2004 saw our already strong balance sheet become stronger than ever. Common and Preferred O.P. Units1 Variable-Rate Debt 1%2% Fixed-Rate Debt2 27% Maintaining a strong balance sheet. 70% Common Shares 1 In connection with the acquisition of the Pacesetter Park Shopping Center in 1999, the Company issued 2,212 Preferred OP Units, of which 632 have been converted to Common OP Units to date. The remaining Preferred OP Units are reflected above at their stated cost of $1,000 per unit. Also includes $4,000 of Preferred OP Units issued to Klaff L.P. related to the acquisition of management contracts. 2Fixed-rate debt includes notional principal fixed through interest rate swap transactions and conversely, variable-rate debt excludes this amount. WA OR CA MN MI IL IN OH VT MA CT RI NY NJ DE Headquarters Regional Offices Core Properties RCP Properties (Levitz) Fund Properties Kroger/Safeway Properties PA VA NC SC AZ AR Blackman Plaza Wilkes-Barre, PA Bradford Towne Centre Towanda, PA Fund Properties Brandywine Town Center Wilmington, DE Acadia Locations Core Properties 239 Greenwich Avenue Greenwich, CT Bartow Avenue Bronx, NY Marketplace of Absecon Absecon, NJ Town Line Plaza Rocky Hill, CT Hobson West Plaza Naperville, IL Merrillville Plaza Hobart, IN Crescent Plaza Brockton, MA Methuen Shopping Center Methuen, MA Bloomfield Town Square Bloomfield Hills, MI Berlin Shopping Center Berlin, NJ Elmwood Park Shopping Center Elmwood Park, NJ Ledgewood Mall Ledgewood, NJ The Branch Plaza Smithtown, NY New Loudon Center Latham, NY Pacesetter Park Shopping Center Pomona, NY Greenridge Plaza Scranton, PA Luzerne Street Shopping Center Scranton, PA Mark Plaza Edwardsville, PA Soundview Marketplace Port Washington, NY Pittston Plaza Pittston, PA Village Commons Shopping Center Smithtown, NY Crossroads Shopping Center White Plains, NY Mad River Station Dayton, OH Abington Towne Center Abington, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Walnut Hill Plaza Woonsocket, RI The Gateway Shopping Center South Burlington, VT Market Square Shopping Center Wilmington, DE Sterling Heights Shopping Center Sterling Heights, MI Fordham Place Bronx, NY Pelham Manor Shopping Plaza Pelham, NY Tarrytown Centre Tarrytown, NY Amherst Marketplace Amherst, OH Granville Center Columbus, OH Sheffield Crossing Sheffield, OH Roswell, NM Roanoke, VA Ruidoso, NM Shreveport, LA San Ramon, CA Wichita, KS (2 stores) Springerville, AZ Tucson, AZ Tulsa, OK Headquarters White Plains, NY Regional Offices Dayton, OH Edwardsville, PA Woonsocket, RI Hitchcock Plaza Aiken, SC Haygood Shopping Center Virginia Beach, VA Kroger/Safeway Locations Cary, NC Atlanta, TX Cincinnati, OH Batesville, AR Conroe, TX Benton, AR Great Bend, KS Carthage, TX Hanrahan, LA Little Rock, AR Indianapolis, IN Longview, WA Irving, TX Mustang, OK Pratt, KS Trustees and Officers Trustees Kenneth F. Bernstein President and Chief Executive Officer Douglas Crocker II Former Chief Executive Officer, Equity Residential Alan S. Forman Director of Investments Office Yale University Suzanne M. Hopgood President and Chief Executive Officer The Hopgood Group, LLC Lorrence T. Kellar Vice President of Retail Development, Continental Properties Wendy Luscombe President and CEO WKL Associates, Inc. Lee S. Wielansky (Lead Trustee) Chairman of the Board and Chief Executive Officer, Midland Development Group Inc. Senior Officers Kenneth F. Bernstein President and Chief Executive Officer Joel Braun Sr. Vice President, Chief Investment Officer Joseph Hogan Sr. Vice President, Director of Construction Robert Masters, Esq. Sr. Vice President, General Counsel and Corporate Secretary Joseph M. Napolitano Sr. Vice President, Director of Operations Michael Nelsen Sr. Vice President, Chief Financial Officer Joseph Povinelli Sr. Vice President, Director of Leasing Shareholder Information Corporate Headquarters Acadia Realty Trust 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Legal Counsel Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Internet Address Visit us online at www.acadiarealty.com for more information about Acadia Realty Trust and its real estate portfolio. The 2004 Annual Report is available online, as well as current news and quarterly financial and operational supplementary information. Annual Meeting Acadia’s Board of Trustees has scheduled the Annual Shareholders Meeting for Wednesday, May 18, 2005 at 9:30 AM, local time, to be held at the offices of Paul, Hastings, Janofsky & Walker, LLP, Park Avenue Tower, 75 East 55th Street, New York, NY 10022. The record date for determi- nation of shareholders entitled to vote is March 31, 2005. Independent Auditors Ernst & Young LLP 5 Times Square New York, NY 10036 Stock Exchange NYSE: AKR The Company has filed the Section 302 certifications as an exhibit to its Form 10-K, and the Chief Executive Officer has provided the annual certification to the NYSE. Transfer Agent and Registrar American Stock Transfer & Trust Company 59 Maiden Lane Plaza Level New York, NY 10038 Tel: 877.777.0800 website: www.amstock.com email: info@amstock.com Investor Relations Jon Grisham Vice President Chief Accounting Officer Tel: 914.288.8100 email: jgrisham@acadiarealty.com A copy of the Company’s annual report and Form 10-K filed with the Securities and Exchange Commission may be obtained without charge by contacting Investor Relations. Dividend Reinvestment Acadia Realty Trust offers a divi- dend reinvestment plan that enables its shareholders to auto- matically reinvest dividends as well as make voluntary cash payments toward the purchase of additional shares. To participate, contact Acadia Realty Trust’s dividend reinvestment agent at 800.937.5449 ext.6820 or write to: American Stock Transfer & Trust Company Attn: Dividend Reinvestment Dept. 59 Maiden Lane Plaza Level New York, NY 10038 For further information contact Investor Relations. 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Unique strategies. Long-term vision. Acadia Realty Trust. Selected Financials 2004 Contents 1 Management’s Discussion and Analysis 15 Reports of Independent Registered Public Accounting Firm 17 Consolidated Balance Sheets 18 Consolidated Statements of Income 20 Consolidated Statements of Shareholders’ Equity 21 Consolidated Statements of Cash Flows 23 Notes to Consolidated Financial Statements Management’s Discussion and Analysis Financial Condition and Results of Operations The following discussion should be read in conjunction with the consolidated financial statements of the Company (including the related notes thereto) appear- ing elsewhere in this Annual Report. Certain statements contained in this Annual Report may contain forward- looking statements within the meaning of Section 27A • 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. of the Securities Act of 1933 and Section 21E of the Secu- • Pursue above-average returns though a disciplined rities and Exchange Act of 1934 and as such may involve and opportunistic acquisition program. The primary known and unknown risks, uncertainties and other factors which may cause our actual results, perform- ance or achievements to be materially different from conduits for the Company’s acquisition program are through its existing acquisition joint ventures, Acadia Strategic Opportunity Fund, LP (“Fund I”) and Acadia future results, performance or achievements expressed Strategic Opportunity Fund II, LLC (“Fund II”), as well as or implied by such forward-looking statements. For- ward-looking statements, which are based on certain the Retailer Controlled Property Venture (“RCP Venture”) established to invest in surplus or underutilized prop- assumptions and describe the Company’s future plans, erties owned or controlled by retailers and the New York strategies and expectations are generally identifiable by Urban Infill Redevelopment initiative which focuses on use of the words “may,”“will,”“should,”“expect,”“antici- investing in redevelopment projects in urban, dense pate,”“estimate,”“believe,”“intend” or “project” or the areas where retail tenant demand has effectively sur- negative thereof or other variations thereon or compa- passed the supply of available sites. rable terminology. Factors which could have a material • Maintain a strong balance sheet, which provides the adverse effect on the operations and future prospects Company with the financial flexibility to fund both of the Company include, but are not limited to, those property redevelopment and acquisition opportunities. set forth under the heading “Risk Factors” in the Company’s Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorpo- rated by reference herein. Overview The Company currently operates 69 properties, which it Results of Operations Comparison of the year ended December 31, 2004 (“2004”) to the year ended December 31, 2003 (“2003”) Total revenues increased $5.0 million to $72.8 million for 2004 compared to $67.8 million for 2003. owns or has an ownership interest in, consisting of 64 Minimum rents increased $2.6 million, or 5%, to $51.5 neighborhood and community shopping centers, one million for 2004 compared to $48.9 million for 2003. This shopping center under development, one enclosed mall, increase was attributable to an increase in rents follow- one mixed-use property (retail/residential) and two ing the redevelopment of the Gateway shopping center multi-family properties, which are located primarily in in 2003 and an increase in rents from re-tenanting activ- the Northeast, Mid-Atlantic and Midwestern regions of ities as well as increased occupancy across the portfolio. the United States and, in total, comprise approximately 9.6 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 $0.1 million, or 1%, from $13.2 million for 2003 to $13.3 million for 2004. Real estate tax reimbursements increased $0.4 million primarily as a result of general increases in real estate taxes as well as re-tenanting activities throughout the The Company focuses on three primary areas in execut- portfolio. Common area maintenance (“CAM”) expense ing its business plan as follows: reimbursements decreased $0.3 million, or 4%, from Acadia Realty Trust 2004 Annual Report 1 Management’s Discussion and Analysis continued $6.4 million in 2003 to $6.1 million in 2004. This resulted 2004. Depreciation expense decreased $2.5 million. primarily from tenant reimbursements of lower snow This was a result of the write-off of $2.7 million of removal costs in 2004 offset by increased tenant reimburse- unamortized tenant improvement costs related to the ments following re-tenanting activities across the portfolio. buyout and termination of the former anchor at the Management fee income increased $2.8 million, or 142%, to $4.8 million in 2004 from $2.0 million in 2003. This was the result of asset management fees from Fund II and an increase in management fees related to the acquisi- tion of certain management contract rights in 2004. Town Line Plaza redevelopment project in 2003. This decrease was offset by increased depreciation expense in 2004 following the Gateway redevelopment project being placed in service during the second quarter of 2003. Amortization expense increased $0.8 million pri- marily as a result of the amortization of investment in Interest income increased in 2004 by $0.7 million. This management contracts in 2004. net change was a combination of additional interest income on the Company’s advances and notes receiv- able originated in 2004 offset by lower interest earning cash deposits in 2004. Interest expense of $10.4 million for 2004 increased $0.5 million, or 5%, from $9.9 million for 2003. This was primarily attributable to an increase of $0.4 million as a result of higher average interest rates on the portfolio Other income decreased $1.0 million, from $1.2 million debt for 2004 and a decrease of $0.1 million in capital- in 2003 to $0.2 million in 2004. This was primarily due ized interest in 2004. 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. Income from discontinued operations increased $6.6 million due to a property sale in 2004. Total operating expenses decreased $1.2 million, or 2%, to $50.1 million for 2004, from $51.3 million for 2003. Property operating expenses increased $0.2 million, or Comparison of the year ended December 31, 2003 (“2003”) to the year ended December 31, 2002 (“2002”) Total revenues increased $0.8 million to $67.8 million 1%, to $14.9 million for 2004 compared to $14.7 million for 2003 compared to $67.0 million for 2002. for 2003. This was a result primarily of a non-recurring charge of approximately $0.7 million related to flood damage at the Mark Plaza in 2004 offset by higher snow removal costs during 2003. Minimum rents increased $2.3 million, or 5%, to $48.9 million for 2003 compared to $46.6 million for 2002. This increase was attributable to an increase in rents following the redevelopment of the Elmwood Real estate taxes increased $0.5 million, or 7%, from Park and Gateway shopping centers and an increase $8.5 million in 2003 to $9.0 million in 2004. This increase in rents from re-tenanting activities and renewals of was primarily attributable to a real estate tax refund tenant leases across the portfolio. These increases received in 2003 related to the appeal of taxes paid were partially offset by a decrease in rents following in prior years at the Greenridge Plaza and higher real Ames Department Stores’ bankruptcy. estate taxes throughout the portfolio in 2004. In total, expense reimbursements increased $2.2 million, General and administrative expense decreased $0.2 or 20%, from $11.0 million for 2002 to $13.2 million for million, or 2%, from $10.7 million for 2003 to $10.5 mil- 2003. CAM expense reimbursements increased $1.7 lion for 2004. This decrease was primarily the result of million, or 38%, from $4.5 million in 2002 to $6.2 million certain employee termination costs and the Company’s in 2003. This resulted primarily from tenant reimburse- capitalization of internal leasing costs in 2004 offset by ments of higher snow removal costs following the harsh additional professional fees related to Sarbanes-Oxley winter of 2003 as well as tenant reimbursements of compliance in 2004. Depreciation and amortization decreased $1.7 million, or 10%, from $17.4 million for 2003 to $15.7 million for higher insurance costs throughout the portfolio. Real estate tax reimbursements increased $0.5 million primarily as a result of the variance in real estate tax expense as discussed below. 2 Acadia Realty Trust 2004 Annual Report Lease termination income of $3.9 million in 2002 was Depreciation and amortization increased $3.2 million, primarily the result of the settlement of the Company’s or 22%, from $14.2 million for 2002 to $17.4 million for claim against a former tenant. 2003. Depreciation expense increased $3.6 million. This Management fee income increased $0.7 million, or 50%, to $2.0 million in 2003 from $1.3 million in 2002. This increase was the result of an increase in management fee income received from Fund I in 2003 as a result of the acquisition of the Ohio Portfolio in September 2002 and the Brandywine and Kroger/Safeway Portfolios in January of 2003. 