Acadia Realty Trust
Annual Report 2005

Plain-text annual report

Acadia Realty Trust Annual Report 2005 Solid Core Portfolio Strong Balance Sheet External Growth Platform Superior Management Team Acadia Realty Trust (NYSE:AKR), headquartered in White Plains, New York is a fully integrated, self-managed and self-administered equity REIT focused primarily on the ownership, acquisition, redevelopment and management of retail properties, including neighborhood/community shopping centers and mixed-use properties with retail components. We currently operate 75 properties, which we own or have an ownership interest in, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States totaling approximately 10 million square feet. Financial Highlights In thousands Total Revenues Funds from Operations 2 Real Estate Owned, at Cost Common Shares Outstanding Operating Partnership Units Outstanding 2005 2004 1 2003 1 2002 1 2001 1 $83,318 $ 71,657 $ 66,646 $ 65,916 $ 57,327 $35,842 $ 30,004 $ 27,664 $ 30,162 $ 13,487 $435,751 $414,974 $ 407,220 $393,635 $378,216 31,543 31,341 27,409 25,257 28,698 653 392 1,139 3,163 5,250 1Amounts for 2001 through 2004 have been restated to reflect activity and balances from continuing operations only. Consistent with Statement of Financial Accounting Standards No. 144, the results of operations as well as assets and liabilities of sold properties are reported separately as discontinued operations in our consolidated financial statements. 2We consider funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in 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 (or losses) from sales of property and depre- ciation and amortization. However, our method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be con- sidered as an alternative to net income for the purpose of evaluating our performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, we define FFO as net income (computed in accordance with GAAP), excluding gains (or losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Acadia Realty Trust 2005 Annual Report Page 1 To Our Shareholders By almost all measures, 2005 was a year of significant achievement for Acadia and its shareholders. We were the best performing shopping center REIT, delivering to our investors a total return of 36%. Acadia’s shareholders have also enjoyed average annual returns of 46% over the last three years and 35% over five years. As important as high shareholder returns, is our ability to achieve these results while maintaining a conservative balance sheet, an ever-improving core portfolio and a pipeline of value-added proj- ects that represent the seeds for our future growth. Kenneth F. Bernstein President and CEO Acadia’s Average Five-Year Total Returns Acadia versus Other Shopping Center REIT Sectors Acadia Peers 40% 35% 30% 25% 20% 15% Along with strong stock performance, the other financial metrics of our business were among the leaders in our industry. Our earnings (nor- malized FFO) grew 9%. Our dividend grew by 7.25% as our payout ratio (the best indicator of the safety of that dividend) held steady at 63% of FFO. While same store net operating income (NOI) grew at a very healthy 5.7%, we continued to maintain a conservative debt-to-market cap at 32% with very little floating rate debt. All of these achievements have positioned Acadia for continued growth and success. One of the more evident, but less meaningful, changes this year, is the format of our annual report. Because most of our shareholders/readers use the Internet, we have chosen this year to focus our creativity and resources on creating an electronic annual report available on our recently updated website at acadiarealty.com . While this letter and our 10k will continue to be printed (this year on recycled paper stock), this mailed version is certainly leaner and greener than previous years. For a more comprehensive visual understanding of Acadia, our progress and our focus, please visit our website the next time you are at your computer. Page 2 Acadia Realty Trust 2005 Annual Report Since I assumed CEO responsibilities five years ago, our focus has been four-pronged: Create a high-quality, core portfolio of high barrier-to-entry retail properties. Maintain a solid balance sheet that provides both security and the opportunity for strong future growth. Implement a disciplined and profitable investment program that stimulates significant external growth through strong risk-adjusted returns on our capital. Create and nurture an experienced and dedicated management team that embraces our core values and will consistently grow our business to provide superior performance well into the future. Those of you who have followed Acadia closely over the past five years have certainly heard or read all this before. While the specific assets and details may change, these four components of our strategy remain the keys to our success. CORE PORTFOLIO In 2005 we continued to drive the performance and enhance the asset quality of our core portfolio through aggressive leasing and effective asset recycling. As a result, our occupancy rate has improved to an all-time high of 94%. 2005 was an opportune time to shed properties that Our leasing/redevelopment team, led by Joe Povinelli, did were inconsistent with our long-term growth strategy a terrific job of driving our occupancy to an all-time high and replace them with higher growth and higher quality for Acadia. More than just occupancy rates, Joe’s team properties. An example of how we implemented this strategy was the disposition of an underperforming cen- focuses on bringing the right tenants to our centers and building strong relationships with those tenants who ter in Berlin, New Jersey and its replacement with an represent the lifeblood of our industry. During 2005 we exceptional property in densely populated Staten Island, renewed our commitment to offer our anchor tenants, New York. While there are several factors that can deter- such as Target, Shaw’s Supermarket and Home Depot, mine the long-term quality of a shopping center, a dense and other important tenants such as Trader Joe’s, TJ Maxx population with very limited land for new retail develop- and Starbucks, the finest locations in a given market. ment — what we consider high barriers to entry — is Acadia’s leasing team should also be credited with cre- perhaps the most significant. We will continue to pru- atively repositioning existing properties, which resulted dently look to recycle or rotate assets, building an ever- in luring such tenants as Coach to our Greenwich, improving portfolio of supply-constrained properties that Connecticut property last June and Sleepy’s to a redevel- provide superior performance independent of where we opment on Bartow Avenue in the Bronx. might be in the economic cycle. Acadia Realty Trust 2005 Annual Report Page 3 STRONG BALANCE SHEET Maintaining a strong balance sheet has always been a critical component of our business plan because it reduces certain risks and volatility. Equally important, a strong balance sheet provides us with plenty of “dry powder” as new opportunities arise. The strength of our 2005 balance sheet was evidenced by all industry measures. We held our debt-to-market cap to 32% and, more importantly, a fixed- charge coverage of 3.5 times. These ratios ensure the availability of capital to take advantage of opportunities without having to be overly dependent on the public equity markets. Protecting our balance sheet from unnecessary exposure Finally, a critical component of our capital structure is to rising interest rates is also crucial to our balance sheet providing our shareholders with a safe and growing divi- strategy. Mike Nelsen, Jon Grisham and the rest of their dend. Last year we increased our dividend by 7.25%, result- team did an excellent job last year of minimizing our ing in average dividend growth of 8.5% over the past five exposure to rising floating-rate debt while simultaneously years. We believe that a dividend’s safety, defined by how locking into low-cost fixed-rate long-term debt. While it well-covered it is by our earnings, is as important as may be unclear when and how significantly long-term the amount of the dividend. Our dividend payout ratio rates will climb, we are confident that borrowing remained at a solid 63% of FFO in 2005, which enables us long-term fixed-rate debt at less than 5.5% will feel to increase our dividend as our earnings growth continues. very comfortable in the not-so-distant future. Dividend Growth Fixed Charge Coverage Ratio Acadia versus Other Shopping Center REITS $0.75 $0.70 $0.65 $0.60 $0.55 $0.50 $0.45 $0.40 $0.35 $0.30 2002 2003 2004 2005 2006 Acadia Peers 4.0x 3.5x 3.0x 2.5x 2.0x 1.5x Page 4 Acadia Realty Trust 2005 Annual Report PROFITABLE EXTERNAL GROWTH PLATFORM Five years ago we launched our external growth platform with the formation of our first invest- ment fund, AKR Fund I. We believed that the discretionary fund structure enabled us to leverage our company’s strength and provide our shareholders with returns superior to a more typical acquisition structure. At the time, the fund structure was relatively new to the REIT community and not fully appreciated. In 2004 we launched our second fund, AKR Fund II, which is our current investment vehicle. In 2005, we continued our Fund II deployment with several exciting new acquisitions, and began the very profitable harvesting of Fund I investments made in prior years. Acadia’s investment team, led by Joel Braun and comple- velopments include two new properties in Northern mented by all of our other departments, is one of the Manhattan, and properties on 161st Street in the Bronx, best in the business. Utilizing our investment funds as on Liberty Avenue in Queens and in Canarsie, Brooklyn. the main driver of external growth, Joel and his talented team acquired a series of outstanding properties and put into place important investment ventures that will help drive our growth for future years. Last year, although we did acquire a few one-off assets, such as Clark and Diversey in Lincoln Park, Chicago, we focused the majority of our investment efforts on the two investment platforms formed in prior years: our New York Urban/Infill Venture and our RCP Venture. Acadia is a participant in the acquisi- tion of the 257-store Mervyn’s department store chain. NEW YORK URBAN/INFILL These seven innovative projects, which could total as Our New York Urban/Infill redevelopment program, much as 1.5 million square feet when complete, utilize the launched with our gifted partners at P/A Associates, unique density of the five boroughs of New York City and acquires prime New York City properties in portions of the strong tenant relationships that P/A and Acadia have the city that are underserved by strong national tenants. fostered, to bring the best retailers to locations previously We use our two companies’ combined talents to identify perceived as too complex for national tenants to pene- locations that can become dominant retail properties. trate. While these deals are as complex as they are excit- Last year we added five redevelopment projects in New ing, I believe our joint team is up to the task. Joe Hogan, York City to our previous acquisitions on Fordham Road our skillful head of construction, works hand in hand in the Bronx and in Pelham Manor, New York. These rede- with Aaron Malinsky and Paul Slayton of P/A Associates Pelham Manor Shopping Plaza, Pelham Manor, NY (suburb of NYC). Redevelopment rendering. Acadia Realty Trust 2005 Annual Report Page 5 and our redevelopment team to see these projects through to their completion. Bob Scholem, head of prop- erty management, has done a remarkable job integrating these projects into our operating system — not an easy task given all of the moving parts. While these ventures will not contribute to our earnings until they are closer to completion, they contribute to Acadia’s opportunities for significant future growth. At a time when existing, stable real estate properties are very expensive, investing in situations where we can use our value-added capabilities to create future growth is essen- tial to our long-term growth prospects. Brandywine Town Center, Brandywine, PA consortium as our partners, and look forward to participat- RETAILER CONTROLLED PROPERTY VENTURE ing in other retailer investments through our RCP Venture. In 2004 we launched our second investment platform, the Retailer Controlled Property (“RCP”) Venture, with our partners Klaff Realty and Lubert-Adler. The goal of this strategy is to acquire real estate owned or controlled by major retailers. Our first RCP investment (our partici- pation in the acquisition of Mervyn’s department stores in 2004) has already proven to be one of the more prof- itable in our company’s history. During 2005, through the sale of a portion of the portfolio and a subsequent refinancing of the balance, we have already received almost twice our equity investment. Our partners in the consortium have done a remarkable job — at both the real estate and Mervyn’s operations level — maximizing the value of this investment. HARVESTING PROFITS While we continue to make important new investments that will plant the seeds for future growth, 2005 was also a great year to begin harvesting some of the profits from earlier investments. With the sale of our fund investors’ interest in our Wilmington, Delaware complex, we entered into an agreement to recapitalize our investment in those properties at year-end. The recapitalization resulted in an implied equity profit of $88 million on our equity invest- ment of only $47 million enabling the return of all of the investors’ capital in AKR Fund I and allowing our profit participation to begin. This profit participation will con- tribute significant earnings gains in 2006 and should continue for several years as the harvesting continues. When we launched RCP with the Klaff organization and Bob Masters, our General Counsel, along with Joel Braun, Lubert-Adler, we were confident that we had chosen did a great job on a complicated and profitable transac- the right partners to participate with in this unique and tion. As an added benefit to this transaction, we are able profitable strategy. Since then, both Hersch Klaff and to create a potentially productive relationship with GDC Dean Adler have proven that they and their extraordinary Development Corp., the acquirer of AKR Fund I’s interest teams are the premier players in the retailer real estate in the property. We consider the GDC team an ideal long- arena. We are fortunate to have them and their extended term partner and a top-tier mixed-use developer. Page 6 Acadia Realty Trust 2005 Annual Report ENERGIZED MANAGEMENT TEAM As Acadia has grown, hiring, motivating, teaching and harnessing the energy from our talented management team has become a critical ingredient in our success. Joe Napolitano, as our head of asset management, has worked with all of our department heads, as well as senior management, to continue to drive our superior performance. In 2005, we added 41 new members to our team. They bring cre- ativity, innovation and new perspectives that have already positively impacted our organization and will enable us to continue to drive our growth and results for years to come. A key component to a successful management team is a with both the letter and the spirit of the evolving and knowledgeable and independent board of directors. Our complex regulations and requirements expected of board not only provides important oversight on behalf of today’s public companies. Wendy Luscombe, as a former shareholders, but is a valuable source of knowledge and REIT CEO herself and an active advisor to institutional experience. Lee Wielansky, as Lead Trustee, brings both his investors, brings an in-depth knowledge of both the decades of experience as a real estate developer and his public and private real estate markets. I am grateful to all extensive REIT experience. Alan Forman of Yale University the board members for their time, integrity, diligence and has managed one of the most successful real estate overall contribution to our success. endowment funds in the nation and contributes his significant investment acumen. Doug Crocker, the former CEO of Equity Residential Trust, is one of the most experi- enced REIT/real estate executives that any board can have as a member. Larry Kellar, former CFO of Kroger Supermarkets and former head of real estate for Kmart, offers both a retailer’s perspective and keen financial insight. Suzanne Hopgood, as chair of our corporate gov- ernance/nominating committee, ensures our compliance With our four-pronged focus, we are excited and energized about the future of Acadia. Our team, which continues to become deeper and stronger as Acadia grows, is well positioned and