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 Plaza redevelopment project. In addition, depreciation 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. Amor- Interest income decreased $1.3 million, or 62%, from tization expense decreased $0.4 million, which was pri- $2.1 million in 2002 to $0.8 million in 2003. This marily attributable to the write-off of deferred leasing decrease was attributable to a decrease in interest costs during 2002 related to certain tenant leases. income during 2003 due to lower interest earning assets, including cash investments and notes receivable, as well as the decline in interest rates. Interest expense of $9.9 million for 2003 increased $0.2 million, or 2%, from $9.7 million for 2002. This was primarily attributable to a decrease of $0.5 million in Other income increased $0.7 million, or 141%, to $1.2 mil- capitalized interest in 2003 and a $0.2 million increase lion in 2003 from $0.5 million in 2002. This was prima- in interest expense as a result of higher average interest rily due to a lump sum additional rent payment of $1.2 rates on the portfolio debt for 2003. These increases million received from a former tenant during 2003 in were offset by a $0.5 million decrease resulting from connection with the re-anchoring of the Branch Plaza lower average outstanding borrowings during 2003. partially offset by the settlement of claims against cer- tain tenants in 2002. Total operating expenses increased $6.6 million, or 15%, to $51.3 million for 2003, from $44.7 million for 2002. Property operating expenses increased $2.8 million, or 23%, to $14.7 million for 2003 compared to $11.9 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 $0.4 million, or 5%, from $8.1 million in 2002 to $8.5 million in 2003. This increase was attributable to higher real estate taxes experienced generally throughout the portfolio and a 2002 adjustment of accrued real estate taxes for an acquired property. These increases were primarily offset by a real estate tax refund agreed to in 2003 related to the appeal of taxes paid in prior years at the Greenridge Plaza. General and administrative expense increased $0.5 mil- lion, or 6%, from $10.2 million for 2002 to $10.7 million for 2003. This increase was primarily attributable to stock-based compensation. These increases were offset by additional costs paid in 2002 related to the Company’s tender offer and repurchase of its Common Shares. Income from discontinued operations decreased $8.6 million due to property sales in 2002. Funds from Operations The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate sup- plemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is pre- sented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of cal- culating 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 gener- ated 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 alter- native to net income for the purpose of evaluating the Acadia Realty Trust 2004 Annual Report 3 Management’s Discussion and Analysis continued Company’s performance or to cash flows as a measure depreciated property, plus depreciation and amortiza- of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of tion, and after adjustments for unconsolidated partner- ships and joint ventures. The reconciliations of net income to FFO for the years ended December 31, 2004, 2003, 2002, 2001 and 2000 are as follows: Reconciliation of Net Income to Funds from Operations Net income Depreciation of real estate and amortization of leasing costs: Wholly owned and consolidated partnerships Unconsolidated partnerships Income attributable to minority interest in operating partnership1 (Gain) loss on sale of properties Cumulative effect of change in accounting principle YEARS ENDED DECEMBER 31, 2004 $ 19,585 2003 $ 7,853 2002 $19,399 2001 $ 9,802 2000 $19,907 14,411 2,329 375 (6,696) — 16,957 2,107 747 — — 15,305 662 2,928 (8,132) — 18,422 627 2,221 (17,734) 149 19,325 625 5,674 (13,742) — Funds from operations $30,004 $27,664 $ 30,162 $13,487 $ 31,789 Notes: 1Represents income attributable to Common Operating Partnership (“OP”) Units and does not include distributions paid to Series A and B Preferred OP Unitholders. Liquidity and Capital Resources Uses of Liquidity The Company’s principal uses of its liquidity are Acadia Strategic Opportunity Fund, LP (“Fund I”) 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 expected to be for distributions to its shareholders $70.0 million, for the purpose of acquiring a total and OP unitholders, debt service and loan repayments, of approximately $300.0 million of community and and property investment which includes the funding neighborhood shopping centers on a leveraged basis. of its joint venture commitments, acquisition, rede- velopment, expansion and re-tenanting activities. Distributions The Company is the manager and general partner of Fund I with a 22% interest. In addition to a pro-rata return on its invested equity, the Company is entitled In order to qualify as a REIT for Federal income tax pur- to a profit participation based upon certain investment poses, the Company must currently distribute at least return thresholds. Cash flow is to be distributed pro- 90% of its taxable income to its shareholders. For the rata to the partners (including the Company) until they first three quarters during 2004, the Company paid a have received a 9% cumulative return on, and a return quarterly dividend of $0.16 per Common Share and of all capital contributions. Thereafter, remaining cash Common OP Unit. In December of 2004, the Board of flow is to be distributed 80% to the partners (including Trustees approved and declared a 7.8% increase in the the Company) and 20% to the Company. The Company Company’s quarterly dividend to $0.1725 per Common also earns a fee for asset management services equal Share and Common OP Unit for the fourth quarter of to 1.5% of the total equity commitments, as well as 2004 which was paid January 14, 2005. On February 4, market-rate fees for property management, leasing 2005, the Board of Trustees approved and declared a and construction services. quarterly dividend of $0.1725 per Common Share and Common OP Unit payable April 15, 2005 to shareholders and OP unitholders of record as of March 31, 2005. To date, Fund I has purchased a total of 35 assets totaling 2.7 million square feet. Details of these are as follows: 4 Acadia Realty Trust 2004 Annual Report 2004 Acquisitions On March 11, 2004, Fund I, in conjunction with the Com- Shopping Center for an aggregate investment of $3.2 million. These assets are part of the portfolio that the pany’s long-time investment partner, Hendon Properties Company currently manages as a result of its January (“Hendon”), purchased a $9.6 million first mortgage 2004 acquisition of certain management contracts. loan from New York Life Insurance Company for $5.5 The Haygood Shopping Center is a 165,000 square foot million. The loan, which was secured by a 235,000 shopping center located in Virginia Beach, Virginia. It is square foot shopping center in Aiken, South Carolina, currently 69% occupied and anchored by Rose’s Depart- was in default at acquisition. Fund I and Hendon ment Store and Eckerd Drug. Redevelopment of this acquired the loan with the intention of pursuing own- property will most likely include the replacement of ership of the property securing the debt. Fund I pro- Rose’s with a new supermarket anchor. The Sterling vided 90% of the equity capital and Hendon provided Heights Shopping Center, located in Sterling Heights, the remaining 10% of the equity capital used to acquire Michigan (suburb of Detroit), totals 141,000 square feet. the loan. Hendon is entitled to receive profit participa- The property is also 69% occupied and is anchored by tion in excess of its proportionate equity interest. The Burlington Coat Factory. Redevelopment activities will property is currently anchored by a Kroger supermarket include the complete renovation of the property and and was only 56% occupied at acquisition due to the the re-leasing of the current vacancy. vacancy of a former Kmart store. Subsequent to the acquisition of the loan, Fund I and Hendon obtained fee title to this property and currently plan to redevelop and re-anchor the center. The Company loaned $3.2 mil- lion to the property-owning entity in connection with the purchase of the first mortgage loan. The note 2003 and 2002 Acquisitions Brandywine Portfolio In January of 2003, Fund I acquired a major open-air retail complex located in Wilmington, Delaware. The approximately 1.0 million square foot value-based retail complex consists of matures March 9, 2006, and bears interest at 7% for the the following two properties: first year and 6% for the second year. In addition to its loan to Fund I, the Company invested $0.9 million, pri- marily its pro-rata share of equity as a partner in Fund I. In September 2004, Fund I and Hendon purchased the Pine Log Plaza for $1.5 million. The 35,000 square foot center is located in front of and adjacent to the Hitch- cock Plaza. Related to this transaction, the Company provided an additional $0.75 million loan to Fund I with a March 2006 maturity and interest at 7% for the first year and 6% for the second year. In May 2004, Fund I and an unaffiliated partner, each with a 50% interest, acquired a 35,000 square foot shopping center in Tarrytown, New York, for $5.3 million. Related to this acquisition, the Company loaned $2.0 million to Fund I which bears interest at the prime rate and matures May 2005. The 35,000 square foot, Westch- ester, New York property (New York City MSA), was for- merly anchored by a 25,000 square foot Grand Union supermarket. The redeveloped property will include a 15,000 square foot Walgreen’s drugstore, a 10,000 square foot junior anchor with the balance of space leased to shop tenants. In May 2004, Fund I acquired a 50% interest in the Haygood Shopping Center and the Sterling Heights Market Square Shopping Center is a 103,000 square foot community shopping center (including a 15,000 square foot outparcel building) which is 100% leased and anchored by a T.J. Maxx and a Trader Joe’s gourmet 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 100% 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 and Bombay occupies 9,000 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. Fund I 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 Acadia Realty Trust 2004 Annual Report 5 Management’s Discussion and Analysis continued by Fund I, of which the Company’s share was $4.3 million. Kroger/Safeway JV partners until they have received an Fund I will also pay additional amounts in conjunction 11% cumulative return and a full return of all contributions. with the lease-up of the current vacant space in Phase II Thereafter, remaining cash flow is to be distributed 75% (the “Earn-out”). To date, Fund I has incurred costs of to Fund I and 25% to AmCap. The Kroger/Safeway JV $20.6 million for Earn-out space. The additional invest- agreement also provides for additional allocations of ment for Earn-out space is projected to be between cash based on Fund I achieving certain minimum invest- $25.0 million and $30.0 million, of which the Company’s ment returns to be determined on a “look-back” basis. share would be between $5.5 million and $6.6 million. To the extent Fund I places additional mortgage debt upon the lease-up of Phase II, the required equity con- tribution for the Earn-out would be less. The Earn-out is structured such that Fund I has no time requirement or payment obligation for any portion of currently vacant space which it is unable to lease. Ohio Portfolio In September of 2002, Fund I acquired three supermarket-anchored shopping centers located in Cleveland and Columbus, Ohio for a total purchase price of $26.7 million. Fund I assumed $12.6 million of fixed-rate debt on two of the properties at a blended rate of 8.1%. A new $6.0 million loan was obtained on the third property at a floating rate of LIBOR plus 200 Kroger/Safeway Portfolio In January of 2003, Fund I basis points. The balance of the purchase price was formed a joint venture (the “Kroger/Safeway JV”) with funded by Fund I, of which the Company’s share was an affiliate of real estate developer and investor AmCap $1.8 million. Incorporated (“AmCap”) for the purpose of acquiring a portfolio of 25 supermarket leases. The portfolio, which aggregates approximately 1.0 million square feet, consists of 25 anchor-only leases with Kroger (12 leases) and Safe- way supermarkets (13 leases). The majority of the proper- ties are free-standing and all are triple-net leases. The Kroger/Safeway JV acquired the portfolio subject to 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 base rental options for the supermarket leases at the end of their primary lease term in approximately 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. Fund I 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 6 Acadia Realty Trust 2004 Annual Report Acadia Strategic Opportunity Fund II, LLC (“Fund II”) On June 15, 2004, the Company closed its second acqui- sition fund, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), which includes all of the investors from Fund I as well as two new institutional investors. With $300 million of committed discretionary capital, Fund II expects to be able to acquire up to $900 million of real estate assets on a leveraged basis. The Company is the managing member with a 20% interest in the joint ven- ture. The terms and structure of Fund II are substan- tially the same as Fund I with the exceptions that the preferred return is 8% and the asset management fee is calculated on committed equity of $250 million through June 15, 2004 and then on the total committed equity of $300 million thereafter. To date, Fund II has invested in the RCP Venture and the New York Urban Infill Rede- velopment initiative as discussed below. New York Urban Infill Redevelopment Initiative Fordham Road On September 29, 2004, in conjunction with an investment partner, P/A Associates, LLC (“P/A”), Fund II purchased 400 East Fordham Road in the Bronx, New York for $30.2 million, inclusive of closing and other related acquisition costs. The Company had provided a bridge loan of $18.0 million to Fund II on market terms in connection with this acquisition. Subsequent to the acquisition, Fund II repaid this loan from the Company with $18.0 million of proceeds from a new loan from a bank. The property, a multi-level retail and commercial building, is located at the intersection of East Fordham Venture is expected to be approximately $300 million in Road and Webster Avenue, near Fordham University, equity based on anticipated investments of approximately one of the strongest retail areas in The Bronx and the $1 billion. Each participant in the RCP Venture has the right third largest retail corridor in New York City, with over to opt out of any potential investment. The Company and 650,000 people in a two-mile radius and retail sales in its current acquisition funds, Funds I and II, anticipate excess of $500 million. Sears is the major tenant of the investing 20% of the equity of the RCP Venture. Cash property, retailing on four levels. The redevelopment of flow is to be distributed to the partners until they have the property is scheduled to commence in 2007 follow- received a 10% cumulative return and a full return of all ing the expiration of the Sears lease, which was originally contributions. Thereafter, remaining cash flow is to be signed in 1964. However, depending on current negotia- distributed 20% to Klaff (“Klaff’s Promote”) and 80% to tions with both Sears and other potential anchors, the the partners (including Klaff). The Company will also timeframe of the redevelopment may be accelerated. The earn market-rate fees for property management, leasing strength of the retail market in The Bronx is evidenced and construction services on behalf of the RCP Venture. by core retail rents exceeding $75 per square foot with many retailers utilizing multi-level formats. As part of the redevelopment, there is the potential for additional expansion of up to 85,000 square feet of space. The total cost of the redevelopment project, including the acquisition cost of $30 million, is estimated to be between $65 and $70 million, depending on the ultimate scope of the project. In September 2004, the Company made its first RCP Venture investment with its participation in the acqui- sition of Mervyn’s. Affiliates of Funds I and Fund II, through separately organized, newly formed limited liability companies on a non-recourse basis, invested in the acquisition of Mervyn’s from the Target Corporation through the RCP Venture, as part of an investment consortium of Sun Capital and Cerberus. The total Pelham Manor On October 1, 2004, Fund II initiated its acquisition price was approximately $1.2 billion subject second urban/infill project in conjunction with P/A. to debt of approximately $800.0 million. Affiliates of Fund II entered into a 95-year ground lease to redevelop Funds I and II invested equity aggregating $23.2 million a 16-acre site in Pelham Manor, Westchester County, on a non-recourse basis which was divided equally New York. The property is in an upper middle-income, between them, of which $4.9 million was the Company’s infill neighborhood located approximately 10 miles total share of the equity investment. Mervyn’s is a 257- from Manhattan with over 400,000 people in a three- store discount retailer with a very strong West Coast mile radius. The redevelopment contemplates the concentration. The majority of the stores are well- demolition of the existing industrial and warehouse located in high-barrier to entry markets, which we buildings, and replacing them with a multi-anchor believe gives a recapitalized and refocused operator community retail center. The Company anticipates the the opportunity to create a productive retail platform redevelopment to cost between $30 and $33 million, and subsequent future value. with construction anticipated to commence within the next 12 to 24 months. In the interim, the property will continue to be operated as an industrial and warehouse facility. Prior to commencement of the redevelopment process, the ground rent payment is projected to equal the warehouse rents collected. Other Investments In January 2004, the Company 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 RCP Venture with Klaff Realty, L.P. (“Klaff”) On January 27, 2004, the Company entered into the retail space located throughout the United States (the “Klaff Properties”). The acquisition involves only Klaff’s Retailer Controlled Property Venture (the “RCP Venture”) rights associated with operating the Klaff Properties with Klaff and Klaff’s long-time capital partner Lubert- and does not include equity interests in assets owned Adler Management, Inc. (“Lubert-Adler”) for the purpose by Klaff or Lubert-Adler. The Operating Partnership of making investments in surplus or underutilized issued $4.0 million of Series B Preferred OP Units to properties owned by retailers. The initial size of the RCP Klaff in consideration of this acquisition. Acadia Realty Trust 2004 Annual Report 7 Management’s Discussion and Analysis continued On March 18, 2004, the Company provided a $3.0 mil- a 15% increase over that of Ames. During 2004, Marshall’s, lion mezzanine loan to an unrelated entity. The loan is an existing tenant at the center, expanded its current for a term of three years with interest of 11% for year 26,000 square foot store to 37,000 square feet. The one, 10% for year two and prime plus 6% for year three. Company also installed a new 49,000 square foot On April 8, 2004, the Company provided a $3.6 million mezzanine loan to an unrelated party. The loan carried interest at the rate of 15%. The loan was paid in full on June 23, 2004, which resulted in an additional 10% Raymour and Flanigan Furniture store at this center during 2004. This community shopping center is now 100% occupied. Costs incurred by the Company for this project totaled $418,000. interest pre-payment penalty over the period the loan The Company has re-anchored the Town Line Plaza, was outstanding. The Company provided a $3.2 million loan to its joint venture partner in the Tarrytown Centre. The loan matures on May 12, 2005, and bears interest at the prime rate. located in Rocky Hill, Connecticut, with a new Super Stop & Shop supermarket, replacing a former GU Markets supermarket. The former building was demolished and replaced with a 66,000 square foot Super Stop & Shop. The new supermarket anchor is paying gross rent at a 33% increase over that of the former tenant with no In March of 2005, the Company invested $20 million interruption in rent payments. Costs incurred by the in a preferred equity position (“Preferred Equity”) with Company for this project totaled $1.7 million. Levitz SL, L.L.C. (“Levitz SL”), the owner of 2.5 million square feet of fee and leasehold interests in 30 locations (the “Properties”), the majority of which are currently leased to Levitz Furniture Stores. Klaff is a managing member of Levitz SL. The Preferred Equity receives a return of 10%, plus a minimum return of capital of $2 million per annum. At the end of 12 months, the rate of return will be reset to the six-month LIBOR plus 644 basis points. The Preferred Equity is redeemable at the option of Levitz SL at any time, although if redeemed during the first 12 months, the redemption price is equal to the outstanding amount of the Preferred Equity, plus the return calculated for the remainder of the 12-month period. 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 2004, the Company substantially completed the redevelop- ment of two shopping centers as follows: Additionally, for the year ending December 31, 2005, the Company currently estimates that capital outlays of approximately $4.0 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 addi- tion 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 14, 2005, the Company had repurchased 2.1 mil- lion Common Shares at a total cost of $11.7 million of During 2004, the Company completed the redevelop- which 1.4 million of these Common Shares have been ment of the New Loudon Center, located in Latham, subsequently reissued. The program may be discontin- New York. A new anchor, The Bon Ton Department Store, ued or extended at any time and there is no assurance opened for business during the fourth quarter of 2003 that the Company will purchase the full amount author- as part of the redevelopment of this shopping center. ized. There were no Common Shares repurchased by the Occupying 66,000 square feet formerly occupied by an Company during the fiscal year ended December 31, 2004. Ames department store, Bon Ton is paying base rent at 8 Acadia Realty Trust 2004 Annual Report Sources of Liquidity The Company intends on using Funds I and II as the primary The following summarizes the financing and refinanc- ing transactions since December 31, 2003: vehicles for future acquisitions, including investments in In January 2004, the Company entered into a forward the RCP Venture and New York Urban-Infill redevelopment starting swap agreement which commences April 1, initiative. Sources of capital for funding the Company’s 2005. The swap agreement, which extends through joint venture commitments, other property acquisitions, January 1, 2011, provides for a fixed rate of 4.345% on redevelopment, expansion and re-tenanting, as well as $37.7 million of notional principal. future repurchases of Common Shares are expected to be obtained primarily from issuance of public equity or debt instruments, cash on hand, additional debt financings and future sales of existing properties. As of December 31, 2004, the Company had a total of approximately $33.4 million of additional capacity with four line of credit facil- ities, cash and cash equivalents on hand of $13.5 million, and 15 properties that are unencumbered and available In February 2004, the Company entered into three for- ward starting swap agreements as follows: Commencement Maturity Date 10/2/2006 Date 10/1/2011 10/2/2006 1/1/2010 6/1/2007 3/1/2012 Notional Principal Rate $11.4 million 4.895% 4.710% $4.6 million $8.4 million 5.140% as potential collateral for future borrowings. The Company On March 11, 2004, the Company drew down $4.5 million anticipates that cash flow from operating activities will under an existing $20.0 million revolving facility and $4.5 continue to provide adequate capital for all debt service million under an existing $7.4 million revolving facility. payments, recurring capital expenditures and REIT distri- bution requirements. Issuance of Equity During November 2004, the Company issued 1,890,000 Common Shares (the “Offering”). The $28.3 million in pro- ceeds to the Company from the Offering, net of related costs, were used to retire above-market, fixed-rate indebt- edness as well as to invest in real estate assets. Financing and Debt At December 31, 2004, mortgage notes payable aggre- On March 26, 2004, the Company paid down $10.4 million and modified and extended $40.0 million of an existing $50.4 million loan with a bank. The loan, secured by two of the Company’s properties, now matures April 1, 2011 and requires the monthly payment of interest at LIBOR plus 150 basis points and principal amortized over 30 years. On April 19, 2004, a $1.4 million letter of credit was placed with a lender in the Company’s name. This letter of credit was necessary to maintain coverage ratios following the rejection of a tenant’s lease at a Fund I property. gated $153.4 million and were collateralized by 16 prop- During the second quarter of 2004, the Company drew erties and related tenant leases. Interest rates on the down an additional $8.0 million under an existing Company’s outstanding mortgage indebtedness ranged $20.0 million revolving facility and an additional $2.5 from 3.8% to 7.6% with maturities that ranged from million under an existing $7.4 million revolving facility. July 2007 to September 2014. Taking into consideration The balances on these revolving facilities were paid in $86.2 million of notional principal under variable to full during the third quarter 2004. fixed-rate swap agreements currently in effect, $146.4 million of the portfolio, or 95%, was fixed at a 6.1% weighted average interest rate and $7.0 million, or 5% was floating at a 3.8% weighted average interest rate. There is no debt maturing in 2005 and 2006. In 2007, $12.5 million is scheduled to mature at a weighted aver- age interest rate of 6.5%. As the Company does not anticipate having sufficient 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. On June 30, 2004, the Company closed on a $45.9 million cross collateralized revolving facility, which is collatera- lized by five of the Company’s properties. The existing combined outstanding debt of $23.0 million was modi- fied to allow the Company to borrow an additional $22.9 million. The facility matures in 2012 and bears interest at LIBOR plus 140 basis points. The Company drew down $16.8 million under this facility on June 30, 2004 of which the proceeds were used to pay down the two revolving facilities mentioned above. During the Acadia Realty Trust 2004 Annual Report 9 Management’s Discussion and Analysis continued third quarter, the Company drew down an additional $4.7 million on this facility. On June 30, 2004, the Company closed on a $12.1 million revolving facility secured by one of its properties. The existing outstanding debt of $8.9 million was modified to allow the Company to borrow an additional $3.2 mil- lion. The facility matures in 2012 and bears interest at LIBOR plus 140 basis points. 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 initia- tive following a major reorganization in 1998 (“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 On August 13, 2004, the Company refinanced an exist- as well as whether a property complemented other ing $7.9 million floating rate mortgage loan with a $15 assets within the Company’s portfolio. The Company million fixed rate mortgage loan maturing in 2014. The sold 28 non-core assets in connection with this initiative terms of the new mortgage loan, bearing interest at comprising a total of approximately 4.6 million square 5.6%, provide for interest-only payments for two years, feet of retail properties and 800 multi-family units, for and principal and interest thereafter based on a 30-year a total sales price of $158.4 million which generated net amortization with a balloon payment due at maturity sale proceeds to the Company of $82.5 million. of $13.1 million. In connection with the refinancing, the Company was required to prepay $1.6 million of debt collateralized by two other properties, and pay a prepay- ment penalty of $0.1 million. Although the Company completed the non-core disposi- tion initiative in 2002, the Company continues to period- ically identify non-core assets within its portfolio. During November of 2004, Acadia disposed of the East End On September 28, 2004, the Company drew down $20 Centre located in Wilkes-Barre, Pennsylvania for approx- million from existing lines of credit from two different imately $12.4 million. In connection with this sale, the banks. The proceeds from these borrowings were uti- mortgage debt which was cross-collateralized by the lized to advance $18 million to Fund II as a bridge loan East End Centre and Crescent Plaza was extinguished. to finance Fund II’s acquisition of a property located in the Bronx, New York. Fund II’s advance was repaid upon financing of the acquisition with a bank during the fourth quarter 2004. On December 1, 2004, the Company paid down $0.8 mil- lion of outstanding balance on a line of credit and fully repaid $13.0 million from two other lines of credit. 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 During December of 2004, the Company retired $33.4 of net proceeds totaled $1.4 million. The Company million of mortgage debts with two banks. currently plans to build and lease a 15,000 square foot In connection with the sale of the East End Centre, the retail building on the remaining parcel. Company extinguished $23.8 million of 8.13% fixed-rate On November 8, 2002, a joint venture between the mortgage debt which was scheduled to mature in 2010 Company and an unaffiliated joint venture partner and cross-collateralized by the East End Centre and completed the sale of a contract to purchase land in Crescent Plaza. 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 reimbursements due from the buyer, which was paid in full during 2003. The Company’s share of the net proceeds totaled $1.4 million. 10 Acadia Realty Trust 2004 Annual Report Contractual Obligations and Other Commitments At December 31, 2004, maturities on the Company’s mortgage notes ranged from July 2007 to September 2014. In addition, the Company has non-cancelable ground leases at three of its shopping centers. The Company also leases space for its White Plains corpo- rate 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, 2004: amounts in millions Payments due by period Contractual obligation Future debt maturities Operating lease obligations Total Total $122.3 23.1 $145.4 Less than 1 year $ — 1.0 $ 1.0 1 to 3 years $12.5 2.0 $14.5 3 to 5 years $ 8.0 2.0 More than 5 years $101.8 18.1 $ 10.0 $119.9 Off Balance Sheet Arrangements The Company has investments in three joint ventures for the purpose of investing in operating properties variable-rate mortgage debt as of December 31, 2004 was $5.7 million at an interest rate of 4.3%. Maturities on these loans range from May 2005 to January 2023. as follows: The Company owns a 49% interest in two partnerships which own the Crossroads Shopping Center (“Cross- Historical Cash Flow The following discussion of historical cash flow compares roads”). The Company accounts for its investment in the Company’s cash flow for the year ended December 31, Crossroads using the equity method of accounting as 2004 (“2004”) with the Company’s cash flow for the year it has a non-controlling investment in Crossroads, but ended December 31, 2003 (“2003”). 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, 2004 was $31.4 million. This fixed- rate debt, which was refinanced in October of 2004, Cash and cash equivalents were $13.5 million and $14.1 million at December 31, 2004 and 2003, respectively. The decrease of $0.6 million was a result of the following increases and decreases in cash flows: bears interest at 5.4% and matures in December 2014. amounts in millions In connection with the refinancing, the Company paid $1.3 million to settle two variable to fixed-rate swap agreements which served to hedge the former LIBOR based floating rate debt. Reference is made to the discussion of Funds I and II Net cash provided by operating activities Net cash (used in) investing activities Years Ended December 31, 2004 2003 Variance $20.6 $ 18.2 $ 2.4 (14.7) (19.3) 4.6 under “Uses of Liquidity” in this Annual Report for Net cash used in additional detail related to the Company’s investment financing activities (6.5) (29.9) 23.4 in and commitments to Funds I and II. The Company owns a 22% interest in Fund I and 20% in Fund II for which it also uses the equity method of accounting. The Company’s pro rata share of Funds I and II fixed- rate mortgage debt as of December 31, 2004 was $21.7 million at a weighted average interest rate of 6.4%. The Company’s pro rata share of Fund I and II The variance in net cash provided by operating activities resulted from an increase of $4.3 million in operating income before non-cash expenses in 2004, which was primarily due to an increase in rents following the redevel- opment of the Gateway shopping center, re-tenanting activities and an increase in management fee income. Acadia Realty Trust 2004 Annual Report 11 Management’s Discussion and Analysis continued Offsetting this increase was a net decrease in cash and estimates used by the Company in the preparation provided by changes in operating assets and liabilities of its consolidated financial statements. of $1.9 million. The variance in net cash used in investing activities was primarily the result of an additional $15.2 million of dis- tributions received from unconsolidated partnerships in 2004, a $2.5 million Earn-out payment in 2003 related to a redevelopment project and a $6.0 million decrease in expenditures for real estate acquisitions, develop- ment and tenant installations during 2004. In addition, $0.9 million of proceeds from the sale of land were received in 2004. These increases were offset by addi- tional investments in and advances to unconsolidated partnerships of $10.4 million in 2004 as well as $10.4 million of notes issued in 2004. The decrease in net cash used in financing activities resulted from $28.3 million of proceeds received in 2004 related to the issuance of Common Shares and $9.3 million of cash provided by the exercise of stock options in 2004. These decreases were partially offset by $9.8 million of additional cash used in 2004 for net repayments of outstanding mortgage debt, $2.8 million of additional cash paid for dividends and distributions on Common OP Units in 2004, $1.4 million of cash used for additional deferred financing costs in 2004, and $1.3 million of cash used to terminate a derivative instrument in 2004. 