committed to continuing to create share- holder value, our mandate. We are extremely grateful for the support our shareholders gave us in 2005 and hope to retain that confidence and support by continuing to deliver superior results in 2006 and beyond. Kenneth F. Bernstein President and CEO Acadia Realty Trust 2005 Annual Report Page 7 Acadia Locations Core Properties 239 Greenwich Avenue Greenwich, CT 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 Elmwood Park Shopping Center Elmwood Park, NJ Ledgewood Mall Ledgewood, NJ Clark and Diversey Chicago, IL Marketplace of Absecon Absecon, NJ Bartow Avenue Bronx, NY Amboy Road Staten Island, NY The Branch Plaza Smithtown, NY New Loudon Center Latham, NY Pacesetter Park Shopping Center Pomona, NY Soundview Marketplace Port Washington, NY Village Commons Shopping Center Smithtown, NY Crossroads Shopping Center White Plains, NY Mad River Station Dayton, OH Abington Towne Center Abington, PA Blackman Plaza Wilkes-Barre, PA Bradford Towne Centre Towanda, PA Greenridge Plaza Scranton, PA Luzerne Street Shopping Center Scranton, PA Mark Plaza Edwardsville, PA Pittston Plaza Pittston, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Walnut Hill Plaza Woonsocket, RI The Gateway Shopping Center South Burlington, VT Fund Properties Brandywine Town Center Wilmington, DE Market Square Shopping Center Wilmington, DE Sterling Heights Shopping Center Sterling Heights, MI Fordham Place Bronx, NY Pelham Manor Shopping Plaza Pelham, NY 4650 Broadway Manhattan, NY 161st Street Bronx, NY Liberty Avenue Queens, NY 216th Street Manhattan, NY Tarrytown Centre Tarrytown, NY Amherst Marketplace Amherst, OH Granville Center Columbus, OH Sheffield Crossing Sheffield, OH 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 Roswell, NM Roanoke, VA Ruidoso, NM Shreveport, LA San Ramon, CA Wichita, KS (2 stores) Springerville, AZ Tucson, AZ Tulsa, OK Neiman Marcus (Oakbrook Center) Chicago, IL Levitz Furniture (Montrose Crossing Shopping Center) Rockville, MD Headquarters White Plains, NY Regional Offices Dayton, OH Kingston, PA Woonsocket, RI Page 8 Acadia Realty Trust 2005 Annual Report Acadia Realty Trust Form 10k Report 2005 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K ✔ ❏ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 ❏ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____ to _____ Commission File Number 1-12002 ACADIA REALTY TRUST (Exact name of registrant as specified in its charter) Maryland (State of incorporation) 23-2715194 (I.R.S. employer identification no.) 1311 Mamaroneck Avenue, Suite 260, White Plains, NY 10605 (Address of principal executive offices) (914) 288-8100 (Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act: Common Shares of Beneficial Interest, $.001 par value (Title of Class) New York Stock Exchange (Name of Exchange on which registered) Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ✔ YES ❏ NO ❏ Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15 (d) of the Securities Act. ✔ YES ❏ NO ❏ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. ✔ YES ❏ NO ❏ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ❏ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Act). Large Accelerated Filer ❏ Accelerated Filer ❏ Non-accelerated Filer ❏ ✔ Indicate by checkmark whether the registrant ia a shell company (as defined in Rule 12b-2 of the Act). ✔ YES ❏ NO ❏ The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of the last business day of the Registrant’s most recently completed second fiscal quarter was $586.4 million, based on a price of $18.65 per share, the average sales price for the Registrant’s shares of beneficial interest on the New York Stock Exchange on that date. The number of shares of the registrant’s Common Shares of Beneficial Interest outstanding on March 15, 2006 was 31,758,241. Part III: Definitive proxy statement for the 2006 Annual Meeting of Shareholders presently scheduled to be held May 15, 2006 to be filed pur- suant to Regulation 14A. DOCUMENTS INCORPORATED BY REFERENCE Acadia Realty Trust 2005 Annual Report Acadia Realty Trust. Form 10-K Report 2005 Contents Item No. PART I Page 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 PART II 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . 27 7A. Quantitative and Qualitative Disclosures about Market Risk. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . 36 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 PART III 10. Directors and Executive Officers of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39 PART IV 15. Exhibits, Financial Statements, Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Acadia Realty Trust 2005 Annual Report Special Note Regarding Forward-Looking Statements Certain statements contained in this Annual Report on Form 10-K may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities & Exchange Act of 1934 and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, per- formance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking statements, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,”“will,” to share, in proportion to our percentage interest, in the cash distributions and profits and losses of the Operating Partner- ship. The limited partners represent entities or individuals who contributed their interests in certain properties or partnerships to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”). Limited part- ners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial interest of the Company (“Common Shares”). This structure is commonly referred to as an umbrella partnership REIT or “UPREIT.” Capital Market Transactions On January 27, 2004, the Operating Partnership issued 4,000 “should,”“expect,”“anticipate,”“estimate,”“believe,”“intend” Series B Preferred Units in connection with the acquisition or “project” or the negative thereof or other variations from Klaff Realty, L.P. (“Klaff”) of its rights to provide asset thereon or comparable terminology. Factors which could management, leasing, disposition, development and construc- have a material adverse effect on our operations and future tion services for an existing portfolio of retail properties. prospects include, but are not limited to those set forth These units have a stated value of $1,000 each and are enti- under the heading “Risk Factors” in this Form 10-K. These tled to a quarterly preferred distribution of the greater of risks and uncertainties should be considered in evaluating (i) $13.00 (5.2% annually) per Preferred OP Unit or (ii) the any forward-looking statements contained or incorporated quarterly distribution attributable to a Preferred OP Unit if by reference herein. PART I ITEM 1. BUSINESSx GENERAL Acadia Realty Trust (the “Company,”“Acadia,”“we,”“us” or “our”) was formed on March 4, 1993 as a Maryland Real Estate Investment Trust (“REIT”). We are a fully integrated, self-managed and self-administered equity REIT focused primarily on the ownership, acquisition, redevelopment and such unit were converted into a Common OP Unit. The Pre- ferred OP Units are convertible into Common OP Units based on the stated value of $1,000 divided by $12.82 at any time. Additionally, the holder of the Preferred OP Units may redeem them at par for either cash or Common OP Units (at our option) after the earlier of the third anniversary of their issuance, or the occurrence of certain events including a change in the control of our Company. Finally, after the fifth anniversary of the issuance, we may redeem the Pre- ferred OP Units and convert them into Common OP Units at market value as of the redemption date. management of retail properties, including neighborhood In March of 2004, a secondary public offering was completed and community shopping centers and mixed-use properties for a total of 5,750,000 Common Shares. The selling share- with retail components. We currently operate 75 properties, holders, Yale University and its affiliates (“Yale”) and Ross which we own or have an ownership interest in. These assets Dworman, a former trustee and Chairman, sold 4,191,386 are located primarily in the Northeast, Mid-Atlantic and Mid- and 1,558,614 Common Shares, respectively. Yale was a major western regions of the United States which, in total, comprise shareholder, owning, at one time, approximately one-third approximately 10 million square feet. We also have non-oper- of all of our outstanding Common Shares. We did not sell ational investments in properties throughout the country any Common Shares in the offering and did not receive any through joint ventures. proceeds from the offering. All of our assets are held by, and all of our operations are During November 2004, we issued 1,890,000 Common Shares conducted through, Acadia Realty Limited Partnership, a (the “Offering”). The Offering was made pursuant to shelf Delaware limited partnership (the “Operating Partnership”) registration statements filed under the Securities Act of 1933, and its majority-owned subsidiaries. As of December 31, as amended, and previously declared effective by the Securities 2005 we controlled 98% of the Operating Partnership as the and Exchange Commission on March 29, 2000, May 14, 2003 sole general partner. As the general partner, we are entitled and March 19, 2004. The $28.3 million in proceeds from the Acadia Realty Trust 2005 Annual Report 1 Offering, net of related costs, were used to retire above-market, date we have launched two acquisition joint ventures, Acadia fixed-rate indebtedness as well as to invest in real estate Strategic Opportunity Fund, LP (“Fund I”) and Acadia Strategic assets. Yale, and Kenneth F. Bernstein, our Chief Executive Opportunity Fund II, LLC (“Fund II”). Officer, also sold 1,000,000, and 110,000 Common Shares, respectively, in connection with this transaction. Fund I RECENT DEVELOPMENTS Effective February 15, 2005, we acquired the balance of Klaff’s rights to provide the above services and certain potential In September 2001, we and four of our institutional share- holders formed a joint venture, whereby the investors com- mitted $70 million for the purpose of acquiring real estate assets. We committed an additional $20 million to Fund I, future revenue streams. The consideration for this acquisition as the general partner with a 22% interest. In addition to was $4.0 million in the form of 250,000 restricted Common a pro-rata return on our invested equity, we are entitled to OP Units, valued at $16 per unit, which are convertible into our Common Shares on a one-for-one basis after a five year lock-up period. As part of this transaction we also assumed all operational and redevelopment responsibility for the a profit participation based upon certain investment return thresholds. Cash flow is distributed pro-rata to the partners (including us) until they have received a 9% cumulative return on, and a return of, all capital contributions. Thereafter, remain- Klaff Properties a year earlier than was contemplated in the ing cash flow is distributed 80% to the partners (including January 2004 transaction. BUSINESS OBJECTIVES AND STRATEGIES Our primary business objective is to acquire and manage commercial retail properties that will provide cash for distri- butions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective: us) and 20% to us. We also earn a fee for asset manage- ment services equal to 1.5% of the allocated invested equity , as well as fees for property management, leasing and con- struction services. Our acquisition program was executed exclusively through Fund I through June 2004. Fund I focused on targeting assets for acquisition that had superior in-fill locations, restricted competition due to high barriers of entry and in-place below- ■ Own and operate a portfolio of community and neigh- market anchor leases with the potential to create significant borhood shopping centers and mixed-use properties additional value through re-tenanting, timely capital with a retail component located in markets with strong improvements and property redevelopment. Fund I consid- demographics. ■ Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth. ered both single assets and portfolios in its acquisition program. Although our core properties are located primarily in the Northeast, Mid-Atlantic and Midwest region, and therefore Fund I focused on potential acquisitions within these geographic areas, Fund I considered portfolio acquisi- ■ Generate internal growth within the portfolio through tions outside the geographic footprint. aggressive redevelopment, re-anchoring and leasing activities. On January 4, 2006, Fund I recapitalized a one million square foot retail portfolio located in Wilmington, Delaware (“Brandy- ■ Generate external growth through an opportunistic wine Portfolio”) through a merger of interests with affiliates yet disciplined acquisition program. The emphasis is on of GDC Properties (“GDC”). The Brandywine Portfolio was targeting transactions with high inherent opportunity for recapitalized through a “cash-out” merger of the 77.8% inter- the creation of additional value through redevelopment est, which was previously held by the institutional investors and leasing and/or transactions requiring creative capital in Fund I to GDC at a valuation of $164 million. We, through structuring to facilitate the transactions. a subsidiary, retained our existing 22.2% interest and will External Growth Strategy: Opportunistic Acquisition Platforms In addition to our direct investments in real estate assets, we have also capitalized on our expertise in the acquisition, redevelopment, leasing and management of retail real estate by establishing joint ventures in which we earn, in addition to a return on our equity interest, fees for our services. To continue to operate the Brandywine Portfolio and earn fees for such services. At the closing, the Fund I investors received a return of all of their capital invested in Fund I and preferred return, thus triggering the payment to us of our additional 20% carried interest (“Promote”) in all future Fund I distribu- tions. It is anticipated that up to $38 million of additional proceeds will be distributed to our investors from this transaction following, among other things, the successful Acadia Realty Trust 2005 Annual Report 2 replacement of bridge financing provided by us and our ■ Working with financially healthy retailers to create value investors. Additionally there are 32 assets comprising from their surplus real estate. approximately 2 million square feet remaining in Fund I in which our interest in cash flow and income will increase from 22.2% to 37.8% as a result of the Promote. Fund II Following our success with Fund I, we formed a second, larger acquisition joint venture. In June of 2004, we launched Fund II, which includes all of the investors from Fund I as well as two additional 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. We are the managing member with a 20% interest in Fund II. The terms and structure of Fund II are substantially 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 for the first twelve months and then on the total committed equity of $300 million thereafter. ■ Acquiring properties, designation rights or other control of real estate or leases associated with retailers in bankruptcy. ■ Completing sale leasebacks with retailers in need of capital. During 2004, we made our first RCP Venture investment with our participation in the acquisition of Mervyn’s as discussed in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. The RCP Venture is also currently exploring additional investment opportunities. New York Urban Infill Redevelopment Initiative In September of 2004, we, through Fund II, launched our New York Urban Infill Redevelopment initiative. As retailers continue to recognize that many of the nation’s urban mar- kets are underserved from a retail standpoint, Fund II is poised to capitalize on this trend by investing in redevelop- ment projects in dense urban areas where retail tenant demand has effectively surpassed the supply of available As the demand for retail real estate has significantly increased sites. During 2004, Fund II, together with an unaffiliated in recent years, there has been a commensurate increase in partner, P/A Associates, LLC (“P/A”), formed Acadia-P/A Hold- selling prices. In an effort to generate superior risk-adjusted ing Company, LLC (“Acadia-P/A”) for the purpose of acquiring, returns for our shareholders and joint venture investors, we constructing, developing, owning, operating, leasing and have channeled our acquisition efforts through Fund II in managing certain retail real estate properties in the New two new opportunistic joint ventures launched during 2004 York City metropolitan area. P/A has agreed to invest 10% — the Retailer Controlled Property Venture and the New York of required capital up to a maximum of $2.0 million and Urban Infill Redevelopment Initiative. Fund II, the managing member, has agreed to invest the Retailer Controlled Property Venture (the “RCP Venture”) On January 27, 2004, through Funds I and II, we entered into the RCP Venture with Klaff and Klaff’s long time capital part- ner Lubert-Adler Management, Inc. (“Lubert-Adler”) for the purpose of making investments in surplus or underutilized properties owned by retailers. The initial size of the RCP Venture is expected to be approximately $300 million in equity based on anticipated investments of approximately $1 billion. Each participant in the RCP Venture has the right to opt out of any potential investment. Affiliates of Funds I and II have invested $24.6 million in the RCP Venture to date. Fund II anticipates investing the remaining portion of the original 20% of the equity of the RCP Venture. Cash flow is to be distributed to the partners until they have received a 10% cumulative return and a full return of all contributions. Thereafter, remaining cash flow is to be distributed 20% to balance to acquire assets in which Acadia-P/A agrees to invest. Operating cash flow is generally to be distributed pro-rata to Fund II and P/A until they have received a 10% cumulative return and then 60% to Fund II and 40% to P/A. Distributions of net refinancing and net sales proceeds, as defined, follow the distribution of operating cash flow except that unpaid original capital is returned before the 60%/40% split between Fund II and P/A, respectively. Upon the liquidation of the last property investment of Acadia- P/A, to the extent that Fund II has not received an 18% inter- nal rate of return (“IRR”) on all of its capital contributions, P/A is obligated to return a portion of its previous distribu- tions, as defined, until Fund II has received an 18% IRR. To date, Fund II has, in conjunction with P/A, invested in six projects through Fund II as discussed further in “PROPERTY ACQUISITIONS” in this Item 1 of this Form 10-K. Klaff (“Klaff’s Promote”) and 80% to the partners (including Other Investments Klaff). We will also earn market-rate fees for property man- We may also invest in preferred equity investments, mort- agement, leasing and construction services on behalf of the gages, other real estate interests and other investments. RCP Venture. Fund II seeks to invest opportunistically in the The mortgages in which we invest may be either first RCP Venture primarily in the following three ways: Acadia Realty Trust 2005 Annual Report 3 mortgages or mezzanine debt, where we believe the under- We typically hold our properties for long-term investment. lying value of the real estate collateral is in excess of its loan As such, we continuously review the existing portfolio and balance. In March of 2005, we invested $20 million in a pre- implement programs to renovate and modernize targeted ferred equity position (“Preferred Equity”) in Levitz SL, L.L.C. centers to enhance the property’s market position. This in (“Levitz SL”), the owner of 2.5 million square feet of fee and turn strengthens the competitive position of the leasing leasehold interests in 30 locations (the “Properties”), the program to attract and retain quality tenants, increasing majority of which are currently leased to Levitz Furniture cash flow and consequently property value. We also periodi- Stores. Klaff is a managing member of Levitz SL. The Preferred cally identify certain properties for disposition and redeploy Equity receives a return of 10%, plus a minimum return of the capital to existing centers or acquisitions with greater capital of $2 million per annum. At the end of 12 months, the potential for capital appreciation. Our core portfolio consists rate of return will be reset to the six-month LIBOR plus 644 primarily of neighborhood and community shopping centers, basis points. The Preferred Equity is redeemable at the option which are generally dominant centers in high barrier-to-entry of Levitz SL at any time. We also regularly engage in discussions with public and private entities regarding business combinations. Furthermore, we may consider either acquiring directly or engaging in addi- tional joint ventures related to property acquisition and development. The requirements that acquisitions be accretive on a long-term basis based on our cost of capital, as well as markets. The anchors at these centers typically pay market or below-market rents and have low rent-to-sales ratios, which are, on average, less than 5%. Furthermore, supermarket and necessity-based retailers anchor the majority of our core portfolio. These attributes enable our properties to better withstand a weakening economy while also creating oppor- tunities to increase rental income. increase the overall portfolio quality and value, are core to During 2004 and 2005 we sold two non-core properties and our acquisition program. As such, we constantly evaluate the redeployed the capital to acquire two retail properties during blended cost of equity and debt and adjust the amount of 2005 as further discussed in “ASSET SALES” and PROPERTY acquisition activity to align the level of investment activity ACQUISITIONS” in this Item 1 of this Form 10-K. with capital flows. Financing Strategy Operating Strategy: Experienced Management Team with Proven Track Record We intend to continue financing acquisitions and property redevelopment with sources of capital determined by man- Our senior management team has an average of eight years agement to be the most appropriate based on, among other with us and our predecessors and 25 years in the real estate industry. During 2002, the management team successfully completed a multi-year portfolio repositioning initiative that significantly improved the quality of our portfolio and tenant base. We believe our management team has demon- strated the ability to create value internally through anchor recycling, property redevelopment and strategic non-core dispositions. Operating functions such as leasing, property management, construction, finance and legal (collectively, the “Operating Departments”) are provided by our personnel, providing for fully integrated property management and development. factors, availability, pricing and other commercial and finan- cial terms. The sources of capital may include cash on hand, bank and other institutional borrowing, the sale of properties and issuance of equity securities. We continually focus on maintaining a strong balance sheet when considering the sourcing of capital. We manage our interest rate risk prima- rily through the use of variable and fixed rate debt. We also utilize LIBOR swap agreements in managing our exposure to interest rate fluctuations. See Item 7A for a discussion on our market risk exposure related to our mortgage debt. PROPERTY ACQUISITIONS By incorporating the Operating Departments in the acquisi- RCP Venture tion process, acquisitions are appropriately priced giving effect to each asset’s specific risks and returns. Also, because of the Operating Departments involvement with, and corre- sponding understanding of, the acquisition process, transi- tion time is minimized and management can immediately execute on its strategic plan for each asset. In September 2004, we made our first RCP Venture invest- ment with our participation in the acquisition of Mervyn’s. Affiliates of Fund I and Fund II, through separately organized, newly formed limited liability companies on a non-recourse basis, invested in the acquisition of Mervyn’s through the RCP Venture, which, as part of an investment consortium of Acadia Realty Trust 2005 Annual Report 4 Sun Capital and Cerberus, acquired Mervyn’s from Target is to reconfigure the property so that approximately 50% of Corporation. The total acquisition price was approximately the income from the building will eventually be derived $1.2 billion subject to debt of approximately $800.0 million. from retail tenants. Our share of equity invested aggregated $24.6 million on a non-recourse basis and was divided equally between affiliates of Funds I and II. As of the date of acquisition, Mervyn’s was a 257-store discount retailer with a very strong West Coast concentration. During 2005, the consortium sold a portion of the portfolio as well as refinanced existing mortgage debt and distributed cash to the investors, of which a total of $42.7 million was distributed to affiliates of Fund I and Fund II of which our share amounted to $10.2 million. In February of 2006, the consortium distributed additional cash of which a total of $1.4 million was distributed to affili- ates of Fund I and Fund II of which $0.4 million was our share. New York Urban/Infill Redevelopment Initiative Liberty Avenue: On December 20,2005, Acadia-P/A acquired the remaining 40-year term of a leasehold interest in land located at Liberty Avenue and 98th Street in Queens (Ozone Park), NY. The development plans for this property include 30,000 square feet of retail anchored by a CVS drug store and a 98,500 square foot self-storage facility to be operated by Storage Post. Acadia-P/A will be a partner in the self-storage complex with Storage Post, which is anticipated to be a part- ner in future retail projects in New York City where self stor- age will be a potential component of the redevelopment. The total cost of the redevelopment is expected to be approxi- mately $13 million. The CVS 10,880 square foot lease has been executed and construction on this project has commenced. 216th Street: On December 1, 2005, Acadia-P/A acquired a 65,000 square foot parking garage located at 10th Avenue and 216th Street in the Inwood section of Manhattan for $7 million. Acadia-P/A plans to redevelop the building into a 60,000 square foot office building and are finalizing a lease where it would relocate an agency of the City of New York, which is a current tenant at another of our Urban/Infill Redevelopment projects. Inclusive of acquisition costs, total costs for the project, which also includes a 100-space rooftop parking deck, are anticipated to be $25 million. 161st Street: On August 5, 2005, Acadia-P/A purchased 244-268 161st Street located in the Bronx for $49.3 million, inclusive of closing costs. In connection with the transaction, Acadia- P/A borrowed $12.1 million from Bank of America as bridge financing. The loan carries variable-rate interest at LIBOR plus 1.5% with monthly payments of interest only. The loan matures March 31, 2006. The ultimate redevelopment plan for the property, a 100% occupied, 10-story office building, Acadia Realty Trust 2005 Annual Report 5 4650 Broadway: On April 6, 2005, Acadia-P/A acquired 4650 Broadway located in the Washington Heights/Inwood section of Manhattan. The property, a 140,000 square foot building, which is currently occupied by the City of New York and a commercial parking garage, was acquired for a purchase price of $25 million. Acadia-P/A plans to redevelop the site to include retail, commercial and residential components totaling over 300,000 square feet. The retail and commercial (including office, “Community Use” and parking) portion comprise approximately 50% of the project and the residen- tial component comprises the other 50%. Redevelopment of the project is anticipated to commence during 2007 with completion expected 18 months thereafter. Expected costs to complete the retail and commercial component of the project are estimated at $40 million before any potential sale of the residential air rights. In lieu of directly developing the resi- dential portion of the project, the rights to this component may be sold while retaining ownership of the other portions of the project. Pelham Manor: On October 1, 2004, Acadia-P/A entered into a 95-year, inclusive of extension options, ground lease to redevelop a 16-acre site in Pelham Manor, Westchester County, New York. The property is in an upper middle-income, infill neighborhood located approximately 10 miles from Manhat- tan with over 400,000 people in a three-mile radius. The redevelopment contemplates the demolition of the existing industrial and warehouse buildings, and replacing them with a multi-anchor community retail center. Acadia-P/A anticipates the redevelopment to cost between $30 and $33 million, with construction anticipated to commence during 2007. In the interim, the property will continue to be operated as an industrial and warehouse facility. Prior to commence- ment of the redevelopment process, the warehouse rents collected are projected to equal the ground rent payment. Fordham Road: On September 29, 2004, Acadia-P/A purchased 400 East Fordham Road in the Bronx, NY. The property, a multi-level retail and commercial building, is located at the intersection of East Fordham Road and Webster Avenue, near Fordham University. Sears is the major tenant of the property, retailing on four levels. The redevelopment of the property is scheduled to commence in 2007 following the expiration of the Sears lease, which was originally signed in 1964. However, depending on current negotiations with both Sears and other potential anchors, the time frame of the redevelopment may be accelerated. As part of the redevelopment, there is the potential for additional expan- $0.9 million, primarily our pro-rata share of equity, as a partner sion of up to 85,000 square feet of space. The total cost of in Fund I. In September 2004, Fund I and Hendon purchased the redevelopment project, including the acquisition cost of the Pine Log Plaza for $1.5 million. The 35,000 square foot $30 million, is estimated to be between $65 and $70 million, center is located in front of and adjacent to Hitchcock Plaza. depending on the ultimate scope of the project. On February Related to this transaction, we provided an additional $0.75 25, 2005, Acadia-P/A acquired vacant land adjacent to the million mortgage loan to the project with a March 2006 400 East Fordham Road property for $867,000. maturity and interest at 7% for the first year and 6% for the In addition to the above New York Urban/Infill projects, Fund II also acquired the following: During July 2005, Fund II acquired for $1.0 million, a 50% equity interest from its partner in the RCP Venture in the entity which has a leasehold interest in a former Levitz Furniture store located in Rockville, Maryland. second year. During February 2006, Fund I finalized an agreement with Hendon whereby Fund I converted its common equity to a preferred equity position with a 15% preferred return. In connection with this agreement, Hendon assumed all opera- tional, redevelopment and leasing responsibilities. Hendon also secured construction financing from which the first During November 2005, Fund II acquired a ground lease mortgage loans to us were repaid. interest in a 112,000 square foot building occupied by Neiman Marcus. The property is located at Oakbrook Center, a super- regional Class A mall located in the Chicago Metro area. The ground lease was acquired for $6.9 million, including closing and other acquisition costs. Fund I To date, Fund I has purchased a total of 35 assets totaling 2.7 million square feet. During January 2006, Fund I recapi- talized the Brandywine Portfolio, representing two assets totaling approximately 1.0 million square feet, through a In May 2004, Fund I and an unaffiliated partner, each with a 50% interest, acquired a 35,000 square foot shopping cen- ter in Tarrytown, New York, for $5.3 million. Related to this acquisition, we loaned $2.0 million to Fund I which bears interest at the prime rate and matured May 2005. This loan has been converted to a demand note. The 35,000 square foot, Westchester, NY property (New York City MSA), was formerly anchored by a 25,000 square foot Grand Union supermarket. The redeveloped property includes a 15,000 square foot Walgreen’s drugstore with the balance of space merger of interests with GDC as discussed further in “BUSI- leased to shop tenants. NESS OBJECTIVES AND STRATEGIES” in this Item 1 of this Form 10-K. Following are the Fund I acquisitions: 2004 Acquisitions On March 11, 2004, Fund I, in conjunction with our long-time investment partner, Hendon Properties (“Hendon”), purchased a $9.6 million first mortgage loan from New York Life Insur- ance Company for $5.5 million. The loan, which was secured by the Hitchcock Plaza in Aiken, South Carolina, was in default at acquisition. Fund I and Hendon acquired the loan with the intention of pursuing ownership of the property secur- ing 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 entitled to receive profit participation in excess of its proportionate equity interest. 