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 prepa- ration of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. The Company bases its estimates on his- torical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about car- rying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company believes the following critical accounting policies affect the significant judgments 12 Acadia Realty Trust 2004 Annual Report Valuation of Property Held for Use and Sale On a quarterly basis, the Company reviews the carrying value of both properties held for use and for sale. The Company records impairment losses and reduces the carrying value of properties when indicators of impair- ment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where the Company does not expect to recover its carrying costs on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Company reduces its carrying value to the fair value less costs to sell. For the year ended December 31, 2002, an impair- ment loss of $0.2 million was recognized related to properties which were held for sale and subsequently sold. Management does not believe that the value of any properties in its portfolio was impaired as of December 31, 2004 or 2003. Bad Debts The Company maintains an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likelihood that tenants will not have the ability to make payment on unbilled rents including estimated expense recoveries and straight-line rent. As of December 31, 2004, the Company had recorded an allowance for doubtful accounts of $2.8 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. Inflation The Company’s long-term leases contain provisions designed to mitigate the adverse impact of inflation on the Company’s net income. Such provisions include clauses enabling the Company to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and/or, in certain cases, escala- tion clauses, which generally increase rental rates dur- ing the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indexes. In addition, many of the Company’s leases are for terms of less than ten years, which permits the Company to seek to increase rents Currently, the Company manages its exposure to fluc- upon re-rental at market rates if current rents are below tuations in interest rates primarily through the use of the then existing market rates. Most of the Company’s fixed-rate debt and interest rate swap agreements. As leases require the tenants to pay their share of operating of December 31, 2004, the Company had total mortgage expenses, including common area maintenance, real debt of $153.4 million of which $146.4 million, or 95%, estate taxes, insurance and utilities, thereby reducing was fixed-rate, inclusive of interest rate swaps, and the Company’s exposure to increases in costs and oper- $7.0 million, or 5%, was variable-rate based upon LIBOR ating expenses resulting from inflation. plus certain spreads. As of December 31, 2004, the Com- Recently Issued Accounting Pronouncements Reference is made to the Notes to Consolidated Finan- cial Statements. 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 for certain quantitative details related to the Company’s mortgage debt. Consolidated mortgage debt: pany was a party to five interest rate swap transactions to hedge the Company’s exposure to changes in interest rates with respect to $86.2 million of LIBOR based variable- rate debt. The Company also has four forward-starting interest rate swaps which commence during 2005, 2006 and 2007 and mature from 2010 to 2012 that will hedge the Company’s exposure to changes in interest rates with respect to $62.2 million of refinanced LIBOR-based variable rate debt with the matching maturities. The following table sets forth information as of Decem- ber 31, 2004 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 2005 2006 2007 2008 2009 Thereafter Scheduled Amortization $ 1.6 2.2 3.8 4.5 5.2 13.8 $31.1 Maturities $ — — 12.5 8.0 — 101.8 $122.3 Mortgage debt in unconsolidated partnerships (at Company’s pro rata share): Year 2005 2006 2007 2008 2009 Thereafter Scheduled Amortization $ 1.4 Maturities $ 1.1 1.5 1.5 1.5 1.5 3.6 $11.0 — 4.5 6.7 — 35.5 $47.8 Weighted Average Interest Rate N/A N/A 6.5% 3.8% N/A 4.8% Weighted Average Interest Rate 5.3% N/A 4.4% 4.7% N/A 5.7% Total 1.6 $ 2.2 16.3 12.5 5.2 115.6 $153.4 Total $ 2.5 1.5 6.0 8.2 1.5 39.1 $58.8 Acadia Realty Trust 2004 Annual Report 13 Management’s Discussion and Analysis continued Of the Company’s total outstanding debt, $12.5 million will become due in 2007. As the Company intends on refinancing some or all of such debt at the then-exist- ing market interest rates which may be greater than Controls and Procedures Disclosure Controls and Procedures The Company conducted an evaluation, under the the current interest rate, the Company’s interest supervision and with the participation of management expense would increase by approximately $0.1 million including the Company’s Chief Executive Officer and annually if the interest rate on the refinanced debt Chief Financial Officer, of the effectiveness of the Com- increased by 100 basis points. Interest expense on the pany’s disclosure controls and procedures. Based on that Company’s variable debt as of December 31, 2004 would evaluation, the Chief Executive Officer and Chief Finan- not increase materially as the Company has only $7.0 cial Officer concluded that the Company’s disclosure million of floating rate debt after taking into account controls and procedures were effective as of December the effect of interest rate swaps hedging $86.2 million 31, 2004. of notional principal. The Company may seek additional 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. Changes in internal control over financial reporting. There was no change in the Company’s internal control over financial reporting during the Company’s fourth fiscal quarter ended December 31, 2004 that has mate- rially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. Management’s Report on Internal Control Over Financial Reporting Management of Acadia Realty Trust is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the supervi- sion and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2004 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this assessment, we used the criteria set forth in the framework in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control–Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2004. Our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2004 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which appears in this Annual Report. Acadia Realty Trust White Plains, New York March 10, 2005 14 Acadia Realty Trust 2004 Annual Report Attestation Report of the Independent Registered Public Accounting Firm To the Shareholders and Trustees of Acadia Realty Trust We have audited management’s assessment, included in the accompanying Management’s Report on Internal Con- trol Over Financial Reporting, that Acadia Realty Trust and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Acadia Realty Trust and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and eval- uating the design and operating effectiveness of internal control, and performing such other procedures as we consid- ered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transac- tions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding pre- vention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management’s assessment that Acadia Realty Trust and subsidiaries maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Acadia Realty Trust maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Acadia Realty Trust and subsidiaries as of December 31, 2004 and 2003, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004 and our report dated March 10, 2005 expressed an unqualified opinion thereon. Ernst & Young LLP New York, New York March 10, 2005 Acadia Realty Trust 2004 Annual Report 15 Report of Independent Registered Public Accounting Firm To the Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheets of Acadia Realty Trust and subsidiaries (the “Com- pany”) as of December 31, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2004. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 finan- cial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acadia Realty Trust and subsidiaries at December 31, 2004 and 2003, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Acadia Realty Trust and subsidiaries’ internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control–Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2005 expressed an unqualified opinion thereon. Ernst & Young LLP New York, New York March 10, 2005 16 Acadia Realty Trust 2004 Annual Report Consolidated Balance Sheets 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 Real Estatei Land Buildings and improvements Construction in progress Less: accumulated depreciation Net real estate Cash and cash equivalents Restricted cash Cash in escrow Investment in management contracts, net of accumulated amortization of $578 Investments in and advances to unconsolidated partnerships Rents receivable, net Notes receivable Prepaid expenses Deferred charges, net Other assets Assets of discontinued operations Liabilities and Shareholders’ Equity Mortgage notes payable Accounts payable and accrued expenses Dividends and distributions payable Due to related parties Derivative instruments Other liabilities Liabilities of discontinued operations Total liabilities Minority interest in Operating Partnership Minority interests in majority-owned partnerships Total minority interests Shareholders’ equity: Common shares, $.001 par value, authorized 100,000,000 shares, issued and outstanding 31,340,637 and 27,409,141 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Deficit Total shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. December 31, 2004 2003 $ 53,804 $ 53,804 362,477 5,896 422,177 107,352 314,825 13,499 612 4,467 3,422 18,135 10,891 10,087 3,029 13,478 3,898 — 354,476 5,858 414,138 93,670 320,468 14,159 504 3,342 — 13,630 10,157 3,586 2,976 11,140 1,731 6,491 $396,343 $ 388,184 $ 153,361 $ 174,847 7,640 5,597 — 2,136 3,134 — 5,639 4,619 48 4,044 3,712 15,856 171,868 208,765 5,743 1,808 7,551 31 222,715 (3,180) (2,642) 7,875 1,810 9,685 27 177,891 (5,505) (2,679) 216,924 169,734 $396,343 $ 388,184 Acadia Realty Trust 2004 Annual Report 17 Consolidated Statements of Income 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 Revenuesi Minimum rents Percentage rents Expense reimbursements Lease termination income Other property income Management fee income (net of submanagement fees of $1,591) Interest income Other Total revenues Operating Expensesi Property operating Real estate taxes General and administrative Depreciation and amortization Abandoned project costs Total operating expenses Operating income Equity in earnings of unconsolidated partnerships Interest expense Gain on sale of land Minority interest Income from continuing operations Discontinued operations: Operating (loss) income from discontinued operations Impairment of real estate Gain on sale of properties Minority interest Income (loss) from discontinued operations Net income The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2004 2003 2002 $ 51,469 $48,912 $ 46,643 952 13,350 — 643 4,763 1,469 210 72,856 14,908 9,025 10,468 15,650 — 50,051 22,805 1,797 (10,446) 932 (1,197) 13,891 (886) — 6,696 (116) 5,694 988 13,222 — 748 1,971 788 1,218 67,847 14,726 8,469 10,734 17,374 — 51,303 16,544 2,411 (9,954) 1,187 (1,433) 8,755 (988) — — 86 (902) 1,064 10,988 3,945 535 1,314 2,062 504 67,055 11,965 8,086 10,173 14,221 274 44,719 22,336 628 (9,720) 1,530 (3,032) 11,742 907 (197) 8,132 (1,185) 7,657 $ 19,585 $ 7,853 $ 19,399 18 Acadia Realty Trust 2004 Annual Report Consolidated Statements of Income 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 Basic Earnings per ShareI Income from continuing operations Income (loss) from discontinued operations Basic earnings per share Diluted Earnings per ShareI Income from continuing operations Income (loss) from discontinued operations Diluted earnings per share The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2004 2003 2002 $0.47 0.20 $0.67 $0.46 0.19 $0.65 $ 0.33 (0.03) $ 0.30 $ 0.32 (0.03) $ 0.29 $ 0.47 0.30 $ 0.77 $ 0.46 0.30 $ 0.76 Acadia Realty Trust 2004 Annual Report 19 Consolidated Statements of Shareholders’ Equity Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders’ Equity Deficit 28,698 $29 $189,378 $ (1,206) $ (9,103) $179,098 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 at December 31, 2001 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 Net income Balance at 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 Net income 2,087 — (5,525) (3) — — 25,257 2,059 84 8 — — — — 1 — Balance at December 31, 2003 27,409 Conversion of 746,762 OP Units to Common Shares by limited partners of the Operating Partnership Shares issued to Trustees and Employees Employee restricted share award Settlement of vested options Dividends declared ($0.6525 per Common Share) Employee and Trustee exercise of 1,262,000 options Unrealized gain on valuation of swap agreements Common Shares issued under Employee Stock Purchase Plan Issuance of 1,890,000 Common Shares, net of issuance costs Net income Balance at December 31, 2004 747 5 22 — — 1,262 — 6 1,890 — 31,341 2 — (6) — — — 25 2 — — — — — — — — 27 1 — — — — 1 — — 2 — $ 31 14,901 — (33,414) (14) — — 170,851 14,898 632 410 (750) (8,160) 2 — 8 — — — — — (5,668) — (6,874) — — — — — — — 14,903 (12,975) — — — 19,399 (12,975) (33,420) (14) (5,668) 19,399 (2,679) 161,323 — 14,900 — — — 632 410 (750) (7,853) — (16,013) 2 1,369 — 1,369 — — — 7,853 8 7,853 177,891 (5,505) (2,679) 169,734 6,395 443 394 (67) — 9,265 — 84 28,310 — 222,715 — — — — — — 2,325 — — — $ (3,180) — — — — 6,396 443 394 (67) (19,548) (19,548) — — — — 19,585 9,266 2,325 84 28,312 19,585 $ (2,642) $216,924 The accompanying notes are an integral part of these consolidated financial statements 20 Acadia Realty Trust 2004 Annual Report Consolidated Statements of Cash Flows 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 Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Gain on sale of land Gain on sale of properties Minority interests Abandoned project costs Equity in earnings of unconsolidated partnerships Amortization of derivative settlement included in interest expense Provision for bad debts Adjustment to carrying value of property held for sale Changes in assets and liabilities: Restricted cash 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 Net proceeds from sale of property Payment of accrued expense related to redevelopment project Investment in and advances to unconsolidated partnerships Distributions from unconsolidated partnerships Collections on notes receivable Payment of deferred leasing costs Proceeds from sale of land Advances of notes receivable Net cash (used in) provided by investing activities The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2004 2003 2002 $ 19,585 $ 7,853 $ 19,399 16,077 (932) (6,696) 1,313 — (1,797) 99 783 — (108) (1,125) (1,288) 99 (3,004) 2,464 (974) (673) 23,823 (7,139) — — (16,422) 16,781 3,929 (2,378) 932 (10,429) (14,726) 17,909 (1,187) — 1,347 — (2,411) — 523 — (504) 105 (3,958) (1,085) (891) 218 (126) 785 16,429 (1,530) (8,132) 4,217 274 (628) — 602 197 — (161) (1,135) 266 1,266 (534) 67 (1,131) 18,578 29,466 (13,531) — (2,488) (6,032) 1,602 3,232 (2,183) — — (14,408) 24,169 — (2,956) 1,049 41,042 (801) — — (19,400) 48,095 Acadia Realty Trust 2004 Annual Report 21 Consolidated Statements of Cash Flows 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 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 partnership Settlement of vested options Repurchase of Common Shares Common Shares issued under Employee Stock Purchase Plan Exercise of options to purchase Common Shares Termination of derivative instrument Issuance of Common Shares Net cash used in financing activities (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of year Cash and cash equivalents, end of year Supplemental Disclosure of Cash Flow InformationI Cash paid during the period for interest, net of amounts capitalized of $304, $403, and $931, respectively Years Ended December 31, 2004 2003 2002 $ (100,928) $ (32,917) $ (24,565) 76,251 (1,630) (18,507) (416) (283) (606) (67) — 84 9,340 (1,307) 28,312 (9,757) (660) 14,159 21,000 (241) (14,896) (1,207) (199) (985) (750) — 8 — — — 7,758 (812) (13,131) (2,023) (199) (139) — (33,420) — — — — (30,187) (31,009) 45,168 (66,531) 11,030 34,138 $ 13,499 $ 14,159 $ 45,168 $ 11,473 $ 11,242 $ 12,346 Supplemental Disclosure of Non-Cash Investing and Financing ActivitiesI Notes received in connection with sale of properties Disposition of real estate through assumption of debt Acquisition of management contract rights through issuance of preferred Operating Partnership Units $ $ — 12,405 $ 4,000 $ $ $ — — — $ 22,425 $ 42,438 $ — The accompanying notes are an integral part of these consolidated financial statements.