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. We provided $3.2 million of mortgage financing to the project in connection with the purchase of the first mortgage loan. The note matured March 9, 2006, and bore interest at 7% for the first year and 6% for the second year. In addition to this loan, we invested In May 2004, Fund I acquired a 50% interest in the Haygood Shopping Center and the Sterling Heights Shopping Center for an aggregate investment of $3.2 million. These assets are part of the portfolio that we currently manage as a result of our January 2004 acquisition of certain management contracts from Klaff. The Haygood Shopping Center is a 165,000 square foot shopping center located in Virginia Beach, VA. It is currently 73% occupied and anchored by a Farmfresh supermarket and Eckerd Drug. The Sterling Heights Shopping Center, located in Sterling Heights, MI (suburb of Detroit), totals 141,000 square feet. The property is 55% occupied and is anchored by Burlington Coat Factory. Redevelopment activities include the complete renovation of the property and the re-leasing of the current vacancy to Rite-Aid. 2003 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 the following two properties: Acadia Realty Trust 2005 Annual Report 6 Market Square Shopping Center: A 103,000 square foot com- munity shopping center (including a 15,000 square foot out- Kroger/Safeway Portfolio: In January of 2003, Fund I formed a joint venture (the “Kroger/Safeway JV”) with an affiliate parcel building) which is 100% leased and anchored by a T.J. of real estate developer and investor AmCap Incorporated Maxx and a Trader Joe’s gourmet food market. (“AmCap”) for the purpose of acquiring a portfolio of 25 Brandywine Town Center: 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 occu- pies 138,000 square feet and Bombay occupies 9,000 square feet. The balance of Phase II is currently not occupied. supermarket leases for $48.9 million inclusive of the closing and other related acquisition costs. The portfolio, which aggregates approximately 1.0 million square feet, consists of 25 anchor-only leases with Kroger (12 leases) and Safeway supermarkets (13 leases). The majority of the properties are free-standing and all are triple-net leases. The Kroger/Safe- way 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-affili- ated entity. The rental options for the supermarket leases at The initial investment for this portfolio was approximately the end of their primary lease term in approximately seven $86.3 million, inclusive of closing and other related acquisi- years (“Primary Term”) are at an average of $5.13 per square tion costs. Fund I will also pay additional amounts for the foot. Although there is no obligation for the Kroger/Safeway current vacant space in Phase II when and if it is leased and JV to pay ground rent during the Primary Term, to the extent occupied (the “Earn-out”). To date, Fund I has incurred costs it exercises an option to renew a ground lease for a property of $30.3 million for Earn-out space. at the end of the Primary Term, it will be obligated to pay an During January of 2006, Fund I recapitalized this investment average ground rent of $1.55 per square foot. as further discussed in “BUSINESS OBJECTIVES AND STRATE- The following table sets forth more specific information GIES” in this Item 1 of this Form 10-K. with respect to the 25 supermarket leases: Location Great Bend, KS Cincinnati, OH Conroe, TX Harahan, LA Indianapolis, IN Irving, TX Pratt, KS Roanoke, VA Shreveport, LA Wichita, KS Wichita, KS Atlanta, TX Batesville, AR Benton, AR Carthage, TX Little Rock, AR Longview, WA Mustang, OK Roswell, NM Ruidoso, NM San Ramon, CA Springerville, AZ Tucson, AZ Tulsa, OK Cary, NC Tenant Kroger Co. (1) Kroger Co. Kroger Co. (2) Kroger Co. (2) Kroger Co. Kroger Co. Kroger Co. (1) Kroger Co. Kroger Co. Kroger Co. (1) Kroger Co. (1) Safeway (3) Safeway (1) Safeway (1) Safeway (1) Safeway (1) Safeway Safeway (1) Safeway (2) Safeway (1) Safeway Safeway Safeway Safeway (1) Kroger Co. (3) Total Gross Leasable Area (“GLA”) 48,000 32,200 75,000 60,000 34,000 43,900 38,000 36,700 45,000 50,000 40,000 31,000 29,000 33,500 27,700 36,000 48,700 30,200 36,300 38,600 54,000 30,500 41,800 30,000 48,000 1,018,100 Current Rent $ 3.60 8.09 6.95 6.93 5.85 6.53 5.68 13.02 10.52 11.23 10.48 7.35 10.55 8.68 7.59 12.15 8.27 7.66 10.96 11.01 9.16 8.92 8.64 9.14 6.88 Rent Upon Initial Option Commencement $ 2.40 5.36 4.60 4.61 3.87 4.32 3.78 8.62 6.96 7.48 6.97 3.98 5.72 4.71 4.12 6.58 4.48 4.15 5.94 5.97 4.96 4.83 4.68 4.96 4.55 Lease Expiration Year/ Last Option Expiration Year 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 2009/2049 (1) The tenant is obligated to pay rent pursuant to the lease and has sub-leased this location to a supermarket sub-tenant. (2) The tenant is obligated to pay rent pursuant to the lease and has sub-leased this location to a non-supermarket sub-tenant. (3)The tenant is currently not operating at this location although they continue to pay rent in accordance with the lease. Acadia Realty Trust 2005 Annual Report 7 Ohio Portfolio: In September of 2002, Fund I acquired three supermarket-anchored shopping centers located in Cleve- current 26,000 square foot store to 37,000 square feet. We also installed a new 49,000 square foot Raymour and Flanigan land and Columbus, Ohio for a total purchase price of $26.7 Furniture store at this center during 2004. This community million. Additional information on these properties is shopping center is now 100% occupied. Costs incurred for included in Item 2 of this Form 10-K. this project totaled $418,000. ASSET SALES AND CAPITAL/ASSET RECYCLING We periodically identify certain properties for disposition and redeploy the capital to existing centers or acquisitions with greater potential for capital appreciation. During July 2005, we sold the Berlin Shopping Center for $4.0 million and in 2004, we disposed of the East End Centre, for $12.4 million. We also completed the redevelopment and re-anchoring of the Town Line Plaza, located in Rocky Hill, Connecticut during 2004. The former building, occupied by GU Markets, 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 interruption in rent payments. Costs to date for this proj- During July 2005 we purchased 4343 Amboy Road (“Amboy ect totaled $1.7 million. Road”) located in Staten Island, New York for $16.6 million in cash and $0.2 million in Common OP Units. The property, a 60,000 square foot neighborhood shopping center, is anchored by a Waldbaum’s supermarket and a Duane Reade FINANCIAL INFORMATION ABOUT MARKET SEGMENTS We have two reportable segments: retail properties and drug store, and is subject to a 23-year ground lease. multi-family properties. The accounting policies of the seg- During January 2006, we closed on a 20,000 square foot retail building in the Lincoln Park district in Chicago (“Clark/ Diversey”). The property was acquired from an affiliate of Klaff for $9.8 million. Tenants include Starbucks, Nine West, Vitamin Shoppe, The Body Shop, Papyrus and Cold Stone Creamery. Along with its strong location, the property has significant long-term growth potential. ments are the same as those described in the notes to the consolidated financial statements appearing in Item 8 of this Annual Report on Form 10-K. We evaluate property per- formance primarily based on net operating income before depreciation, amortization and certain non-recurring items. The reportable segments are managed separately due to the differing nature of the leases and property operations asso- ciated with retail versus residential tenants. We do not have Also during January 2006, we acquired a 60% interest in the any foreign operations. See the consolidated financial state- A&P Shopping Plaza located in Boonton (“Boonton”), New ments and notes thereto included in Item 8 of this Annual Jersey. The property, which is 100% occupied and located in Report on Form 10-K for certain information on industry northeastern New Jersey, is a 63,000 square foot shopping segments as required by Item 1. center anchored by a 49,000 square foot A&P Supermarket. The remaining 40% interest is owned by a principal of P/A. The interest was acquired for $3.2 million. PROPERTY REDEVELOPMENT AND EXPANSION Our redevelopment program focuses on selecting well- CORPORATE HEADQUARTERS AND EMPLOYEES Our executive offices are located at 1311 Mamaroneck Avenue, Suite 260, White Plains, New York 10605, and our telephone number is (914) 288-8100. We have 158 employees, of whom 94 are located at our executive office, seven at the Pennsylva- located neighborhood and community shopping centers and nia regional office and the remaining property management creating significant value through re-tenanting and property personnel are located on-site at our properties. redevelopment. During 2005, we did not undertake any sig- nificant redevelopment projects within our core portfolio. During 2004, we completed the redevelopment of the New Loudon Center, located in Latham, New York. A new anchor, The Bon Ton Department Store, opened for business during the fourth quarter of 2003 as part of the redevelopment of this shopping center. Occupying 66,000 square feet formerly occupied by an Ames department store, Bon Ton is paying base rent at a 15% increase over that of Ames. During 2004, Marshall’s, an existing tenant at the center, expanded its COMPANY WEBSITE All of our filings with the Securities and Exchange Com- mission, including our annual reports on Form 10-K, quar- terly reports on Form 10-Q and current reports on Form 8-K and amendments to those reports filed or furnished pur- suant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge at our website at www.acadiarealty.com, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. These filings Acadia Realty Trust 2005 Annual Report 8 can also be accessed through the Securities and Exchange if a major tenant files bankruptcy. See the discussion of Commission’s website at www.sec.gov. Alternatively, we will bankruptcy risks under Risk Factors. provide paper copies of our filings free of charge upon request. CODE OF ETHICS AND WHISTLEBLOWER POLICIES During 2003, our Board of Trustees adopted a Code of Ethics for Senior Financial Officers that applies to our Chief Execu- tive Officer, Chief Financial Officer, Chief Accounting Officer, Controller and Assistant Controllers. The Board also adopted a Code of Business Conduct and Ethics applicable to all employees, as well as a “Whistleblower Policy.” Copies of these documents are available in the Investor Information section of our website. ITEM 1A. RISK FACTORSx Limited control over joint venture investments. Our joint venture investments may involve risks not other- wise present for investments made solely by us, including the possibility that our joint venture partner might have different interests or goals than we do. Other risks of joint venture investments include impasse on decisions, such as a sale, because neither we nor a joint venture partner would have full control over the joint venture. Also, there is no limitation under our organizational documents as to the amount of funds that may be invested in joint ventures. Through our investments in joint ventures we have also invested in operating businesses that have operational risk If any of the following risks actually occur, our business, in addition to the risks associated with real estate investments, results of operations and financial condition would likely including among other risks, human capital issues, adequate suffer. This section includes or refers to certain forward- supply of product and material, and merchandising issues, looking statements. Refer to the explanation of the qualifi- cations and limitations on such forward-looking statements discussed elsewhere in this Form 10-K. We rely on revenues derived from major tenants. We derive significant revenues from certain anchor tenants that occupy space in more than one center. We could be adversely affected in the event of the bankruptcy or insol- vency of, or a downturn in the business of, any of our major tenants, or in the event that any such tenant does not renew its leases as they expire or renews at lower rental rates. Vacated anchor space not only would reduce rental revenues if not re-tenanted at the same rental rates but also could adversely affect the entire shopping center because of the loss of the departed anchor tenant’s customer drawing power. Loss of customer drawing power also can occur through the exercise of the right that most anchors have to vacate and prevent re-tenanting by paying rent for the balance of the lease term, or the departure of an anchor tenant that owns its own property. In addition, in the event that certain major tenants cease to occupy a property, such an action may result in a significant number of other tenants having the right to terminate their leases, or pay a reduced rent based on a percentage of the tenant’s sales, at the affected property, which could adversely affect the future income from such property. Tenants may seek the protection of the bankruptcy laws, which could result in the rejection and termination of their leases and thereby cause a reduction in the cash flow avail- able for distribution by us. Such reduction could be material During 2005, our investment in joint ventures provided Promote income. There can be no assurance that the joint ventures will continue to operate profitably and thus provide additional Promote income in the future. Under the terms of our Fund II joint venture, we are required to first offer to Fund II all of our opportunities to acquire retail shopping centers. Only if (i) our joint venture partner elects not to approve Fund II’s pursuit of an acquisition opportunity; (ii) the ownership of the acquisition opportunity by Fund II would create a material conflict of interest for us; (iii) we require the acquisition opportunity for a “like-kind” exchange; or (iv) the consideration payable for the acquisition opportunity is our Common Shares, OP Units or other securities, may we pursue the opportunity directly. As a result, we may not be able to make attractive acquisitions directly and may only receive a minority interest in such acquisitions through Fund II. We operate through a partnership structure, which could have an adverse effect on our ability to manage our assets. Our primary property-owning vehicle is the Operating Part- nership, of which we are the general partner. Our acquisition of properties through the Operating Partnership in exchange for interests in the Operating Partnership may permit certain tax deferral advantages to limited partners who contribute properties to the Operating Partnership. Since properties contributed to the Operating Partnership may have unrealized gain attributable to the difference between the fair market value and adjusted tax basis in such properties prior to con- tribution, the sale of such properties could cause adverse tax consequences to the limited partners who contributed such Acadia Realty Trust 2005 Annual Report 9 properties. Although we, as the general partner of the Oper- potential reduction in customer traffic may adversely impact ating Partnership, generally have no obligation to consider the balance of tenants at the center. the tax consequences of our actions to any limited partner, there can be no assurance that the Operating Partnership will not acquire properties in the future subject to material restrictions designed to minimize the adverse tax conse- quences to the limited partners who contribute such prop- erties. Such restrictions could result in significantly reduced flexibility to manage our assets. There are risks relating to investments in real estate. Value of real estate is dependent on numerous factors. Real property investments are subject to varying degrees of risk. Real estate values are affected by a number of factors, including: changes in the general economic climate, local conditions (such as an oversupply of space or a reduction in demand for real estate in an area), the quality and philosophy of management, competition from other available space, the ability of the owner to provide adequate maintenance and insurance and to control variable operating costs. Shopping centers, in particular, may be affected by changing perceptions of retailers or shoppers regarding the safety, convenience and attractiveness of the shopping center and by the overall climate for the retail industry generally. Real estate values are also affected by such factors as government regulations, interest rate levels, the availability of financing and potential liability under, and changes in, environmental, zoning, tax and other laws. As substantially all of our income is derived from rental income from real property, our income and cash flow would be adversely affected if a significant number of our tenants were unable to meet their obligations, or if we were unable to lease on economically favorable terms a sig- nificant amount of space in our properties. In the event of default by a tenant, we may experience delays in enforcing, and incur substantial costs to enforce, our rights as a land- lord. In addition, certain significant expenditures associated with each equity investment (such as mortgage payments, real estate taxes and maintenance costs) are generally not reduced when circumstances cause a reduction in income from the investment. The bankruptcy of, or a downturn in the business of, any of our major tenants may adversely affect our cash flows and property values. Certain of our tenants have experienced financial difficulties and have filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code (“Chapter 11 Bankruptcy”). Pursuant to bankruptcy law, tenants have the right to reject their leases. In the event the tenant exercises this right, the landlord generally has the right to file a claim for lost rent equal to the greater of either one year’s rent (including tenant expense reimbursements) for remaining terms greater than one year, or 15% of the rent remaining under the balance of the lease term, but not to exceed three years rent. Actual amounts to be received in satisfaction of those claims will be subject to the tenant’s final plan of reorganization and the availability of funds to pay its creditors. Since January 1, 2003, there have been two significant tenant bankruptcies within our portfolio: On May 30, 2003, The Penn Traffic Company (“Penn Traffic”) filed for protection under Chapter 11 Bankruptcy. Penn Traffic operates in one location in our wholly-owned portfolio in 52,000 square feet. Rental revenues from this tenant at this location were $0.4 million for the year ended December 31, 2005 and $0.5 million for each of the years ended December 31, 2004 and 2003. Penn Traffic also operated in a location occupying 55,000 square feet at a property in which we, through Fund I, hold a 22% ownership interest. Our pro-rata share of rental revenues from the tenant at this location were $0, $22,000 and $147,000 for the years ended December 31, 2005, 2004 and 2003, respectively. Penn Traffic continues to operate in our wholly-owned location and has assumed this lease. Penn Traffic rejected the lease at the joint venture location on February 20, 2004. On January 14, 2004, KB Toys (“KB”) filed for protection under Chapter 11 Bankruptcy. KB operated in five locations in our wholly-owned portfolio totaling approximately 41,000 square feet. Rental revenues from KB at these locations aggregated $0.3 million, $ 0.8 million and $0.7 million for the years ended December 31, 2005, 2004 and 2003, respectively. KB also operated in a location occupying 20,000 square feet at a property in which we hold a 22% ownership interest through Fund I. Our pro-rata share of rental revenues from the tenant The bankruptcy of, or a downturn in the business of, any of at this location were $0, $37,000 and $87,000 for the years our major tenants causing them to reject their leases, or not ended December 31, 2005, 2004 and 2003, respectively. KB renew their leases as they expire, or renew at lower rental rejected the lease at two of the locations and continues rates may adversely affect our cash flows and property values. to operate in three of our wholly-owned locations but has Furthermore, the impact of vacated anchor space and the neither assumed nor rejected these three leases. The tenant has rejected the lease at the Fund I property. Acadia Realty Trust 2005 Annual Report 10 We could be adversely affected by poor market conditions where properties are geographically concentrated. require us to comply with certain affirmative and negative covenants, including the maintenance of certain debt service Our performance depends on the economic conditions in coverage and leverage ratios. In addition, as of December 31, markets in which our properties are concentrated. We have 2005, loans secured by five of our properties, totaling $44.5 significant exposure to the New York region, from which we million, are subject to cross-collateralization and cross-default derive 32% of the annual base rents within our wholly-owned provisions and two loans, aggregating $29.1 million, are also portfolio. Our operating results could be adversely affected subject to cross-collateralization and cross-default provisions. if market conditions, such as an oversupply of space or a reduction in demand for real estate, in this area becomes more competitive relative to other geographic areas. Our ability to change our portfolio is limited because real estate investments are illiquid. Interest expense on our variable debt as of December 31, 2005 would increase by $0.2 million annually for a 100 basis point increase in interest rates. We may seek additional vari- able-rate financing if and when pricing and other commercial and financial terms warrant. As such, we would consider Equity investments in real estate are relatively illiquid and, hedging against the interest rate risk related to such addi- therefore, our ability to change our portfolio promptly in tional variable-rate debt through interest rate swaps and response to changed conditions will be limited. Our board protection agreements, or other means. of trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number of properties in which we may seek to invest or on the concentration of investments in any one geographic region. We could change our investment, disposition and financing policies without a vote of our shareholders. Market interest rates could have an adverse effect on our share price. One of the factors that may influence the trading price of our Common Shares is the annual dividend rate on our Common Shares as a percentage of its market price. An increase in market interest rates may lead purchasers of our Common Shares to seek a higher annual dividend rate, which could adversely affect the market price of our Com- mon Shares and our ability to raise additional equity in the public markets. We could become highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of operations and our ability to pay distributions. We enter into interest-rate hedging transactions, including interest rate swaps and cap agreements, with counterpar- ties. There can be no guarantee that the financial condition of these counterparties will enable them to fulfill their obli- gations under these agreements. We may not be able to renew current leases and the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms. Upon the expiration of current leases for space located in our properties, we may not be able to re-let all or a portion of that space, or the terms of re-letting (including the cost of concessions to tenants) may be less favorable to us than current lease terms. If we are unable to re-let promptly all or a substantial portion of the space located in our properties or if the rental rates we receive upon re-letting are signifi- cantly lower than current rates, our net income and ability to make expected distributions to our shareholders will be adversely affected due to the resulting reduction in rent receipts. There can be no assurance that we will be able to retain tenants in any of our properties upon the expiration We have incurred, and expect to continue to incur, indebted- of their leases. See Item 2 - Properties - Lease Expirations in ness in furtherance of our activities. Neither our Declaration this Annual Report on Form 10-K for additional information of Trust nor any policy statement formally adopted by our as to the scheduled lease expirations in our portfolio. board of trustees limits either the total amount of indebted- ness or the specified percentage of indebtedness that we may incur. Accordingly, we could become more highly leveraged, resulting in increased risk of default on our obligations and in an increase in debt service requirements which could adversely affect our financial condition and results of opera- tions and our ability to make distributions. Our loan agreements contain customary representations, covenants and events of default. Certain loan agreements Acadia Realty Trust 2005 Annual Report 11 Possible liability relating to environmental matters. Under various federal, state and local environmental laws, statutes, ordinances, rules and regulations, as an owner of real property, we may be liable for the costs of removal or remediation of certain hazardous or toxic substances at, on, in or under our property, as well as certain other potential costs relating to hazardous or toxic substances (including government fines and penalties and damages for injuries to persons and adjacent property). These laws may impose Changes in laws increasing the potential liability for environ- liability without regard to whether we knew of, or were mental conditions existing on properties or increasing the responsible for, the presence or disposal of those substances. restrictions on discharges or other conditions may result in This liability may be imposed on us in connection with the significant unanticipated expenditures or may otherwise activities of an operator of, or tenant at, the property. The adversely affect the operations of our tenants, which could cost of any required remediation, removal, fines or personal adversely affect our financial condition or results of operations. or property damages and our liability therefore could exceed the value of the property and/or our aggregate assets. In addition, the presence of those substances, or the failure to properly dispose of or remove those substances, may adversely affect our ability to sell or rent that property or to borrow using that property as collateral, which, in turn, would reduce our revenues and ability to make distributions. Competition may adversely affect our ability to purchase properties and to attract and retain tenants. There are numerous commercial developers, real estate companies, financial institutions and other investors with greater financial resources than we have that compete with us in seeking properties for acquisition and tenants who will lease space in our properties. Our competitors include A property can also be adversely affected either through other REITs, financial institutions, insurance companies, physical contamination or by virtue of an adverse effect pension funds, private companies and individuals. This com- upon value attributable to the migration of hazardous or petition may result in a higher cost for properties that we toxic substances, or other contaminants that have or may wish to purchase. have emanated from other properties. Although our tenants are primarily responsible for any environmental damages and claims related to the leased premises, in the event of the bankruptcy or inability of any of our tenants to satisfy any obligations with respect to the property leased to that tenant, we may be required to satisfy such obligations. In addition, we may be held directly liable for any such dam- ages or claims irrespective of the provisions of any lease. From time to time, in connection with the conduct of our business, and prior to the acquisition of any property from a third party or as required by our financing sources, we authorize the preparation of Phase I environmental reports and, when necessary, Phase II environmental reports, with respect to our properties. Based upon these environmental reports and our ongoing review of our properties, as of the date of this prospectus supplement, we are not aware of any environmental condition with respect to any of our properties that we believe would be reasonably likely to have a material adverse effect on us. There can be no assurance, however, that the environmental reports will reveal all environmental conditions at our properties or that the following will not expose us to material liability in the future: ■ The discovery of previously unknown environmental conditions. ■ Changes in law. ■ Activities of tenants. ■ Activities relating to properties in the vicinity of our properties. In addition, retailers at our properties face increasing com- petition from outlet malls, discount shopping clubs, internet commerce, direct mail and telemarketing, which could (i) reduce rents payable to us; (ii) reduce our ability to attract and retain tenants at our properties; and (iii) lead to increased vacancy rates at our properties. We have pursued, and may in the future continue to pursue, extensive growth opportunities which may result in significant demands on our operational, administrative and financial resources. We have pursued extensive growth opportunities. This expansion has placed significant demands on our operational, administrative and financial resources. The continued growth of our real estate portfolio can be expected to continue to place a significant strain on its resources. Our future perform- ance will depend in part on our ability to successfully attract and retain qualified management personnel to manage the growth and operations of our business and to finance such acquisitions. In addition, acquired properties may fail to operate at expected levels due to the numerous factors which may affect the value of real estate. There can be no assurance that we will have sufficient resources to identify and manage acquired properties or otherwise be able to maintain our historic rate of growth. Our inability to carry out our growth strategy could adversely affect our financial condition and results of operations. Our growth strategy is based on the acquisition and development of additional properties, including acquisitions through co-investment programs such as joint ventures. In Acadia Realty Trust 2005 Annual Report 12 the context of our business plan, “development” generally qualified or will remain qualified as a REIT. The Internal Rev- means an expansion or renovation of an existing property. enue Code provisions and income tax regulations applicable The consummation of any future acquisitions will be subject to REIT’s are more complex than those applicable to corpo- to satisfactory completion of our extensive valuation analysis rations. The determination of various factual matters and and due diligence review and to the negotiation of definitive circumstances not entirely within our control may affect our documentation. We cannot be sure that we will be able to ability to continue to qualify as a REIT. In addition, no assur- implement our strategy because we may have difficulty ance can be given that legislation, regulations, administrative finding new properties, negotiating with new or existing interpretations or court decisions will not significantly change tenants or securing acceptable financing. the requirements for qualification as a REIT or the federal Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expec- tations, including operating and leasing expectations. Rede- velopment is subject to numerous risks, including risks of construction delays, cost overruns or force majeure that may increase project costs, new project commencement risks such as the receipt of zoning, occupancy and other required governmental approvals and permits, and the incurrence of development costs in connection with projects that are not pursued to completion. Our board of trustees may change our investment policy without shareholder approval. income tax consequences of such qualification. If we do not qualify as a REIT, we would not be allowed a deduction for distributions to shareholders in computing our net taxable income. In addition, our income would be subject to tax at the regular corporate rates. We also could be disqualified from treatment as a REIT for the four taxable years following the year during which qualification was lost. Cash available for distribution to our shareholders would be significantly reduced for each year in which we do not qualify as a REIT. In that event, we would not be required to continue to make distri- butions. Although we currently intend to continue to qualify as a REIT, it is possible that future economic, market, legal, tax or other considerations may cause us, without the con- Our board of trustees will determine our investment and sent of the shareholders, to revoke the REIT election or to financing policies, our growth strategy and our debt, capital- otherwise take action that would result in disqualification. ization, distribution, acquisition, disposition and operating policies. Our board of trustees may establish investment criteria or limitations as it deems appropriate, but currently does not limit the number of properties in which we may seek to invest or on the concentration of investments in any one geographic region. Although our board of trustees has no present intention to revise or amend our strategies and policies, it may do so at any time without a vote by our shareholders. Accordingly, our shareholders’ control over changes in our strategies and policies is limited to the elec- tion of trustees, and changes made by our board