\ 22 Acadia Realty Trust 2004 Annual Report Notes to Consolidated Statements December 31, 2004 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 issued OP Units and cash valued at $2,750 to certain limited partners in connection 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, 2004, the Company operated 69 and self-managed real estate investment trust (“REIT”) properties, which it owns or has an ownership interest which specializes in the acquisition, redevelopment and in, consisting of 64 neighborhood and community shop- operation of shopping centers which are anchored by ping centers, one shopping center under development, 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, 2004, the one enclosed mall, one mixed-use property (retail/resi- dential) and two multi-family properties, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States and, in total, comprise approximately 9.6 million square feet. Company controlled 99% of the Operating Partnership as the sole general partner. As the general partner, the Principles of Consolidation The consolidated financial statements include the con- Company is entitled to share, in proportion to its percent- solidated accounts of the Company and its majority age interest, in the cash distributions and profits and owned partnerships, including the Operating Partner- losses of the Operating Partnership. The limited partners ship. Non-controlling investments in partnerships are represent entities or individuals who contributed their accounted for under the equity method of accounting interests in certain properties or partnerships to the as the Company exercises significant influence. Operating Partnership in exchange for common or pre- ferred units of limited partnership interest (“Common or Preferred OP Units”). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Company (“Common Shares”). This struc- ture is commonly referred to as an umbrella partnership REIT or “UPREIT.” Variable interest entities within the scope of Financial Accounting Statements Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46-R”) are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable inter- est entity is determined to be the party that absorbs a majority of the entity’s expected losses, receives a majority of its expected returns, or both. Management On August 12, 1998, the Company completed a major has evaluated the applicability of FIN 46-R to its invest- reorganization (“RDC Transaction”) in which it acquired ments in certain joint ventures and determined that twelve shopping centers, five multi-family properties these joint ventures do not meet the requirements of and a 49% interest in one shopping center along with a variable interest entity and, therefore, consolidation certain third-party management contracts and promis- of these ventures is not required. Accordingly, these sory notes from real estate investment partnerships investments are accounted for using the equity method. (“RDC Funds”) managed by affiliates of RD Capital, Inc. In exchange for these and a cash investment of $100,000, the Company issued 11.1 million Common OP Units and 15.3 million Common Shares to the RDC Funds. After giving effect to the conversion of the Com- mon OP Units, the RDC Funds beneficially owned 72% of the Common Shares as of the closing of the RDC Transaction. During February of 2003, the Company Use of Estimates 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. Acadia Realty Trust 2004 Annual Report 23 Notes to Consolidated Statements continued Properties Real estate assets are stated at cost less accumulated Revenue Recognition Leases with tenants are accounted for as operating depreciation. Expenditures for acquisition, development, leases. Minimum rents are recognized on a straight-line construction and improvement of properties, as well as basis over the term of the respective leases. As of significant renovations, are capitalized. Interest costs are December 31, 2004 and 2003 unbilled rents receivable capitalized until construction is substantially complete. relating to straight-lining of rents were $6,506 and Construction in progress includes costs for significant $5,873, respectively. shopping center expansion and redevelopment. Depre- ciation is computed on the straight-line basis over esti- mated useful lives of 30 to 40 years for buildings and Percentage rents are recognized in the period when the tenant sales breakpoint is met. the shorter of the useful life or lease term for improve- Reimbursements from tenants for real estate taxes, ments, furniture, fixtures and equipment. Expenditures insurance and other property operating expenses for maintenance and repairs are charged to operations are recognized as revenue in the period the expenses as incurred. are incurred. The Company reviews its long-lived assets used in An allowance for doubtful accounts has been provided operations for impairment when there is an event, against certain tenant accounts receivable that are esti- or change in circumstances that indicates impairment mated to be uncollectible. Rents receivable at December in value. The Company records impairment losses and 31, 2004 and 2003 are shown net of an allowance for reduces the carrying value of properties when indicators doubtful accounts of $2,841 and $2,420, respectively. of impairment are present and the expected undiscoun- ted 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. 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. Management does not believe that the values of its Interest income from notes receivable is recognized on an accrual basis based on the contractual terms of the notes. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash in Escrow Cash in escrow consists principally of cash held for real properties within the portfolio are impaired as of estate taxes, property maintenance, insurance, mini- December 31, 2004. Deferred Costs Fees and costs paid in the successful negotiation of leases have been deferred and are being amortized on a straight-line basis over the terms of the respective mum occupancy and property operating income requirements at specific properties as required by certain loan agreements. Income Taxes The Company has made an election to be taxed, and leases. Fees and costs incurred in connection with believes it qualifies as a REIT under Sections 856 obtaining financing have been deferred and are being through 860 of the Internal Revenue Code of 1986, amortized over the term of the related debt obligation. as amended (the “Code”). To maintain REIT status for Management Contracts Income from management contracts, net of subman- agement fees, is recognized on an accrual basis as such fees are earned. The initial acquisition cost of the management contracts is being amortized over the estimated lives of the contracts acquired. 24 Acadia Realty Trust 2004 Annual Report 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 cer- tain other requirements as defined by the Code. The Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. Accordingly, no provision has been made for Federal income taxes for the Company in the Recent Accounting Pronouncements On December 16, 2004, the FASB issued SFAS No. 153: accompanying consolidated financial statements. The “Exchanges of Nonmonetary Assets–An Amendment of Company is subject to state income or franchise taxes APB Opinion No. 29.” The amendments made by SFAS in certain states in which some of its properties are No. 153 are based on the principle that exchanges of located. These state taxes, which in total are not signifi- nonmonetary assets should be measured based on the cant, are included in general and administrative expenses fair value of the assets exchanged. Further, the amend- in the accompanying consolidated financial statements. ments eliminate the narrow exception for nonmonetary Stock-based Compensation Prior to 2002, the Company accounted for stock options under Accounting Principles Board Opinion No. 25, “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 for Stock-Based Compensation” (“SFAS No. 123”). As such, all stock options granted after December 31, 2001 are reflected as compensation expense in the Company’s 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 accounting 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. The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value based method of accounting for stock- based employee compensation for stock options granted exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmone- tary assets that do not have “commercial substance.” SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company does not believe the adoption of SFAS No. 153 on June 15, 2005 will have a material effect on the Company’s consolidated financial statements. On December 16, 2004, the FASB issued SFAS No. 123: (Revised 2004) – “Share-Based Payment” (“SFAS No. 123R”). SFAS 123R replaces SFAS No. 123, which the Com- pany adopted on January 1, 2003. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial state- ments and be measured based on the fair value of the equity or liability instruments issued. SFAS No. 123R is effective as of the first interim or annual reporting period that begins after June 15, 2005. The Company does not believe that the adoption of SFAS No. 123R will have a material effect on the Company’s consolidated financial statements. Comprehensive Income The following table sets forth comprehensive income prior to January 1, 2002. See Note 11 – “Share Incentive for the years ended December 31, 2004, 2003 and 2002: Plan” for the assumptions utilized in valuing the below stock options: Years Ended December 31, Years Ended December 31, 2004 2003 2002 2004 2003 2002 Net income $19,585 $7,853 $ 19,399 Net income: As reported Pro forma $19,585 $7,853 $19,399 19,561 7,829 19,363 Basic earnings per share: As reported Pro forma $ 0.67 $ 0.30 $ 0.67 0.29 Diluted earnings per share: As reported Pro forma $ 0.65 $ 0.29 $ 0.65 0.29 0.77 0.76 0.76 0.76 Other comprehensive income (loss)1 2,325 1,369 (5,668) Comprehensive income $21,910 $9,222 $ 13,731 1Relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges. Acadia Realty Trust 2004 Annual Report 25 Notes to Consolidated Statements continued The following table sets forth the change in accumu- the Company’s share of the deferred gain, or $634, was lated other comprehensive loss for the years ended recognized in 2003. Additional amounts held in escrow December 31, 2004, 2003 and 2002: from the closing of $932 were released to the Company 2004 2003 2002 during 2004 and recognized as additional gain. Of this Beginning balance $ 5,505 $6,874 $ 1,206 Unrealized (gain) loss on valuation of derivative instruments (2,325) (1,369) 5,668 Ending balance $ 3,180 $ 5,505 $6,874 As of December 31, 2004, the balance in accumulated other comprehensive loss related solely to amounts attributable to interest rate swap agreements accounted for as cash flow hedges. Reclassifications Certain 2003 and 2002 amounts were reclassified to conform to the 2004 presentation. Note 2i Acquisition and Disposition of Properties Currently the primary vehicle for the Company’s acquisi- tions are through its acquisition joint ventures (Note 4). A significant component of the Company’s business plan in prior years was also the disposition of non- core real estate assets. Under this initiative, which was completed in 2002, the Company sold a total of two apartment complexes and 23 shopping centers. Dispositions relate to the sale of shopping centers, multi-family properties and land. Gains from these sales are recognized in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” 2002 Acquisitions and Dispositions On November 8, 2002, the Company and an unaffiliated joint venture partner completed the sale of a contract to purchase land in Bethel, Connecticut, to the Target Corporation for $1,540 after closing and other related amount, $466 was attributable to the Company’s joint venture partner and reflected in minority interest in the accompanying consolidated statement of income. On October 11, 2002, the Company sold the Manahawkin Village Shopping Center and Valmont Plaza for $16,825 to two entities affiliated with each other. The Company received two purchase money notes in connection with the sale. The first for $11,000 was repaid in full on November 8, 2002. The second for $1,600, 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 consisted of 17 retail properties, which were cross-collateralized in a securi- tized loan program and in the aggregate contained approximately 2.3 million square feet. As part of the transaction, the buyer assumed the outstanding mort- gage debt of $42,438. The Company retained a senior, preferred interest in the acquiring entity in the amount of $6,262, which earned an initial annual preferred return of 15%. On December 31, 2002, the Company’s interest was purchased at par by an affiliate of the purchaser of the portfolio. The Company recorded an $8,134 gain on the sale. On January 16, 2002, the Company sold Union Plaza, a 218,000 square foot shopping center located in New Castle, Pennsylvania, for $4,750. The Company received a $3,563 purchase money note. The note, which was extended and now matures January 15, 2006, requires monthly interest of 7% for year one, increasing at a rate of 1% per annum throughout the term. As part of the costs. The joint venture received a $1,632 note receivable transaction, the Company agreed to reimburse the pur- for the net purchase price and additional reimburse- ments due from the buyer and deferred recognition of chaser 50% of a former tenant’s rent, or $22 a month, through July 15, 2003. The Company recorded a loss of the gain on sale in accordance with SFAS No. 66. The $166 on the sale. note was paid in full on January 10, 2003, and as such, 26 Acadia Realty Trust 2004 Annual Report On January 10, 2002, the Company and an unaffiliated joint venture partner purchased a three-acre site located in the Bronx, New York, for $3,109. Simultaneously, the Assets: 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 is currently redeveloping the remaining parcel. Net real estate Rents receivable, net Prepaid expenses Deferred charges, net Discontinued Operations SFAS No. 144 requires discontinued operations presen- Liabilities and Deficit tation for disposals of a “component” of an entity. In Mortgage note payable accordance with SFAS No. 144, for all periods presented, the company reclassified its consolidated statements Accounts payable and accrued expenses of income to reflect income and expenses for proper- Other liabilities ties which became held for sale subsequent to Decem- ber 31, 2001, as discontinued operations and reclassified its consolidated balance sheets to reflect assets and liabilities related to such properties as assets related to discontinued operations and liabilities related to discontinued operations. Total liabilities Deficit Total liabilities and deficit The results of operations of sold properties is reported Total revenue separately as discontinued operations for the years Total expenses ended December 31, 2004, 2003 and 2002. Revenues from discontinued operations for the years ended December 31, 2004, 2003, and 2002 totaled $1,354, $1,598, and $8,587 respectively. December 31, 2003 $6,070 237 151 33 $6,491 $ 15,597 165 94 $15,856 (9,365) $ 6,491 Years Ended December 31, 2004 2003 2002 $ 1,354 $ 1,598 $ 8,587 2,356 2,500 9,062 (1,002) (902) (475) Gain on sale of properties 6,696 — 8,132 Income (loss) from discontinued operations $ 5,694 $ (902) $ 7,657 On November 22, 2004, the Company disposed of the East End Centre, a 308,000 square foot shopping center Note 3i in Wilkes-Barre, Pennsylvania, for approximately $12,405 resulting in a $6,696 gain on the sale. The assets, liabili- ties, revenues and expenses of the properties classified as discontinued operations are summarized as follows: Segment Reporting The Company has two reportable segments: retail properties and multi-family properties. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain nonrecurring items. The repor- table segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. The following table sets forth certain segment infor- mation for the Company, reclassified for discontinued operations, as of and for the years ended December 31, 2004, 2003, and 2002 (does not include unconsolidated partnerships): Acadia Realty Trust 2004 Annual Report 27 Notes to Consolidated Statements continued 2004 2003 2002 Retail Multi-Family All Retail Multi-Family All Retail Multi-Family Properties Properties Other Total Properties Properties Other Total Properties Properties All Other Total $ 58,799 $ 7,596 $ 6,461 $ 72,856 $ 56,552 $ 7,318 $3,977 $ 67,847 $ 56,206 $ 6,969 $3,880 $ 67,055 19,799 4,134 — 23,933 19,008 4,187 — 23,195 16,360 3,691 — 20,051 $ 39,000 $ 3,462 $ 6,461 $ 48,923 $ 37,544 $ 3,131 $3,977 $ 44,652 $ 39,846 $ 3,278 $3,880 $ 47,004 $ 13,889 $ 1,433 $ 328 $ 15,650 $ 15,717 $ 1,336 $ 321 $ 17,374 $ 12,704 $ 1,201 $ 316 $ 14,221 $ 8,928 $ 1,518 $ — $ 10,446 $ 8,424 $ 1,530 $ — $ 9,954 $ 8,093 $ 1,627 $ — $ 9,720 $381,562 $40,615 $ — $ 422,177 $374,364 $ 39,774 $ — $ 414,138 $ 362,142 $38,396 $ — $ 400,538 $338,722 $36,872 $20,749 $396,343 $ 337,724 $36,830 $13,630 $ 388,184 $ 368,547 $36,224 $ 6,164 $ 410,935 4,848 1,207 — 6,055 4,848 1,207 — 6,055 4,848 1,207 — 6,055 $ 6,297 $ 842 $ — $ 7,139 $ 12,003 $ 1,378 $ — $ 13,381 $ 13,107 $ 1,000 $ — $ 14,107 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 $ 74,983 Elimination of intersegment management fee income (1,290) Elimination of intersegment asset management fee income (708) Elimination of intersegment service fees and interest income (129) $ 72,856 Total consolidated revenues Property Operating Expenses and Real Estate Taxes Total property operating expenses and real estate taxes for reportable segments Elimination of intersegment management fee expense Total consolidated expenses $ 25,059 (1,126) 23,933 Reconciliation to Net Income Net property income before depreciation and amortization Depreciation and amortization $ 48,923 (15,650) General and administrative and abandoned project costs (10,468) Equity in earnings of unconsolidated partnerships Interest expense Gain on sale of property Income from discontinued operations Minority interest Net income 1,797 (10,446) 932 5,694 (1,197) $ 19,585 28 Acadia Realty Trust 2004 Annual Report $ 69,487 (1,340) (300) — $ 67,847 $ 24,352 (1,157) $ 23,195 $ 44,652 (17,374) (10,734) 2,411 (9,954) 1,187 (902) (1,433) $ 7,853 $ 68,121 (1,066) — — $ 67,055 $ 21,108 (1,057) $ 20,051 $ 47,004 (14,221) (10,447) 628 (9,720) 1,530 7,657 (3,032) $ 19,399 Note 4i Investments in Unconsolidated Partnerships Crossroads The Company owns a 49% interest in Crossroads Joint Venture LLC and Crossroads II LLC (collectively, “Cross- 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, which was allocated between land, and building and improvements. The portion of this excess attributable to buildings and improvements is being amortized over the life of the related property. roads”) which collectively own a 311,000 square foot shopping center in White Plains, New York. The Com- Acadia Strategic Opportunity Fund, LP (“Fund I”) In 2001, the Company formed a joint venture, Fund I, pany accounts for its investment in Crossroads using with four of its institutional investors for the purpose the equity method. Summary financial information of of acquiring real estate assets. The total committed Crossroads and the Company’s investment in and share capital for Fund I totals $90,000, of which the Company’s of income from Crossroads follows: Balance Sheets i 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, 2004 2003 share is $20,000. The Company is the sole general part- ner with 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 management, $ 6,939 $ 7,402 construction and leasing services. Decisions made by 6,129 3,710 the general partner as it relates to purchasing, financing $ 13,068 $ 11,112 64,000 $ 32,961 2,481 4,696 (53,413) (26,545) $ 13,068 $ 11,112 $ (9,304) $ 3,665 and disposition of properties are subject to the unani- mous disapproval of the Advisory Committee, which is comprised of representatives from each of the four institutional investors. Acquisitions completed during 2004 and 2003 were as follows: On March 11, 2004, Fund I, in conjunction with the Com- pany’s long-time investment partner, Hendon Properties (“Hendon”), purchased a $9,600 first mortgage loan Years Ended December 31, from New York Life Insurance Company for $5,500. The 2004 2003 2002 loan, which was secured by a 235,000 square foot shop- Statements of Incomei ping center in Aiken, South Carolina, was in default at Total revenue Operating and other expenses Interest expense Depreciation and amortization Net income $8,160 $ 8,324 $7,091 acquisition. Fund I and Hendon acquired the loan with 2,707 2,740 2,465 2,542 2,150 2,722 the intention of pursuing ownership of the property securing the debt. Fund I provided 90% of the equity capital and Hendon provided the remaining 10% of the equity capital used to acquire the loan. Hendon is enti- 778 570 547 tled to receive profit participation in excess of its pro- $ 1,935 $ 2,747 $1,672 Company’s share of net income Amortization of excess investment (see below) $ 1,112 $ 1,377 $ 934 392 392 392 Income from partnerships $ 720 $ 985 $ 542 portionate equity interest. The property is currently anchored by a Kroger supermarket and was only 56% occupied at acquisition due to the vacancy of a former Kmart store. Subsequent to the acquisition of the loan, Fund I and Hendon obtained fee title to this property and currently plan to redevelop and re-anchor the cen- ter. The Company loaned $3,150 to Fund I in connection Acadia Realty Trust 2004 Annual Report 29 Notes to Consolidated Statements continued with the purchase of the first mortgage loan. The note weighted-average rate of 6.6%. The mortgage debt fully matures March 9, 2006, and bears interest at 7% for the amortizes over the next seven years, which is cotermi- first year and 6% for the second year. In addition to its nous with the primary lease term of the supermarket loan to Fund I, the Company invested approximately leases. Fund I invested $11,250 of the equity capitaliza- $900, primarily its pro-rata share of equity as a partner tion of which the Company’s share was $2,500. in Fund I. In September 2004, Fund I and Hendon pur- chased the Pine Log Plaza for $1,500. The 35,000 square foot center is located in front of and adjacent to the Hitchcock Plaza. Related to this transaction, the Com- pany provided an additional $750 loan to Fund I with a March 2006 maturity and interest at 7% for the first year and 6% for the second year. In January 2003, Fund I acquired a one million square foot portfolio for an initial purchase price of $86,287, inclusive of closing and other related acquisition costs. The portfolio consists of two shopping centers located in Wilmington, Delaware (“Brandywine Portfolio”). A portion of one of the properties is currently unoccu- pied, which Fund I will pay for on an “earn-out” basis In May 2004, Fund I acquired a 50% interest in Haygood only when it is leased. To date, Fund I has incurred Shopping Center and Sterling Heights Shopping Center costs of $20,600 for Earn-out space. At closing, Fund I for an aggregate investment of $3,184. These assets are assumed $38,082 of fixed-rate debt which bears interest part of the portfolio that the Company currently man- at a weighted average rate of 6.2% as well as obtained ages as a result of its January 2004 acquisition of cer- an additional fixed-rate loan of $30,000 which bears tain management contracts. The Haygood Shopping interest at 4.7%. Fund I invested equity of $19,270 in the Center is a 165,000 square foot shopping center located acquisition, of which the Company’s share was $4,282. in Virginia Beach, Virginia. The Sterling Heights Shop- ping Center is a 141,000 square foot shopping center located in Sterling Heights, Michigan. The Company accounts for its investment in Fund I using the equity method. Summary financial informa- tion of Fund I and the Company’s investment in and In May 2004, Fund I and an unaffiliated partner, each share of income from Fund I is as follows: with a 50% interest, acquired a 35,000 square foot shopping center in Tarrytown, New York, for approxi- mately $5,300. Related to this acquisition, the Company loaned $2,000 to Fund I which bears interest at the Balance Sheetsi prime rate and matures May 2005. Assets: In January 2003, Fund I and an unaffiliated joint venture party acquired a one million square foot supermarket Rental property, net Other assets portfolio consisting of twenty-five anchor-only leases Total assets with either Kroger or Safeway supermarkets (“Kroger/ Safeway Portfolio”). 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 acquisition costs) included the assumption of $34,450 Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity Total liabilities and partners’ equity of existing fixed-rate debt which bears interest at a Company’s investment December 31, 2004 2003 $187,046 $ 173,507 13,077 4,763 $200,123 $ 178,270 $120,188 $120,609 24,060 11,731 55,875 45,930 $200,123 $ 178,270 $ 12,115 $ 9,965 30 Acadia Realty Trust 2004 Annual Report Statements of Incomei Total revenue Operating and other expenses Management and other fees Interest expense Depreciation and amortization Minority interest Loss in unconsolidated subsidiary Net income (loss) Company’s share of net income Year ended December 31, 2004 Year ended December 31, 2003 Year ended December 31, 2002 $26,664 $26,008 $ 1,224 5,807 2,106 6,673 8,731 166 207 $ 2,974 $ 1,170 5,017 2,171 6,399 8,055 157 — $ 4,209 $ 1,426 342 1,391 350 145 — — $(1,004) $ 86 Acadia Strategic Opportunity Fund II, LLC (“Fund II”) In June of 2004, the Company formed a joint venture, Fund II, with the investors from Fund I as well as two new institutional investors for the purpose of acquiring real estate assets. The total committed capital for Fund On October 1, 2004, Fund II initiated its second urban/ infill project in conjunction with P/A. Fund II entered into a 95-year ground lease to redevelop a 16-acre site in Pelham Manor, Westchester County, New York. II totals $300,000, of which the Company’s share is At December 31, 2004, Fund II had total assets of $60,000. The Company is the sole managing member $33,492, total liabilities of $18,321 (including mortgage with 20% interest in the joint venture and is also enti- debt of $18,000) and members equity of $15,171 of which tled to a profit participation in excess of its invested the company’s share was $2,760. For the period ended capital based on certain investment return thresholds. December 31, 2004, Fund II had revenues of $885, The Company also earns market-rate fees for asset expenses of $3,457, and net loss of $2,572, of which management as well as for property management, the Company’s share was $93. construction, legal and leasing services. Decisions made by the managing member 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 six institutional investors. On September 29, 2004, in conjunction with an invest- ment partner, P/A Associates, LLC (“P/A”), Fund II pur- chased 400 East Fordham Road in the Bronx, NY for $30,197, inclusive of closing and other related acquisi- tion costs. The Company had provided a bridge loan of $18,000 to Fund II in connection with this acquisition. Other In September 2004, affiliates of Funds I and Fund II, through separately organized, newly formed limited liability companies invested in the acquisition of Mervyn’s from Target Corporation as part of an invest- ment consortium of Sun Capital and Cerberus. The total acquisition price was approximately $1,175,000 subject to debt of approximately $800,000. Each of the affiliates of Funds I and II invested approximately $11,600, of which the Company’s share of equity totalled $4,898. Included in investments in and advances to unconsoli- dated partnerships at December 31, 2004 are advances Subsequent to the acquisition, Fund II repaid this loan aggregating $7,666. from the Company with $18,000 of proceeds from a new loan from a bank which bears interest at LIBOR plus 175 basis points and matures September 2014. Acadia Realty Trust 2004 Annual Report 31 Notes to Consolidated Statements continued Note 5I Deferred Charges Deferred charges consist of the following as of December 31, 2004 and 2003: On December 1, 2004, the Company paid down $800 of an outstanding balance on a line of credit. At the same time, the Company fully repaid the outstanding balances on two other lines of credit totaling $13,029. December 31, During December of 2004, the Company retired $33,401 2004 2003 of mortgage debts with two banks. Deferred financing costs $ 7,263 $ 6,372 Deferred leasing and other costs 17,743 15,286 On August 13, 2004, the Company refinanced an exist- ing $7,936 floating rate mortgage loan with a $15,000 fixed rate mortgage loan maturing in 2014. The terms 25,006 21,658 of the new mortgage loan, bearing interest at 5.6%, Accumulated amortization (11,528) (10,518) $ 13,478 $ 11,140 Note 6I Mortgage Loans At December 31, 2004, mortgage notes payable aggre- gated $153,361 and were collateralized by 15 properties and related tenant leases. Interest rates ranged from 3.8% to 7.6%. Taking into consideration $86,156 of notional principal under variable to fixed-rate swap agreements currently in effect, $146,407 of the portfolio, or 95%, was fixed at a 6.1% weighted average interest provide for interest-only payments for two years, and principal and interest thereafter based on a 30-year amortization with a balloon payment due at maturity of $13,064. In connection with the refinancing, the Com- pany was required to prepay $1,587 of debt collateralized by two other properties, and pay a prepayment penalty of $95. On June 30, 2004, the Company closed on a $45,900 cross collateralized revolving facility, which is collateral- ized by five of the Company’s properties. The existing combined outstanding debt of $23,000 was modified to allow the Company to borrow an additional $22,900. The facility matures in 2012 and bears interest at LIBOR rate and $6,954, or 5% was floating at a 3.8% weighted plus 140 basis points. average interest rate. Mortgage payments are due in monthly installments of principal and/or interest and mature on various dates through 2014. Certain loans are cross-collateralized and cross-defaulted. The loan agree- ments contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. In connection with the disposition of the East End Centre during November of 2004, the Company extin- guished $23,734 of mortgage debt which was scheduled to mature in 2010 and which was cross-collateralized by the East End Centre and Crescent Plaza. On June 30, 2004, the Company closed on a $12,100 revolving facility secured by one of its properties. The existing outstanding debt of $8,900 was modified to allow the Company to borrow an additional $3,200. The facility matures in 2012 and bears interest at LIBOR plus 140 basis points. On March 26, 2004, the Company paid down $10,363 and modified and extended $40,000 of an existing $50,363 loan with a bank. The loan, secured by two of the Company’s properties, now matures April 1, 2011 and requires the monthly payment of interest at LIBOR plus 150 basis points and principal amortized over 30 years. 32 Acadia Realty Trust 2004 Annual Report The following table summarizes the Company’s mortgage indebtedness (exclusive of mortgage debt of discontinued operations) as of December 31, 2004 and 2003: DECEMBER 31, 2004 2003 Interest Rate at December 31, 2004 Properties Monthly Maturity Encumbered Payment Terms Mortgage notes payable – variable-rate Washington Mutual Bank, FA Bank of America, N.A. Bank of America, N.A. Bank of America, N.A. Washington Mutual Bank, FA Bank of America, N.A. Sun America Life Insurance Company Bank of America, N.A. Washington Mutual Bank, FA Bank of America, N.A. $ 29,900 $ 50,686 3.82% (LIBOR + 1.50%) 44,485 10,252 8,473 8,992 3.79% (LIBOR + 1.40%) 6,256 3.82% (LIBOR + 1.40%) 8,598 3.79% (LIBOR + 1.40%) — — — — — — — — 9,191 12,009 20,083 4,865 — (LIBOR + 1.50%) — (LIBOR + 1.50%) — — — — 04/01/11 06/29/12 06/29/12 12/01/08 11/22/07 03/01/08 n/a n/a n/a n/a (1) (2) (3) (4) (5) (6) n/a n/a n/a n/a Bank of America, N.A. – Interest Rate Swaps (86,156) (86,669) (Note 16) Total variable-rate debt 6,954 34,011 Mortgage notes payable – fixed-rate Bank of America, N.A. RBS Greenwich Capital RBS Greenwich Capital SunAmerica Life Insurance Company Metropolitan Life Insurance Company 16,062 15,000 16,000 13,189 16,226 7.55% — 5.64% 16,000 5.19% 13,425 6.46% — 8,516 8.13% Bank of America, N.A. – Interest Rate Swaps 86,156 86,669 5.95% (Note 16) Total fixed-rate debt 146,407 140,836 $ 153,361 $ 174,847 01/01/11 09/06/14 06/01/13 07/01/07 n/a (7) (8) (9) (10) n/a (11) (12) (11 (11) (15) (16) n/a n/a n/a n/a (11) (14) (13) (11) n/a Notes: (1) Bradford Towne Centre Ledgewood Mall (2) Branch Shopping Center Abington Towne Center Methuen Shopping Center Town Line Plaza Gateway Shopping Center; there is additional capacity of $970 on this facility. (8) New Loudon Center (3) Smithtown Shopping Center (9) 239 Greenwich Avenue (4) Soundview Marketplace; there is addi- tional capacity of $5,000 on this facility. (5) Elmwood Park Shopping Center; no (10) Merrillville Plaza amounts are outstanding under this $20,000 revolving facility. (6) Marketplace of Absecon; no amounts are outstanding under this $7,400 revolving facility. (11) Monthly principal and interest (12) Annual principal and monthly interest (13) Interest only until 5/05; monthly principal and interest thereafter (7) GHT Apartments/Colony Apartments (14) Interest only until 9/06; monthly principal and interest thereafter (15) Interest only monthly (16) Interest only monthly until fully drawn; monthly principal and interest thereafter Acadia Realty Trust 2004 Annual Report 33 Notes to Consolidated Statements continued The scheduled principal repayments of all mortgage 3% of the Company’s shares through December 31, indebtedness as of December 31, 2004 are as follows: 2004, or an aggregate of up to 5% of the Company’s 2005 2006 2007 2008 2009 Thereafter $ 1,605 2,188 16,362 12,434 5,156 115,616 $153,361 Note 7i Shareholders’ Equity and Minority Interests Common Shares In March of 2004, a secondary public offering was completed for a total of 5,750,000 Common Shares. The selling shareholders, Yale University and its affili- ates (“Yale”) and Ross Dworman, a former trustee, sold 4,191,386 and 1,558,614 Common Shares, respectively. The Company did not sell any Common Shares in the offering and did not receive any proceeds from the offering. During November 2004, the Company issued 1,890,000 Common Shares (the “Offering”). The $28,312 in pro- ceeds from the Offering, net of related costs, was used to retire above-market, fixed-rate indebtedness as well as to invest in real estate assets. Yale and Kenneth F. Bernstein, the Company’s Chief Executive Officer, also sold 1,000,000, and 110,000 Common Shares, respec- tively, in connection with this transaction. Mr. Bernstein sold 110,000 Common Shares in connection with his exercise of options to purchase 150,000 Common Shares. In connection with the Offering, the Company and all insiders, including Yale, agreed to a 90-day lockup period. After the Offering, Yale owns approxi- mately 3,600,000 Common Shares, or approximately Common Shares. During 2003, the Board of Trustees approved a resolu- tion 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, permitted 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, 2004, the Company had repur- chased 2,051,605 Common Shares at a total cost of $11,650 (of which 1,425,643 of these Common Shares have been subsequently reissued) under the expanded share repurchase program that allows for the repur- chase of up to $20,000 of the Company’s outstanding Common Shares. The repurchased shares are reflected as a reduction of par value and additional paid-in capital. Minority Interests Minority interest in Operating Partnership represents the limited partners’ interest of 392,255 and 1,139,017 units in the Operating Partnership (“Common OP Units”) at December 31, 2004 and 2003, respectively. During 2004 and 2003, various limited partners converted a total of 746,762 and 2,058,804 Common OP Units into Common Shares on a one-for-one basis, respectively. Mr. Dworman, a former 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 units of preferred limited partnership interests designated as Series A Preferred Units at December 31, 12% of all outstanding Common Shares of the Company. 2004 and 2003 and 4,000 preferred limited partnership In May 2004, the Board of Trustees approved a resolution permitting one of its institutional shareholders, which currently owns approximately 2% of the Company’s outstanding Common Shares, to acquire additional shares through open market purchases. This waiver of the Company’s share ownership limitation will permit this shareholder to acquire up to an additional interests designated as Series B Preferred Units at December 31, 2004. The Series A Preferred OP Units were issued on Novem- ber 16, 1999 in connection with the acquisition of all the partnership interests of the limited partnership which owns the Pacesetter Park Shopping Center. Certain Series A Preferred OP Unit holders converted 632 Series 34 Acadia Realty Trust 2004 Annual Report A Preferred OP Units into 84,267 Common OP Units and sale of the property on July 12, 2004, the management then into Common Shares during 2003. The Series A contract was terminated and the Company earned a Preferred OP Units, which have a stated value of $1,000 $75 disposition fee. each, are entitled to a quarterly preferred distribution of the greater of (i) $22.50 (9% annually) per Series A Preferred OP Unit or (ii) the quarterly distribution attrib- utable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit. The Series A Preferred OP Units are currently convertible into Common OP Units based on the stated value divided by $7.50. After The Company also earns certain management and service fees in connection with its investment in Fund I and Fund II (Note 4). Such fees earned by the Company (after adjusting for intercompany fees) aggregated $3,504, $1,689 and $1,082 for the years ended December 31, 2004, 2003 and 2002, respectively. the seventh anniversary following their issuance, either The Company also earns fees in connection with its the Company or the holders can call for the conversion rights to provide asset management, leasing, disposition, of the Series A Preferred OP Units at the lesser of $7.50 development and construction services for an existing or the market price of the Common Shares as of the portfolio of retail properties and/or leasehold interests conversion date. The Series B Preferred OP Units were issued to Klaff Realty LP (“Klaff”) in January 2004 in consideration for the acquisition of certain management contract rights. The Series B Preferred OP Units, with a stated value of a in which Klaff, a preferred OP unit holder, has an inter- est, which was acquired during 2004. Net fees earned by the Company (after payment of submanagement fees of $1,591) in connection with this portfolio were $885 for the year ended December 31, 2004. $1,000 each, are entitled to a preferred quarterly distri- On March 19, 2004, Mr. Dworman and certain entities bution of the greater of (i) $13.00 (5.2% annually) per controlled by Mr. Dworman converted 1,000,000 share unit or (ii) the quarterly distribution attributable to a options and 548,614 OP Units held by them in connection Series B Preferred OP Unit if such unit were converted with Mr. Dworman’s resignation from the Company’s into a Common OP Unit. The Series B Preferred OP Units Board of Trustees and in connection with a secondary are convertible into Common OP Units based on the public offering. Included in the Common OP Units stated value of $1,000 divided by $12.82 at any time. The converted to Common Shares during 2003 were 2,300 Company’s Board of Trustees approved a waiver on Feb- Common OP Units converted by Mr. Dworman who ruary 24, 2004, which allows Klaff to redeem 1,500 Series then transferred them to a charitable foundation in B Preferred OP Units at any time for cash. As of Decem- accordance with a pre-existing arrangement. ber 31, 2004, none of these units have been redeemed. As of December 31, 2002, the Company was obligated Minority interests in majority-owned partnerships to issue Common OP Units and cash valued at $2,750 represent third party interests in four properties in to certain limited partners in connection with the RDC which the Company has a majority ownership position. Transaction. The payment was due upon the commence- Note 8I Related Party Transactions The Company managed one property in which a share- 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. holder of the Company had an ownership interest, for During the year ended December 31, 2004, Kenneth F. which the Company earned a management fee of 3% Bernstein, President and Chief Executive Officer, and of tenant collections. Management fees earned by the certain former trustees of the Company exercised Company under this contract aggregated $142, $212 400,000 and 20,000 options to purchase Common and $229 for the years ended 2004, 2003 and 2002, Shares, respectively. respectively. In addition, the Company also earned leas- ing commissions of $157 related to this property for the year ended December 31, 2004. In connection with the Acadia Realty Trust 2004 Annual Report 35 Notes to Consolidated Statements continued Note 9I 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. 2005 2006 2007 2008 2009 Thereafter Minimum future rentals to be received under non- Note 11I $ 1,042 1,051 1,068 1,129 1,149 17,088 $22,527 cancelable leases for shopping centers and other retail properties as of December 31, 2004 are summarized as follows: 2005 2006 2007 2008 2009 Thereafter $ 42,868 41,189 37,871 32,982 28,875 171,903 $ 355,688 Minimum future rentals above include a total of $4,805 for two tenants (with three leases), which have filed for bankruptcy protection. None of these leases have been rejected nor affirmed. During the years ended Decem- ber 31, 2004, 2003 and 2002, no single tenant collec- tively accounted for more than 10% of the Company’s total revenues. Note 10I Lease Obligations The Company leases land at four of its shopping centers, which are accounted for as operating leases and gener- ally provide the Company with renewal options. Ground rent expense was $791, $780 and $791 for the years ended December 31, 2004, 2003 and 2002, respectively. 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. Office rent expense was $239, $242 and $109 for the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum rental payments required for leases having remaining non-cancelable lease terms are as follows: Share Incentive Plan During 1999, the Company adopted the 1999 Share Incentive Plan (the “1999 Plan”), which replaced both the 1994 Share Option Plan and the 1994 Non-Employee Trustees’ Share Option Plan. The 1999 Plan authorizes the issuance of options equal to up to 8% of the total Common Shares outstanding from time to time on a fully diluted basis. However, not more than 4,000,000 of the Common Shares in the aggregate may be issued pursuant to the exercise of options and no participant may receive more than 5,000,000 Common Shares during the term of the 1999 Plan. Options are granted by the Share Option Plan Committee (the “Committee”), which currently consists of two non-employee Trustees, and will not have an exercise price less than 100% of the fair market value of the Common Shares and a term of greater than ten years at the grant date. Vesting of options is at the discretion of the Committee with the exception of options granted to non-employee Trustees, 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. The 1999 Plan also provides for the granting of share appreciation rights, restricted shares and performance units/shares. Share appreciation rights provide for the participant to receive, upon exercise, cash and/or Com- mon Shares, at the discretion of the committee, equal to the excess of the market value of the Common Shares at the exercise date over the market value of the Common Shares at the Grant Date. The Committee will determine the award and restrictions placed on restricted shares, including the dividends thereon and the term of such restrictions. The Committee also determines the award and vesting of performance units and performance shares based on the attainment of specified performance objectives of the Company within a specified performance 36 Acadia Realty Trust 2004 Annual Report period. Through December 31, 2004, no share appreciation discretion, is 8% or more either for such fiscal year or, on rights or performance units/shares have been awarded. average, for such fiscal year and each other fiscal year During 2003, the Company adopted the 2003 Share Incentive Plan (the “2003 Plan”) because no Common Shares remained available for future grants under the occurring after January 2, 2004 — in which case vesting shall occur for any restricted shares that did not vest in a prior fiscal year based on this 8% condition. 1999 Plan. The 2003 Plan provides for the granting of iii. 20,848 restricted shares vest 20% on each of the next options, share appreciation rights, restricted shares and five anniversaries of the Grant Date, provided that in performance units (collectively, “Awards”) to officers, addition to the Recipients’ continued employment employees and trustees of the Company and consultants through the vesting date, the Company’s total share- to the Company. The 2003 Plan is generally identical to holder return, as determined by the Committee in its the 1999 Plan, except that the maximum number of discretion, is 11% or more either for such fiscal year or, Common Shares that the Company may issue pursuant on average, for such fiscal year and each other fiscal to the 2003 Plan is four percent of the Common Shares year occurring after January 2, 2004 — in which case outstanding from time to time on a fully diluted basis. vesting shall occur for any restricted shares that did not However, no participant may receive more than 1,000,000 vest in a prior fiscal year based on this 11% condition. Common Shares during the term of the 2003 Plan with respect to Awards. The total value of the above restricted share awards on the date of grant was $1,586 which will be recognized As of December 31, 2004, the Company has 464,650 in expense over the vesting period. options outstanding to officers and employees. These fully vested options are for 10-year terms from the grant date and, except for 10,000 options which vested fully as of the grant date, vested in three equal annual install- ments which began on the grant date. In addition, 26,000 options have been issued to non-employee Trustees of which 8,200 options were vested as of December 31, 2004. For the year ended December 31, 2003, 107,834 restricted shares were issued pursuant to the 2003 Plan. The total value of the restricted share awards on the date of grant was $752 which will be recognized in expense over the vesting period. No restricted shares were issued for the year ended December 31, 2002. No awards of share appreciation rights or performance units/shares were During 2004, the Committee granted a total of 126,853 granted for the years ended December 31, 2004, 2003 restricted shares (net of subsequent forfeitures) pursuant and 2002. to the 2003 Plan to certain employees of the Company (the “Recipients”). In general, the restricted shares carry all the rights of Common Shares including voting and dividend rights, but may not be transferred, assigned or pledged until the Recipients have a vested non-forfeitable right to such shares. Vesting with respect to these For the years ended December 31, 2004, 2003 and 2002, $764, $410 and $121, respectively, was recognized in com- pensation expense related to restricted share grants. Unearned compensation of $1,400 as of December 31, 2004 will be recognized in expense as such shares vest. restricted shares, which is subject to the Recipients’ Effective January 1, 2002, the Company adopted the fair continued employment with the Company through value method of recording stock-based compensation the applicable vesting dates, is as follows: contained in SFAS No. 123, “Accounting for Stock-Based i. 85,157 restricted shares vest 20% on each of the next five anniversaries of the grant date, January 2, 2004 (“Grant Date”), ii. 20,848 restricted shares vest 20% on each of the next five anniversaries of the Grant Date, provided that in addition to the Recipients’ continued employment through the vesting date, the Company’s total share- holder return, as determined by the Committee in its Compensation.” As such, stock based compensation awards are expensed over the vesting period based on the fair value at the date the stock-based compensation was granted. 