of trustees may not serve the interests of all of our shareholders and could adversely affect our financial condition or results of operations, including our ability to distribute cash to share- holders or qualify as a REIT. There can be no assurance we have qualified or will remain qualified as a REIT for federal income tax purposes. Distribution requirements imposed by law limit our operating flexibility. To maintain our status as a REIT for federal income tax pur- poses, we are generally required to distribute to our share- holders at least 90% of our taxable income for that calendar year. Our taxable income is determined without regard to any deduction for dividends paid and by excluding net capital gains. To the extent that we satisfy the distribution require- ment, but distribute less than 100% of our taxable income, we will be subject to federal corporate income tax on our undistributed income. In addition, we will incur a 4% nonde- ductible excise tax on the amount, if any, by which our distri- butions in any year are less than the sum of (i) 85% of our ordinary income for that year; (ii) 95% of our capital gain net income for that year; and (iii) 100% of our undistributed tax- able income from prior years. We intend to continue to make distributions to our shareholders to comply with the distribu- We believe that we have met the requirements for qualifi- tion requirements of the Internal Revenue Code and to reduce cation as a REIT for federal income tax purposes beginning exposure to federal income and nondeductible excise taxes. with our taxable year ended December 31, 1993, and we intend Differences in timing between the receipt of income and the to continue to meet these requirements in the future. How- payment of expenses in determining our income and the ever, qualification as a REIT involves the application of highly effect of required debt amortization payments could require technical and complex provisions of the Internal Revenue us to borrow funds on a short-term basis in order to meet Code, for which there are only limited judicial or administra- the distribution requirements that are necessary to achieve tive interpretations. No assurance can be given that we have the tax benefits associated with qualifying as a REIT. Acadia Realty Trust 2005 Annual Report 13 Uninsured losses or a loss in excess of insured limits could adversely affect our financial condition. rules for these limits are complex and groups of related individuals or entities may be deemed a single owner and We carry comprehensive liability, fire, extended coverage consequently in violation of the share ownership limits. and rent loss insurance on most of our properties, with policy specifications and insured limits customarily carried for sim- ilar properties. However, with respect to those properties where the leases do not provide for abatement of rent under any circumstances, we generally do not maintain rent loss insurance. In addition, there are certain types of losses, such as losses resulting from wars, terrorism or acts of God that generally are not insured because they are either uninsurable or not economically insurable. Should an uninsured loss or a loss in excess of insured limits occur, we could lose capital invested in a property, as well as the anticipated future rev- enues from a property, while remaining obligated for any mortgage indebtedness or other financial obligations related to the property. Any loss of these types would adversely affect our financial condition. Adverse legislative or regulatory tax changes could have an adverse effect on us. There are a number of issues associated with an investment in a REIT that are related to the federal income tax laws, including, but not limited to, the consequences of failing to continue to qualify as a REIT. At any time, the federal income tax laws governing REIT’s or the administrative interpretations of those laws may be amended. Any of those new laws or interpretations may take effect retroactively and could adversely affect us or our shareholders. Recently enacted legislation reduces tax rates applicable to certain corporate dividends paid to most domestic noncorporate shareholders. REIT dividends generally would not be eligible for reduced rates because a REIT’s income generally is not subject to corporate level tax. As a result, investment in Limits on ownership of our capital shares. non-REIT corporations may be viewed as relatively more For the Company to qualify as a REIT for federal income tax attractive than investment in REIT’s by domestic noncorporate purposes, among other requirements, not more than 50% investors. This could adversely affect the market price of the of the value of our capital shares may be owned, directly or Company’s shares. indirectly, by five or fewer individuals (as defined in the Inter- nal Revenue Code to include certain entities) during the last half of each taxable year after 1993, and such capital shares must be beneficially owned by 100 or more persons during at least 335 days of a taxable year of 12 months or during a proportionate part of a shorter taxable year (in each case, other than the first such year). Our Declaration of Trust includes certain restrictions regarding transfers of our capital shares and ownership limits that are intended to assist us in satis- fying these limitations. These restrictions and limits may not be adequate in all cases, however, to prevent the transfer of our capital shares in violation of the ownership limitations. The ownership limit discussed above may have the effect of delaying, deferring or preventing someone from taking control of us. Concentration of ownership by certain investors. Six shareholders own more than 5% individually, and 45.7% in the aggregate, of our Common Shares. A significant con- centration of ownership may allow an investor to exert a greater influence over our management and affairs and may have the effect of delaying, deferring or preventing a change in control of us. Restrictions on a potential change of control. Our Board of Trustees is authorized by our Declaration of Trust to establish and issue one or more series of preferred shares without shareholder approval. We have not established any series of preferred shares; however, the establishment and issuance of a series of preferred shares could make more difficult a change of control of us that could be in the best Actual or constructive ownership of our capital shares in interest of the shareholders. excess of the share ownership limits contained in our Decla- ration of Trust would cause the violative transfer or ownership to be null and void from the beginning and subject to purchase by us at a price equal to the lesser of (i) the price stipulated in the challenged transaction; and (ii) the fair market value of such shares (determined in accordance with the rules set forth in our declaration of trust). As a result, if a violative transfer were made, the recipient of the shares would not acquire any economic or voting rights attributable to the transferred shares. Additionally, the constructive ownership In addition, we have entered into an employment agreement with our Chief Executive Officer and severance agreements are in place with our senior vice presidents which provide that, upon the occurrence of a change in control of us, those executive officers would be entitled to certain termination or severance payments made by us (which may include a lump sum payment equal to defined percentages of annual salary and prior years’ average bonuses, paid in accordance with the terms and conditions of the respective agreement), Acadia Realty Trust 2005 Annual Report 14 which could deter a change of control of us that could be in feet with an average size of 199,000 square feet. As of our best interest. The loss of a key executive officer could have an adverse effect on us. Our success depends on the contribution of key management members. The loss of the services of Kenneth F. Bernstein, December 31, 2005, our wholly-owned portfolio and the Joint Venture Portfolio (excluding properties under redevel- opment) were 94.3% and 96.8% occupied, respectively. Our shopping centers are typically anchored by supermarkets or value-oriented retail. President and Chief Executive Officer, or other key executive- We had approximately 671 leases as of December 31, 2005. level employees could have a material adverse effect on Greater than 50% of our rental revenues were from national our results of operations. Although we have entered into tenants. A majority of the income from the properties consists an employment agreement with our President, Kenneth F. of rent received under long-term leases. Most of these leases Bernstein, the loss of his services could have an adverse provide for the payment of fixed minimum rent monthly in effect on our operations. ITEM 1B. UNRESOLVED STAFF COMMENTSx None. ITEM 2. PROPERTIESx Shopping Center Properties The discussion and tables in Item 2 include properties held through joint ventures in which we own a partial interest (“Joint Venture Portfolio”). Except where noted, it does not include our partial interest in 25 anchor-only leases with Kroger and Safeway supermarkets as previously discussed advance and for the payment by tenants of a pro-rata share of the real estate taxes, insurance, utilities and common area maintenance of the shopping centers. Minimum rents and expense reimbursements accounted for approximately 80% of our total revenues for the year ended December 31, 2005. As of December 31, 2005, approximately 45% of our existing leases also provided for the payment of percentage rents either in addition to, or in place of, minimum rents. These arrangements generally provide for payment to us of a certain percentage of a tenant’s gross sales in excess of a stipulated annual amount. Percentage rents accounted for approximately 1% of the total 2005 revenues of the Company. in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K , as Five of our shopping center properties are subject to long- the majority of these properties are free-standing and all term ground leases in which a third party owns and has are triple-net leases. As of December 31, 2005, we owned and operated 46 shop- ping centers as part of our wholly-owned portfolio and the Joint Venture Portfolio, which included a mixed-use property leased the underlying land to us. We pay rent for the use of the land at four locations and are responsible for all costs and expenses associated with the buildings and improve- ments at all five locations. (retail and residential), ten properties under redevelopment No individual property contributed in excess of 10% of our and one property under development. Our shopping centers, total revenues for the years ended December 31, 2005, 2004 which total approximately 7.7 million square feet of gross and 2003. leaseable area (“GLA”), are located in 15 states and are gener- ally well-established, anchored community and neighborhood shopping centers. The operating properties are diverse in size, ranging from approximately 17,000 to 775,000 square Reference is made to our consolidated financial statements in Item 8 of this Annual Report on form 10-K for information on the mortgage debt pertaining to our properties. Acadia Realty Trust 2005 Annual Report 15 The following sets forth more specific information with respect to each of our shopping centers at December 31, 2005: Shopping Center Location Year Constructed (C) Acquired (A) Ownership Interest Occupancy (1) % 12/31/05 GLA Anchor Tenants Current Lease Expiration/ Lease Option Expiration NEW YORK REGION New York Soundview Marketplace Village Commons Shopping Center Port Washington 1998 (A) LI/Fee (5) 183,675 94% Smithtown 1998 (A) Fee 87,306 100% Branch Shopping Plaza Smithtown 1998 (A) LI (5) 125,724 99% New Loudon Center Latham 1982 (A) Fee 255,826 100% Pacesetter Park Shopping Center Pomona Amboy Road Staten Island 1999 (A) 2005 (A) Fee LI (5) 96,698 59,979 96% 100% Bartow Avenue Bronx 2005 (C) Fee 14,694 51% New Jersey Elmwood Park Shopping Center Elmwood Park 1998 (A) Fee 149,085 98% Marketplace of Absecon Absecon 1998 (A) Fee 105,097 97% Ledgewood Mall Ledgewood 1983 (A) Fee 517,077 95% NEW ENGLAND REGION Connecticut Town Line Plaza Rocky Hill 1998 (A) Fee 206,178 (2) 96% 239 Greenwich Avenue Greenwich 1998 (A) Fee 16,834 (3)(4) 100% Massachusetts Methuen Shopping Center Methuen 1998 (A) LI/Fee (5) 130,238 92% Crescent Plaza Brockton 1984 (A) Fee 218,141 99% Rhode Island Walnut Hill Plaza Woonsocket 1998 (A) Fee 283,235 99% King Kullen 2007/2022 Clearview Cinema 2010/2030 Daffy’s 2008/2028 Walgreens 2021/none Waldbaum’s 2013/2028 CVS 2010/— Price Chopper 2015/2035 Marshalls 2014/2029 Bon Ton 2014/2034 Raymour & Flanigan 2019/2034 AC Moore 2009/2014 Stop & Shop 2020/2040 Waldbaum’s 2028/— Duane Reade 2008/2018 Pathmark 2017/2052 Walgreens 2022/2062 Acme 2015/2055 Eckerd Drug 2020/2040 Wal-Mart 2019/2049 Macy’s 2010/2025 The Sports Authority 2007/2037 Circuit City 2020/2040 Marshall’s 2014/2034 Barnes & Noble 2010/2035 Ashley Furniture 2010/2030 Stop & Shop 2023/2063 Wal-Mart(2) Restoration Hardware 2015/2025 Coach 2016/2021 DeMoulas Market 2015/2020 Wal-Mart 2011/2051 Shaw’s 2012/2042 Home Depot 2021/2056 Shaw’s 2013/2043 Sears 2008/2033 CVS 2009/2014 Vermont The Gateway Shopping Center South Burlington 1999 (A) Fee 101,792 99% Shaw’s 2024/2054 Acadia Realty Trust 2005 Annual Report 16 Shopping Center Location Year Constructed (C) Acquired (A) Ownership Interest Occupancy (1) % 12/31/05 GLA Anchor Tenants Current Lease Expiration/ Lease Option Expiration MIDWEST REGION Illinois Hobson West Plaza Indiana Merrillville Plaza Naperville 1998 (A) Fee 99,044 99% Bobak’s Market & Restaurant 2007/2032 Merrillville 1998 (A) Fee 235,605 94% TJ Maxx 2009/2014 JC Penney 2008/2018 Office Max 2008/2028 Pier I 2009/— David’s Bridal 2010/2020 Toys ‘R’ Us 2014/2039 TJ Maxx 2009/— Marshalls 2011/2026 Home Goods 2010/2025 Babies ‘R’ Us 2010/2020 Office Depot 2010/— Pier I 2010/— TJ Maxx 2010/2020 Target (6) Kmart 2009/2049 Eckerd Drug 2006/— P&C Foods 2014/2024 Kmart 2019/2069 Giant Food 2021/2051 Eckerd Drug 2009/2019 Price Rite/Wakefern 2015/2035 Redner’s Markets 2018/2028 Kmart 2009/2049 Redner’s Markets 2018/2028 Eckerd Drug 2006/2016 Home Depot 2028/2058 Weis Markets (not owned) Kmart 2020/2070 Eckerd Drug 2011/2026 Fashion Bug 2006/— Michigan Bloomfield Town Square Bloomfield Hills 1998 (A) Fee 214,866 97% Ohio Mad River Station MID-ATLANTIC REGION Pennsylvania Abington Towne Center Dayton 1999 (A) Fee 155,739 (7) 82% Abington 1998 (A) Fee 216,355 (6) 99% Blackman Plaza Wilkes-Barre 1968 (C) Fee 121,341 92% Bradford Towne Centre Towanda 1993 (C) Fee 256,939 91% Greenridge Plaza Scranton Luzerne Street Shopping Center Scranton 1986 (C) 1983 (A) Fee Fee 191,755 58,228 79% 87% Mark Plaza Pittston Plaza Plaza 422 Route 6 Mall Edwardsville 1968 (C) LI/Fee (5) 216,047 97% Pittston 1994 (C) Fee 79,494 96% Lebanon Honesdale 1972 (C) 1994 (C) Fee Fee 155,026 175,507 69% 99% Wholly-owned portfolio 4,727,525 94% Acadia Realty Trust 2005 Annual Report 17 Properties Held In Joint Ventures Shopping Center Location Constructed (C) Acquired (A) Year Ownership Interest Occupancy (1) % 12/31/05 GLA Anchor Tenants Current Lease Expiration/ Lease Option Expiration NEW YORK REGION New York Crossroads Shopping Center White Plains 1998(A) JV (8) 310,644 100% MID-ATLANTIC REGION Delaware Brandywine Town Center Wilmington 2003(A) JV (10) 775,932 100% Market Square Shopping Center Wilmington 2003(A) JV (10) 102,762 100% MIDWEST REGION Ohio Amherst Marketplace Cleveland 2002(A) JV (10) 79,937 100% Granville Centre Sheffield Crossing Columbus Cleveland 2002(A) 2002(A) JV (10) JV (10) 134,999 112,534 44% 94% VARIOUS REGIONS Kroger/Safeway Portfolio Various 2003 (A) JV (10) 1,018,100 100% Waldbaum’s 2007/2032 Kmart 2012/2022 B. Dalton 2012/2017 Modell’s 2009/2019 Pier I 2007/2017 Pay Half 2018/— Annie Sez (Big M) 2007/2022 Michaels 2011/2026 Old Navy (The Gap) 2011/2016 Petsmart 2017/2042 Thomasville Furniture 2011/2021 World Market 2015/— Access Group 2015/2025 Bed, Bath & Beyond 2014/2029 Dick’s Sporting Goods 2013/2028 Lowe’s Home Centers 2018/2048 Regal Cinemas 2017/2037 Target 2018/2068 Kincaid Furniture 2010/— Transunion Settlement 2013/2018 The Bombay Company 2015/2025 Lane Home Furnishings 2015/— Tutor Time 2010/2025 Moe’s 2015/— MJM Designer 2015/— New Balance Trader Joe’s 2013/2028 TJ Maxx 2006/2016 Giant Eagle 2021/2041 Riser Foods Company/ Pharmacy 2012/2027 California Fitness 2017/2027 Giant Eagle 2022/2042 Revco Drug 2012/2027 25 Kroger/Safeway Supermarkets 2009/2049 Acadia Realty Trust 2005 Annual Report 18 JV Redevelopments Shopping Center Location Michigan Sterling Heights Shopping Center Detroit Year Constructed (C) Acquired (A) Ownership Interest Occupancy (1) % 12/31/05 GLA Anchor