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, 2004, 2003 and 2002. Acadia Realty Trust 2004 Annual Report 37 Notes to Consolidated Statements continued The Company has also used this model for the pro forma information regarding net income and earnings per share as required by SFAS No. 123 for options issued for the year ended December 31, 2001 as if the Company Years Ended December 31, 2004 2003 2002 Risk-free interest rate 4.0% 4.4% 3.3% had also accounted for these employee stock options Dividend yield 4.2% 5.8% 7.0% under the fair value method. The fair value for the options issued by the Company was estimated at the Expected life 7.5 yrs. 10.0 yrs. 7.0 yrs. date of the grant using the following weighted-average Expected volatility 18.0% 18.0% 19.1% assumptions resulting in: Fair value at date of grant (per option) $ 2.17 $0.82 $0.44 Changes in the number of shares under all option arrangements are summarized as follows: Outstanding at beginning of year Granted Option price per share granted Cancelled Exercisable at end of period Settled1 Exercised Expired Outstanding at end of year Option prices per share outstanding Years Ended December 31, 2004 2,095,150 19,000 2003 2,472,400 8,000 $12.55–$14.13 $9.11–$11.66 — 446,850 39,500 1,610,000 — 464,650 — 2,082,750 385,000 250 — 2,095,150 2002 2,593,400 5,000 $7.10 — 2,313,436 126,000 — — 2,472,400 $5.75–$14.13 $4.89–$11.66 $4.89–$7.50 1Pursuant to the 1999 Plan these options were settled and did not result in the issuance of any additional Common Shares. As of December 31, 2004 the outstanding options had a weighted average exercise price of $6.61 and a weighted average remaining contractual life of approximately 5.4 years. Note 12i Employee Stock Purchase Plan and Deferred Share Plan In 2003, the Company adopted the Acadia Realty Trust 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 2004 and 2003, 6,397 and 810 Common Shares, respectively, were purchased by Employee Stock Purchase Plan (the “Purchase Plan”), Employees under the Purchase Plan and the associated which allows eligible employees of the Company to compensation expense was $15 and $1, respectively. purchase Common Shares through payroll deductions. The Purchase Plan provides for employees to purchase 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 deductions 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. Compensation In August of 2004, the Company adopted a Deferral and Distribution Election (“Deferred Share Election”) pursuant to the 1999 Share Incentive Plan and 2003 Share Incen- tive Plan, whereby the participants elected to defer receipt of 190,487 Common Shares (“Share Units”) that would otherwise be issued upon the exercise of certain options. The payment of the option exercise price was made by tendering Common Shares that the partici- pants owned for at least six months prior to the option 38 Acadia Realty Trust 2004 Annual Report exercise date. The Share Units are equivalent to a Common Share on a one-for-one basis and carry a dividend equivalent right equal to the dividend rate for the Company’s Common shares. The deferral period is determined by each of the participants and generally terminates after the cessation of the participants con- tinuous service with the Company, as defined in the agreement. In December 2004, optionees exercised Note 15i Income Taxes The Company believes it qualifies as a REIT and there- 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, 2004, 2003 and 2002, no provision was recorded for 346,000 options pursuant to the Deferred Share Election federal or state income taxes. and tendered 155,513 Common Shares in consideration of the option exercise price. The Company issued 155,513 Common Shares to optionees and 190,487 Share Units. The following unaudited table reconciles the Company’s book net income to REIT taxable income before dividends paid deduction: Note 13i Employee 401(k) Plan 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 employee’s annual salary. A plan participant may contribute up to a maximum of 15% of their compensation but not in excess of $13 for the year ended December 31, 2004. The Company contributed $109, $110, and $115 for the years ended December 31, 2004, 2003 and 2002, respectively. Note 14i Dividends and Distributions Payable On December 7, 2004, the Company declared a cash dividend for the quarter ended December 31, 2004 of $0.1725 per Common Share. The dividend was paid on January 14, 2005 to shareholders of record as of December 31, 2004. The Company has determined that the cash distributed to the shareholders is characterized as follows for Federal income tax purposes: Ordinary income Long-term capital gain Section 1250 gain Return of capital Years Ended December 31, 2004 59% 0% 32% 9% 2003 100% 0% 0% 0% 2002 44% 56% 0% 0% Years Ended December 31, 2004 Estimate 2003 Actual 2002 Actual Book net income $ 19,585 $ 7,853 $19,399 Book/tax difference in depreciation and amortization Book/tax difference on gains/losses from capital transactions Book/tax difference on exercise of options to purchase common shares Other book/tax differences, net REIT taxable income before dividends paid deduction Note 16i 3,438 3,828 (6,802) (1,354) — 904 (8,970) — — 1,953 (326) 1,380 $ 14,652 $11,355 $ 14,881 Financial Instruments Fair Value of Financial Instruments SFAS No. 107, “Disclosures About Fair Value of Financial Instruments” requires disclosure on the fair value of financial instruments. Certain of the Company’s assets and liabilities are considered financial instruments. Fair value estimates, methods and assumptions are set forth below. 100% 100% 100% Cash and Cash Equivalents, Cash in Escrow, Rents Receivable, Notes Receivable, Prepaid Expenses, Other Assets, Accounts Payable and Accrued Expenses, Acadia Realty Trust 2004 Annual Report 39 Notes to Consolidated Statements continued Dividends and Distributions Payable, Due to Related Parties and Other Liabilities — The carrying amount of these assets and liabilities approximates fair value the fair value of the derivative is recognized directly in earnings. The Company assesses the effectiveness of each hedging relationship by comparing the changes in due to the short-term nature of such accounts. fair value or cash flows of the derivative hedging instru- 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, 2004 and 2003 and is determined using ment with the changes in fair value or cash flows of the designated hedged item or transaction. For derivatives not designated as hedges, changes in fair value are recognized in earnings. interest rate market pricing models. As of December 31, 2004 and 2003, no derivatives were Mortgage Notes Payable — As of December 31, 2004 and 2003, the Company has determined the estimated fair value of its mortgage notes payable are approxi- mately $153,612 and $193,619, respectively, by discounting future cash payments utilizing a discount rate equivalent designated as fair value hedges or hedges of net invest- ments in foreign operations. Additionally, the Company does not use derivatives for trading or speculative pur- poses and currently does not have any derivatives that are not designated as hedges. to the rate at which similar mortgage notes payable During November 2004, the Company terminated inter- would be originated under conditions then existing. est rate swaps with a total notional amount of $16,974 Derivative Financial Instruments Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities” (SFAS 133), as amended and interpreted, estab- lishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all deriva- tives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designation. Derivatives used to hedge the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives used to hedge the exposure to variability in expected future cash flows, or other types of fore- casted transactions, are considered cash flow hedges. For derivatives designated as fair value hedges, changes in the fair value of the derivative and the hedged item related to the hedged risk are recognized in earnings. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the in connection with its investment in the Crossroads joint venture, which completed a refinancing of an existing variable-rate mortgage with a new fixed-rate mortgage. The fair value of these interest rate swaps was $1,307 which was paid by the Company to the counter-party at the termination date. This amount has been deferred in accumulated other comprehensive income and will be reclassified as additional interest expense as the hedged forecasted interest payments occur. Of this amount, $62 was reclassified from accumulated other comprehensive income as additional interest expense during 2004. In June of 2002, the Company completed two interest rate swap transactions to hedge the Company’s expo- sure 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 weighted average fixed interest rate of 6.2%. On July 10, 2002, the Company entered into an interest rate swap agreement to hedge its exposure to changes in interest rates with respect to $12,288 of LIBOR based variable-rate debt. The swap agreement, which matures on January 1, 2007, provides for a fixed all-in interest derivative is initially reported in other comprehensive rate of 4.1%. income (outside of earnings) and subsequently reclas- sified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in In January and February 2004, the Company entered into four forward starting variable to fixed interest rate swap agreements as described in the table below. 40 Acadia Realty Trust 2004 Annual Report The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2004. The notional value does not represent exposure to credit, interest rate or market risks: Hedge Type Notional Value Forward Start Date Interest Maturity Fair Value LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap1 LIBOR Swap1 LIBOR Swap1 LIBOR Swap1 $30,000 20,000 8,866 15,387 11,903 $ 86,156 $ 37,667 11,410 4,640 8,434 $ 62,151 Interest rate swap payable 1Forward starting interest swap agreements. Rate 4.80% 4.53% 4.47% 4.32% 4.11% 4.35% 4.90% 4.71% 5.14% N/A N/A N/A N/A N/A 4/1/05 10/1/06 6/1/07 1/1/07 1/1/07 4/1/05 10/2/06 10/2/06 6/1/07 1/1/11 10/1/11 1/1/10 3/1/12 $ (171) (436) (213) (289) (176) (449) (187) (57) (158) $ (2,136) As of December 31, 2004 and 2003, the derivative instru- relationship. For cash flow hedges, offsetting gains ments were reported at fair value as derivative instru- and losses are reported in accumulated other com- ment liabilities of $2,136 and $5,860 (of which $1,816 prehensive income. Over time, the unrealized gains was reflected as a reduction of investments in and and losses held in accumulated other comprehensive advances to unconsolidated partnerships for 2003), income will be reclassified to earnings. This reclassi- respectively. As of December 31, 2004 and 2003, unreal- fication occurs over the same time period in which ized losses totaling $3,219 and $5,734 represented the the hedged items affect earnings. Within the next fair value of the aforementioned derivatives, of which twelve months, the Company expects to reclassify $3,180 and $5,505 was reflected in accumulated other to earnings as interest expense approximately $1,300 comprehensive loss, and $39 and $229 as a reduction of the current balance held in accumulated other of minority interest in Operating Partnership. For the comprehensive loss. years ended December 31, 2004 and 2003, the Company recorded in interest expense an unrealized (loss) gain of Note 17i ($37) and $51, respectively, due to partial ineffectiveness on one of the swaps which was terminated in November 2004. The ineffectiveness resulted from differences between the derivative notional and the principal amount of the hedged variable rate debt. 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 Common Shares outstanding during each year The Company’s interest rate hedges are designated as consistent with SFAS No. 128. Diluted earnings per cash flow hedges and hedge the future cash outflows share reflects the potential dilution that could occur on mortgage debt. Interest rate swaps that convert if securities or other contracts to issue Common Shares variable payments to fixed payments, such as those were exercised or converted into Common Shares or held by the Company, as well as interest rate caps, floors, resulted in the issuance of Common Shares that then collars, and forwards are cash flow hedges. The unreal- shared in the earnings of the Company. The following ized gains and losses in the fair value of these hedges table sets forth the computation of basic and diluted are reported on the balance sheet with a corresponding earnings per share from continuing operations for adjustment to either accumulated other comprehensive the periods indicated. income or earnings depending on the type of hedging Acadia Realty Trust 2004 Annual Report 41 Notes to Consolidated Statements continued Numerator: Income from continuing operations — basic earnings per share $13,891 $ 8,755 $ 11,742 Years Ended December 31, 2004 2003 2002 Effect of dilutive securities: Preferred OP Unit distributions Numerator for diluted earnings per share Denominator: — 13,891 — 8,755 199 11,941 Weighted average shares — basic earnings per share 29,341 26,640 25,321 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 571 — 571 29,912 $ 0.47 $ 0.46 592 — 592 190 295 485 27,232 25,806 $ 0.33 $ 0.32 $ 0.47 $ 0.46 The weighted average shares used in the computation of basic earnings per share include unvested restricted shares (Note 11) and Share Units that are entitled to receive dividend equivalent payments (Note 12). The effect of the con- version of Common OP Units is not reflected in the above table as they are exchangeable for Common Shares on a one-for-one basis. The income allocable to such units is allocated on this same basis and reflected as minority interest in the accompanying consolidated financial statements. As such, the assumed conversion of these units would have no net impact on the determination of diluted earnings per share. 42 Acadia Realty Trust 2004 Annual Report Note 18i Summary of Quarterly Financial Information (unaudited) The quarterly results of operations of the Company for the years ended December 31, 2004 and 2003 are as follows: Revenue Income from continuing operations Income (loss) from discontinued operations Net income Net income per Common Share — basic: Income from continuing operations Income (loss) from discontinued operations Net income Net income per Common Share — diluted: Income from continuing operations Income (loss) from discontinued operations Net income Cash dividends declared per Common Share Weighted average Common Shares outstanding: March 31 $ 17,544 3,209 (359) 2,850 $ 0.11 (0.01) $ 0.10 $ 0.11 (0.01) $ 0.10 $ 0.16 June 30 $ 17,757 4,004 (240) 3,764 $ 0.14 (0.01) $ 0.13 $ 0.14 (0.01) $ 0.13 2004 September 30 $18,340 December 31 $19,215 Total For Year $72,856 3,223 (328) 2,895 $ 0.11 (0.01) $ 0.10 $ 0.11 (0.01) $ 0.10 3,455 6,621 10,076 $ 0.11 0.22 $ 0.33 $ 0.11 0.21 $ 0.32 13,891 5,694 19,585 $ 0.47 0.20 $ 0.67 $ 0.46 0.19 $ 0.65 $ 0.16 $ 0.16 $0.1725 $0.6525 Basic Diluted 27,890,065 29,333,184 29,459,175 30,665,688 29,340,992 28,560,779 29,793,310 29,953,528 31,645,852 29,912,405 Revenue Income(loss) 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 March 31 $17,685 3,702 (239) 3,463 $ 0.15 (0.01) $ 0.14 $ 0.15 (0.01) $ 0.14 $ 0.15 June 30 $16,076 2,648 (205) 2,443 $ 0.10 (0.01) $ 0.09 $ 0.10 (0.01) $ 0.09 2003 September 30 $ 16,374 December 31 $ 17,712 Total For Year $67,847 2,667 (243) 2,424 $ 0.10 (0.01) $ 0.09 $ 0.10 (0.01) $ 0.09 (262) (215) (477) $ (0.01) (0.01) $ (0.02) $ (0.01) (0.01) $ (0.02) 8,755 (902) 7,853 $ 0.33 (0.03) $ 0.30 $ 0.32 (0.03) $ 0.29 $ 0.15 $ 0.15 $ 0.16 $ 0.61 Weighted average Common Shares outstanding: Basic Diluted 25,377,095 26,387,010 27,333,040 27,431,982 26,639,832 25,639,027 26,880,780 28,062,699 28,305,567 27,232,816 Acadia Realty Trust 2004 Annual Report 43 Notes to Consolidated Statements continued Note 19i Commitments and Contingencies Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environ- ment, a current or previous owner or operator of real estate may be liable for the cost of removal or remedia- tion of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental remediation at any of its for- merly 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, For the year ended December 31, 2004, the Company accrued estimated costs of $730 related to flood damage incurred at the Mark Plaza located in Wilkes-Barre, Penn- sylvania. Under the terms of the Company’s insurance policy, a maximum deductible of approximately $730 would apply in the event the flood damage was the direct result of a “named” storm. The insurance company currently contends that the flood damage resulted directly from Hurricane Ivan, a “named” storm. 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 signif- icant effect on the Company’s consolidated financial underground storage tanks and polychlorinated biphenyls position or results of operations. (PCBs). Although such reviews are intended to evaluate the environmental condition of the subject property as Note 20i Subsequent Events On March 8, 2005, the Company invested $20,000 in a 10% preferred equity position in a Klaff controlled entity which leases real estate to Levitz Furniture. 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 recom- mended, a Phase II assessment was conducted to further determine the extent of possible environmental contam- ination. 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 environmental ins urance for most of its properties, which covers only unknown environmental risks. The Company believes that it is in compliance in all material respects with all Federal, state and local ordi- nances and regulations regarding hazardous or toxic substances. Management is not aware of any environ- mental liability that they believe would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which it would incur significant environ- mental costs if any or all properties were sold, disposed of or abandoned. However, there can be no assurance that any such non-compliance, liability, claim or expen- diture will not arise in the future. 44 Acadia Realty Trust 2004 Annual Report 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 800.227.5570