Tenants Current Lease Expiration/ Lease Option Expiration 2004(A) JV (10) 154,838 55% New York Tarrytown Shopping Center 400 E. Fordham Road Pelham Manor Shopping Plaza 161st Street Sherman Avenue South Carolina Hitchcock Plaza Pine Log Plaza Virginia Haygood Shopping Center Notes: Westchester Bronx Westchester/Bronx Bronx New York Aiken Aiken 2004(A) 2004(A) 2004(A) 2005(A) 2005(A) JV (10) JV (11) JV (5)(11) JV (11) JV (11) 38,930 117,355 398,775 223,611 134,773 2004(A) 2004(A) JV (10) JV (10) 233,886 35,064 Virginia Beach 2004(A) JV (10) Joint Venture Portfolio 153,999 4,026,139 63% 100% 51% 100% 100% 27% 91% 73% 86% Burlington Coat Factory 2024/— Walgreens 2080/— Sears 2007/— City of New York 2006/— Pilot Garage 2007/— Farmer’s Furniture 2009/2014 Eckerd Drug 2009/— (1) Does not include space leased for which rent has not yet commenced. (2) Includes a 92,500 square foot Wal-Mart which is not owned by us. (3) In addition to the 16,834 square feet of retail GLA, this property also has 21 apartments comprising 14,434 square feet. (4) Coach is a new tenant and executed an 11-year lease with one five-year option. (5) We are a ground lessee under a long-term ground lease. (6) Includes a 157,616 square foot Target Store that is not owned by the Company. (7) The GLA for this property includes 28,205 square feet of office space. (8) We have a 49% investment in this property. (9) Does not include 80,000 square feet of new space in Phase II of the Brandywine Town Center, which will be paid for by Fund I on an Earn- out basis only if, and when, it is leased. (10) We have invested in this asset through Fund I. (11) We have invested in this asset through Fund II. Acadia Realty Trust 2005 Annual Report 19 MAJOR TENANTS No individual retail tenant accounted for more than 5.5% of minimum rents for the year ended December 31, 2005, or 10.0% of total leased GLA as of December 31, 2005. The following table sets forth certain information for the 20 largest retail tenants based upon minimum rents in place as of December 31, 2005. The table includes leases related to our partial interest in 25 anchor-only leases with Kroger and Safeway supermarkets. The below amounts include our pro-rata share of GLA and annual- ized base rent for our partial ownership interest in properties (GLA and rent in thousands): Retail Tenant Albertson’s (Shaw’s, Acme) Sears (Sears, Kmart) T.J. Maxx (T.J. Maxx, Marshalls, A.J. Wrights) A&P (Waldbaum’s) Ahold (Giant, Stop & Shop) Wal-Mart Brook’s Drug Home Depot Pathmark Redner’s Supermarket Restoration Hardware Kroger (3) Safeway (4) Price Chopper Clearview Cinema (5) Federated (Macy’s) JC Penney Walgreens King Kullen Payless Shoes Total Notes: Number of Stores in Portfolio 4 Total GLA 221 Annualized Base Rent (1) $ 3,013 Total Portfolio GLA (2) 4.0% Annualized Base Rent (2) 5.5% Percentage of Total Represented by Retail Tenant 7 10 2 3 2 7 2 1 2 1 12 13 2 1 1 2 2 1 10 85 553 296 119 179 210 81 211 48 112 9 132 104 77 25 73 73 24 48 38 2,156 2,132 1,913 1,569 1,515 1,070 1,010 955 876 697 722 722 804 686 651 592 589 563 601 10.0% 5.4% 2.2% 3.2% 3.8% 1.5% 3.8% 0.9% 2.0% 0.2% 2.4% 1.9% 1.4% 0.5% 1.3% 1.3% 0.4% 0.9% 0.7% 4.0% 3.9% 3.5% 2.9% 2.8% 2.0% 1.9% 1.8% 1.6% 1.3% 1.3% 1.3% 1.5% 1.3% 1.2% 1.1% 1.1% 1.0% 1.1% 2,633 $22,836 47.8% 42.1% (1) Base rents do not include percentage rents (except where noted), additional rents for property expense reimbursements, and contractual rent escalations due after December 31, 2005. (2) Represents total GLA and annualized base rent for our retail properties including its pro-rata share of Joint Venture Properties. (3) Kroger has sub-leased four of these locations to supermarket tenants, two locations to a non-supermarket tenant and ceased operations at one other location. Kroger is obligated to pay rent through the full term of these leases which expire in 2009. (4) Safeway has sub-leased seven of these locations to supermarket tenants, one location to a non-supermarket tenant and ceased operations at one other location. Safeway is obligated to pay rent through the full term of all these leases which expire in 2009. (5) Subsidiary of Cablevision. Acadia Realty Trust 2005 Annual Report 20 LEASE EXPIRATIONS The following table shows scheduled lease expirations for retail tenants in place as of December 31, 2005, assuming that none of the tenants exercise renewal options. Leases related to our joint venture properties are shown separately below before our pro-rata share of annual base rent and GLA (GLA and rent in thousands): Wholly-Owned Portfolio: Leases maturing in 2006 Number of Leases 86 Annualized Base Rent (1) GLA Current Annual Rent $ 3,476 Percentage of Total 8% Square Feet 288 Percentage of Total 7% 2007 2008 2009 2010 2011 2012 2013 2014 2015 Thereafter Total 66 58 66 54 23 8 15 23 19 33 451 Joint Venture Portfolio: Leases maturing in 2006 Number of Leases 51 2007 2008 2009 2010 2011 2012 2013 2014 Thereafter Total Note: 31 23 44 11 7 6 8 13 26 220 4,386 4,676 4,716 5,591 2,340 885 2,295 2,408 3,678 11,071 $ 45,522 10% 10% 10% 12% 5% 2% 5% 5% 8% 25% 100% 390 338 547 509 213 66 157 307 242 1,146 4,203 9% 8% 13% 12% 5% 2% 4% 7% 6% 27% 100% Annualized Base Rent (1) GLA Current Annual Rent $ 6,497 4,451 1,565 10,012 705 1,773 1,377 2,083 2,172 10,621 $41,256 Percentage of Total 16% Square Feet 491 Percentage of Total 14% 11% 4% 24% 2% 4% 3% 5% 5% 26% 100% 476 67 1,132 43 76 139 119 119 819 3,481 14% 2% 33% 1% 2% 4% 3% 3% 24% 100% (1) Base rents do not include percentage rents, additional rents for property expense reimbursements, nor contractual rent escalations due after December 31, 2005. Acadia Realty Trust 2005 Annual Report 21 GEOGRAPHIC CONCENTRATIONS The following table summarizes our retail properties by region as of December 31, 2005. (GLA and rent in thousands): GLA (1) Occupied % (2) Annualized Base Rent (2) Annualized Base Rent Per Leased Square Foot Wholly-Owned Portfolio: New York Region New England Midwest Mid-Atlantic Northeastern Pennsylvania Total Wholly-Owned Portfolio Joint Venture Portfolio: Operating Properties Midwest (3) Mid-Atlantic (3,4) New York Region (5) Total Operating Properties Redevelopment Properties: Midwest (6) Mid-Atlantic (6) New York Region (7) Total Redevelopment Properties Total Joint Venture Portfolio Notes: 734 1,195 705 839 1,254 4,727 327 879 311 1,517 155 423 913 1,491 3,008 97% 98% 93% 96% 89% 94% 75% 100% 100% 94% 55% 49% 77% 67% 81% Percentage of Total Represented by Region GLA 16% 25% 15% 18% 26% Annualized Base Rent 32% 22% 17% 15% 14% $ 14,735 $ 20.79 9,847 7,597 7,023 6,320 9.19 11.58 10.79 5.67 $ 45,522 $ 10.83 100% 100% $ 2,619 13,961 6,054 $22,634 $ 427 1,524 8,007 9,958 $ 10.67 15.89 19.49 $ 15.77 5.02 7.36 11.36 9.99 $ 32,592 $ 13.40 22% 58% 20% 100% 11% 28% 61% 100% 100% 12% 62% 26% 100% 4% 16% 80% 100% 100% (1) Property GLA includes a total of 255 square feet which is not owned by us. This square footage has been excluded for calculating annual- ized base rent per square foot. (2) The above occupancy and rent amounts do not include space which is currently leased, but for which rent payment has not yet commenced. (3) We have a 22% interest in Fund I, which owns these properties. (4) Does not include 80,000 square feet of new space in Phase II of the Brandywine Town Center, which will be paid for by us on an “earn-out basis” only if, and when it is leased. Subsequent to December 31, 2005, the Brandywine portfolio was recapitalized through the conversion of the 77.8% interest previously held by institutional investors in Fund I to GDC Properties. We have retained our existing 22.2% interest. (5) We have a 49% interest in two partnerships which, together, own the Crossroads Shopping Center. (6) We have a 22% interest in Fund I, which has interests ranging from 50% to 90% of these properties. (7) We have a 22% interest in Fund I, which owns 50% of the Tarrytown Shopping Center and a 20% interest in Fund II, which owns 97% of 400 East Fordham Road; Pelham Manor Shopping Plaza, Sherman Avenue and 161st Street. Acadia Realty Trust 2005 Annual Report 22 MULTI-FAMILY PROPERTIES We own two multi-family properties located in the Mid-Atlantic and Midwest regions. The properties average 737 units and as of December 31, 2005, had an average occupancy rate of 98%. The following sets forth more specific information with respect to each of our multi-family properties at December 31, 2005: Multi-Family Property: Location Year Acquired Ownership Interest Units % Occupied Missouri (1) Gate House, Holiday House, Tiger Village and Colony Apartments Columbia 1998 North Carolina Village Apartments Totals Notes: Winston-Salem 1998 Fee Fee 874 600 1,474 99% 96% 98% (1) We own four contiguous residential complexes in Columbia, Missouri which, although owned in two separate entities, are managed as a single property and therefore reflected as such. ITEM 3. LEGAL PROCEEDINGSx We are involved in other various matters of litigation arising in the normal course of business. While we are unable to predict with certainty the amounts involved, management is of the opinion that, when such litigation is resolved, our resulting liability, if any, will not have a significant effect on our consolidated financial position or results of operations. ITEM 4. SUBMISSION OF MATTERS TOx A VOTE OF SECURITY HOLDERSx No matter was submitted to a vote of security holders through the solicitation of proxies or otherwise during the fourth quarter of 2005. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITYx RELATED SHAREHOLDER MATTERS AND ISSUERx PURCHASES OF EQUITY SECURITIESx (a) Market Information The following table shows, for the period indicated, the high and low sales price for the Common Shares as reported on the New York Stock Exchange, and cash dividends paid during the two years ended December 31, 2005 and 2004: Quarter Ended 2005 March 31, 2005 June 30, 2005 September 30, 2005 December 31, 2005 2004 March 31, 2004 June 30, 2004 September 30, 2004 December 31, 2004 High Low Dividend Per Share $16.60 $15.60 $0.1725 18.65 19.89 20.76 15.53 17.45 16.66 0.1725 0.1725 0.1850 $15.00 $12.36 $0.1600 14.30 15.11 16.49 11.38 13.03 14.70 0.1600 0.1600 0.1725 At March 15, 2006, there were 349 holders of record of the Company’s Common Shares. Acadia Realty Trust 2005 Annual Report 23 (b) Dividends We have determined that for 2005, 95% of the total dividends (c) Issuer purchases of equity securities We have an existing share repurchase program that authorizes distributed to shareholders represented ordinary income, management, at its discretion, to repurchase up to $20.0 3% represented unrecaptured section 1250 gain and 2% million of our outstanding Common Shares. Through March represented nontaxable return of capital. Our cash flow is 15, 2006, we had repurchased 2.1 million Common Shares affected by a number of factors, including the revenues at a total cost of $11.7 million of which 2.0 million of these received from rental properties, our operating expenses, Common Shares have been subsequently reissued. The program the interest expense on its borrowings, the ability of lessees may be discontinued or extended at any time and there is to meet their obligations to us and unanticipated capital no assurance that we will purchase the full amount author- expenditures. Future dividends paid by us will be at the ized. There were no Common Shares repurchased by us during discretion of the Trustees and will depend on our actual cash the fiscal year ended December 31, 2005. flows, our financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Code and such other factors as the Trustees deem relevant. (d) Securities authorized for issuance under equity compensation plans The following table provides information related to our 1999 Share Incentive Plan (the “1999 Plan”) and 2003 Share Incen- tive Plan (the “2003 Plan”) as of December 31, 2005: Equity Compensation Plan Information (a) (b) Number of securities to be issued upon exercise of outstanding options, warrants and rights Weighted-average exercise price of outstanding options, warrants and rights (c) Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in Column a) 477,242 — 477,242 $8.03 — $8.03 3,021,053 (1) — 3,021,053 (1) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Notes: (1) The 1999 and 2003 Plans authorize the issuance of options equal to up to a total of 12% 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 and 2003 Plans. Remaining available is based on 31,542,942 outstanding Common Shares and 653,360 OP Units as of December 31, 2005, less the issuance of a total of 365,261 restricted shares granted through the same date. Acadia Realty Trust 2005 Annual Report 24 ITEM 6. SELECTED FINANCIAL DATAx The following table sets forth, on a historical basis, our selected financial data. This information should be read in conjunction with our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations appearing elsewhere in this Form 10-K. OPERATING DATA: Revenues Operating expenses Interest expense Depreciation and amortization Abandoned project costs Gain in sale of land Equity in earnings of unconsolidated partnerships Minority interest Income taxes Income from continuing operations (Loss) income from discontinued operations Income before cumulative effect of a change in accounting principle Cumulative effect of a change in accounting principle Net income Basic earnings per share: Income from continuing operations (Loss) income from discontinued operations Cumulative effect of a change in accounting principle Basic earnings per share Diluted earnings per share: Income from continuing operations (Loss) income from discontinued operations Cumulative effect of a change in accounting principle Diluted earnings per share Weighted average number of Common Shares outstanding – basic – diluted (1) Cash dividends declared per Common Share BALANCE SHEET DATA: Real estate before accumulated depreciation Total assets Total mortgage indebtedness Minority interest – Operating Partnership Total equity OTHER: Funds from Operations (2) Cash flows provided by (used in): Operating activities Investing activities Financing activities See notes on following page. 2005 Years ended December 31, 2003 2004 2002 2001 $ 83,318 $ 71,657 $66,646 38,958 11,423 16,763 — — 8,228 (695) (2,140) 21,567 (941) 20,626 — 33,774 10,436 15,470 — 932 1,797 (1,190) — 13,516 6,069 19,585 — 33,361 9,896 17,195 — 1,187 2,411 (1,399) — 8,393 (540) 7,853 — $ 20,626 $ 19,585 $ 7,853 $65,916 29,737 9,545 14,040 274 1,530 628 (2,994) — 11,484 7,915 19,399 — $19,399 $ 0.68 $ 0.46 $ 0.32 $ 0.45 $ $ (0.03) — 0.65 0.67 (0.03) — $ $ 0.21 — 0.67 0.45 0.20 — (0.02) — 0.32 — $ 0.30 $ 0.77 $ 0.31 $ 0.45 (0.02) — 0.31 — $ 57,327 27,959 10,800 12,983 — — 504 (1,372) — 4,717 5,234 9,951 (149) $ 9,802 $ $ $ 0.16 0.20 (0.01) 0.35 0.16 0.20 (0.01) $ 0.64 $ 0.65 $ 0.29 $ 0.76 $ 0.35 31,949 32,214 29,341 29,912 26,640 27,232 25,321 25,806 28,313 — $ 0.7025 $ 0.6525 $ 0.61 $ 0.52 $ 0.48 $ 435,751 499,058 238,448 9,204 220,576 $414,974 $ 407,220 $393,652 $ 378,216 405,647 153,361 5,743 216,924 388,184 173,070 7,875 169,734 410,935 181,690 22,745 161,323 493,939 190,462 37,387 179,098 $ 35,842 $ 30,004 $ 27,664 $ 30,162 $ 13,487 23,959 (59,478) 61,632 25,468 (16,371) (9,757) 20,118 (20,940) (30,187) 30,008 47,553 (66,531) 21,039 (11,717) (7,047) Acadia Realty Trust 2005 Annual Report 25 Notes: (1) For 2001, the weighted average number of shares outstanding on a diluted basis is not presented as the inclusion of additional shares was anti-dilutive. (2) The Company considers funds from operations (“FFO”) as defined by the National Association of Real Estate Investment Trusts (“NAREIT”) to be an appropriate supplemental disclosure of operating performance for an equity REIT due to its widespread acceptance and use within the REIT and analyst communities. FFO is presented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating perform- ance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REIT’s. FFO does not represent cash generated from opera- tions as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Com- pany’s performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated part- nerships 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. Acadia Realty Trust 2005 Annual Report 26 Management’s Discussion and Analysis ITEM 7x Management’ s Discussion and Analysis of Financial Condition and Results of Operations The following discussion should be read in conjunction with income primarily from the rental revenue from our proper- ties, including recoveries from tenants, offset by operating and overhead expenses. We focus on three primary areas in executing our business our consolidated financial statements (including the related plan as follows: notes thereto) appearing elsewhere in this Form 10-K. Certain statements contained in this Annual Report on Form 10-K may contain forward-looking statements within the mean- ing of Section 27A of the Securities Act of 1933 and Section 21E of the Securities and Exchange Act of 1934 and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, perform- ance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. Forward-looking state- ments, which are based on certain assumptions and describe our future plans, strategies and expectations are generally identifiable by use of the words “may,”“will,”“should,”“expect,” “anticipate,”“estimate,”“believe,”“intend” or “project” or the negative thereof or other variations thereon or comparable terminology. Factors which could have a material adverse effect on our operations and future prospects include, but are not limited to those set forth under the heading “Risk Factors” in this Annual Report on Form 10-K. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. Overview We currently operate 71 properties, which we own or have an ownership interest in, consisting of 69 neighborhood and community shopping centers and two multi-family properties, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States. We receive ■ Focus on maximizing the return on our existing portfolio through leasing and property redevelopment activities. Our redevelopment program is a significant and ongoing component of managing our existing portfolio and focuses on selecting well-located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevelopment. ■ Pursue above-average returns through a disciplined and opportunistic acquisition program. The primary conduits for our acquisition program are through our existing acquisition joint venture, Acadia Strategic Opportunity Fund II, LLC (“Fund II”), as well as the Retailer Controlled Property Venture (“RCP Venture”) established to invest in surplus or underutilized properties owned or controlled by retailers and the New York Urban Infill Redevelopment initiative which focuses on investing in redevelopment projects in urban, dense areas where retail tenant demand has effectively surpassed the supply of available sites. ■ Maintain a strong balance sheet, which provides us with the financial flexibility to fund both property redevelop- ment and acquisition opportunities. Results of Operations Comparison of the year ended December 31, 2005 (“2005”) to the year ended December 31, 2004 (“2004”) Revenues:: Minimum rents Percentage rents Expense reimbursements Other property income Management fee income Interest income Other Total revenues 22000055 $$ 5522..77 00..77 1144..00 00..88 1111..55 33..66 —— $$8833..33 22000044 $$ 5500..77 00..99 1133..00 00..66 44..88 11..55 00..22 $$ 7711..77 $$ $$ 22..00 ((00..22)) 11..00 00..22 66..77 22..11 ((00..22)) $$ 1111..66 Change %% 44%% ((2222))%% 88%% 3333%% 114400%% 114400%% ((110000))%% 1166%% Acadia Realty Trust 2005 Annual Report 27 The increase in minimum rents was attributable to additional Management fee income increased as a result of additional rents following the purchase of Amboy Road shopping center leasing fees from Fund I of $0.9 million, increased asset in July 2005, re-tenanting activities as well as increased management fees of $2.2 million from Fund II (which was occupancy across the portfolio. formed in June 2004), a $2.6 million increase in management Real estate tax reimbursements increased $0.5 million pri- marily as a result of general increases in real estate taxes as well as re-tenanting activities throughout the portfolio. fees related to the acquisition of certain management con- tract rights in January 2004 and February 2005 and promote income on the Mervyn’s investment in 2005 of $1.0 million. CAM expense reimbursements increased $0.5 million as a The increase in interest income was a combination of addi- result of increased tenant reimbursements of higher snow tional interest income on our advances and notes receivable removal costs in 2005. originated in 2004 and 2005 and additional interest income earned following our preferred equity investment in Levitz Operating Expenses: Property operating Real estate taxes General and administrative Depreciation and amortization Total operating expenses 22000055 $$ 1144..33 99..22 1155..44 1166..88 $$ 5555..77 in 2005. 22000044 $$ 1144..55 88..88 1100..44 1155..55 $$4499..22 Change $$ $$((00..22)) 00..44 55..00 11..33 $$ 66..55 %% ((11))%% 55%% 4488%% 88%% 1133%% The decrease in property operating expenses was primarily a The increase in general and administrative expense was result of the recovery of $0.5 million in 2005 related to the attributable to increased compensation expense and other settlement of our insurance claim in connection with the overhead expenses following the expansion of our infrastruc- flood damage incurred at Mark Plaza. A non-recurring ture related to increased investment activity in fund assets charge of approximately $0.7 million related to this flood and asset management services. damage was recorded in 2004. This decrease was partially offset by higher snow removal costs in 2005. Depreciation expense increased $0.3 million in 2005 which was primarily attributable to increased depreciation expense Real estate taxes increased as a result of general increases in related to capitalized tenant installation costs in 2004 and real estate taxes experienced across the portfolio. 2005. Amortization expense increased $1.0 million primarily as a result of the write-off of certain Klaff management contracts following the disposition of these assets. Change Other:: Equity in earnings of unconsolidated partnerships Interest expense Gain on sale Minority interest Income taxes ((Loss) income from discontinued operations 22000055 $$ 88..22 ((1111..44)) —— ((00..77)) ((22..11)) $$ ((00..99)) 22000044 $$ 11..88 ((1100..44)) 00..99 ((11..22)) —— $$ 66..11 $$ $$ 66..44 ((11..00)) ((00..99)) 00..55 ((22..11)) $$ ((77..00)) %% 335566%% ((1100))%% ((110000))%% 4422%% ((110000))%% ((111155))%% Acadia Realty Trust 2005 Annual Report 28 Management’s Discussion and Analysis continued Equity in earnings of unconsolidated partnerships increased We received additional sales proceeds of $0.9 million which primarily as a result of our $5.0 million share of gain, through were being held in escrow pending the completion of certain our investment funds, from the sale of certain Mervyn’s loca- site work by the buyer. Of these proceeds, $0.5 million were tions and our share of bankruptcy proceeds from Penn Traffic distributed to our joint venture partner in the sale and are through Fund I of $0.2 million. a component of minority interest in the accompanying The increase in interest expense was attributable to higher financial statements. average outstanding balances in 2005 of $0.8 million and Income taxes in 2005 relate to our share of the income taxes higher average interest rates on the portfolio mortgage on gain, through our investment funds, from the sale of certain debt in 2005. Mervyn’s locations during the third and fourth quarters of 2005. The gain on sale of land in 2004 was related to a prior year Income (loss) from discontinued operations represents activity sale of a contract to purchase land to the Target Corporation. related to properties sold during 2004 and 2005. Comparison of the year ended December 31, 2004 (“2004”) to the year ended December 31, 2003 (“2003”) Change Revenue:: Minimum rents Percentage rents Expense reimbursements Other property income Management fee income Interest income Other Total revenues 22000055 $$5500..77 00..99 1133..00 00..66 44..88 11..55 00..22 $$ 7711..77 22000044 $$ 4488..11 11..00 1122..88 00..77 22..00 00..88 11..22 $$6666..66 $$ $$ 22..66 ((00..11)) 00..22 ((00..11)) 22..88 00..77 ((11..00)) $$ 55..11 %% 55%% ((1100%%)) 22%% ((1144%%)) 114400%% 8888%% ((8833%%)) 77..77%% The increase in minimum rents was attributable to an in 2004 offset by increased tenant reimbursements following increase in rents following the redevelopment of the Gate- re-tenanting activities across the portfolio. way shopping center in 2003 and an increase in rents from re-tenanting activities as well as increased occupancy across the portfolio. Management fee income increased as a result of asset man- agement fees from Fund II of $1.7 million and an increase in management fees $0.9 million related to the acquisition of Real estate tax reimbursements increased $0.5 million pri- certain management contract rights in 2004. marily as a result of general increases in real estate taxes as well as re-tenanting activities throughout the portfolio. CAM expense reimbursements decreased $0.3 million primarily from tenant reimbursements of lower snow removal costs Other income decreased primarily due to a lump sum addi- tional rent payment of $1.2 million received from a former tenant during 2003 in connection with the re-anchoring of the Branch Plaza. Operating expenses: Property operating Real estate taxes General and administrative Depreciation and amortization Total operating expenses 22000055 $$ 1144..55 88..88 1100..44 1155..55 $$ 4499..22 22000044 $$ 1144..44 88..22 1100..77 1177..22 $$ 5500..55 Change $$ $$ 00..11 00..66 ((00..33)) ((11..77)) $$ ((11..33)) %% 11%% 77%% ((33%%)) ((1100%%)) ((33%%)) Acadia Realty Trust 2005 Annual Report 29 Property operating expenses increased primarily due to the Depreciation expense decreased $2.5 million. This was a result of a non-recurring charge of approximately $0.7 million result of the write-off of $2.7 million of unamortized tenant related to flood damage at the Mark Plaza in 2004 offset by improvement costs related to the buyout and termination of higher snow removal costs during 2003. the former anchor at the Town Line Plaza redevelopment Real estate taxes increased primarily due to a real estate tax refund received in 2003 related to the appeal of taxes paid in prior years at the Greenridge Plaza and higher real estate taxes throughout the portfolio in 2004. project in 2003. This decrease was offset by increased depre- ciation expense in 2004 following the Gateway redevelop- ment project being placed in service during the second quarter of 2003. Amortization expense increased $0.8 mil- lion primarily as a result of the amortization of investment General and administrative expense decreased primarily as in management contracts in 2004. the result of certain employee termination costs in 2003 and our capitalization of certain internal leasing costs in 2004 offset by additional professional fees related to Sarbanes- Oxley compliance in 2004. Other:: Equity in earnings of unconsolidated partnerships Interest expense Gain on sale Minority interest Operating loss from discontinued operations Discontinued operations — gain on sale of properties 22000055 $$ 11..88 ((1100..44)) 00..99 ((11..22)) ((00..66)) 66..77 22000044 $$ 22..44 ((99..99)) 11..22 ((11..44)) ((00..66)) 00..00 Change $$ $$((00..66)) ((00..55)) ((00..33)) 00..22 00..00 66..77 %% ((2255%%)) 55%% ((2255%%)) ((1144%%)) —— 110000%% Interest expense increase was primarily attributable to an our method of calculating FFO may be different from methods increase of $0.4 million as a result of higher average interest used by other REIT’s and, accordingly, may not be comparable rates on the portfolio debt for 2004 and a decrease of $0.1 to such other REIT’s. FFO does not represent cash generated million in capitalized interest in 2004. from operations as defined by generally accepted accounting Income from discontinued operations increased $6.7 million due to a property sale in 2004. Funds from Operations 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 wide- spread acceptance and use within the REIT and analyst com- munities. 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 operat- ing performance, such as gains (losses) from sales of depre- ciated property and depreciation and amortization. However, principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating our performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, we define FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. The reconciliations of net income to FFO for the years ended December 31, 2005, 2004, 2003, 2002 and 2001 are as follows: Acadia Realty Trust 2005 Annual Report 30 Management’s Discussion and Analysis continued 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 partnership ((11)) ((Gain) loss on sale of properties Cumulative effect of change in accounting principle Funds from operations Notes: 22000055 $$ 2200,,662266 22000044 $$ 1199,,558855 Years ended December 31, 22000033 $$ 77,,885533 22000022 $$ 1199,,339999 22000011 $$ 99,,880022 1144,,009922 33,,333300 441166 ((22,,662222)) —— $$ 3355,,884422 1144,,441111 22,,332299 337755 ((66,,669966)) —— 1166,,995577 22,,110077 774477 —— —— 1155,,330055 666622 22,,992288 ((88,,113322)) —— 1188,,442222 662277 22,,222211 ((1177,,773344)) 114499 $$ 3300,,000044 $$ 2277,,666644 $$ 3300,,116622 $$ 1133,,448877 (1) Represents income attributable to Common Operating Partnership Units and does not include distributions paid to Series A and B Preferred OP Unitholders. Liquidity and Capital Resources Uses of Liquidity Our principal uses of liquidity are expected to be for distri- butions to our shareholders and OP unit holders, debt service and loan repayments, and property investment which include the funding of our joint venture commitments, acquisition, redevelopment, expansion and re-tenanting activities. Distributions In order to qualify as a REIT for Federal income tax purposes, we must currently distribute at least 90% of our taxable income to our shareholders. For the first three quarters during 2005, we paid a quarterly dividend of $0.1725 per Common Share and Common OP Unit. In November of 2005, tributed pro-rata to the partners (including us) until they have received a 9% cumulative return on, and a return of all capital contributions. Thereafter, remaining cash flow is to be distributed 80% to the partners (including us) and 20% to us. We also earn a fee for asset management services equal to 1.5% of the allocated equity in the remaining Fund I assets, as well as market-rate fees for property management, leasing and construction services. As of December 31, 2005, Fund I has purchased a total of 35 properties totaling 2.8 million square feet as further discussed in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. Acadia Strategic Opportunity Fund II, LLC (“Fund II”) On June 15, 2004, we closed our second acquisition fund, our Board of Trustees approved and declared a 7.2% increase Fund II, which includes all of the investors from Fund I as well in our quarterly dividend to $0.1850 per Common Share and as two additional institutional investors. With $300 million Common OP Unit for the fourth quarter of 2005 which was of committed discretionary capital, Fund II expects to be able paid January 13, 2006. Acadia Strategic Opportunity Fund, LP (“Fund I”) In September 2001, we committed $20.0 million to a newly formed joint venture with four of our institutional share- holders, who committed $70.0 million, for the purpose of acquiring a total of approximately $300.0 million of com- munity and neighborhood shopping centers on a leveraged basis. As of December 31, 2005, we have contributed $19.2 million to Fund I. We are the manager and general partner of Fund I with a 22% interest. In addition to a pro-rata return on our invested to acquire up to $900 million of real estate assets on a lever- aged basis. We are the managing member with a 20% interest in the joint venture. The terms and structure of Fund II are substantially 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, 2005 and then on the total committed equity of $300 million thereafter. As of December 31, 2005, we have contributed $67.0 million to Fund II. Fund II has invested in the RCP Venture and the New York Urban/Infill Redevelopment initiatives and other investments as further discussed in “PROPERTY ACQUISITIONS” in Item 1 equity, we are entitled to a profit participation based upon of this Form 10-K . certain investment return thresholds. Cash flow is to be dis- Acadia Realty Trust 2005 Annual Report 31 Other Investments During 2004 and 2005, we made the following other invest- Issuance of Equity During November 2004, we issued 1,890,000 Common ments as further discussed in “PROPERTY ACQUISITIONS” in Shares (the “Offering”). The Offering was made under shelf Item 1 of this Form 10-K: i) $20.0 million in Levitz SL, ii) $16.8 million in Amboy Road, registration statements filed under the Securities Act of 1933, as amended, and previously declared effective by the Securities and Exchange Commission. The $28.3 million in iii) $8.0 million for Klaff’s management rights, proceeds from the Offering, net of related costs, were used iv) $3.2 million for Boonton and v) $9.8 million for Clark/Diversey. Property Development, Redevelopment and Expansion During 2005, we completed the development of the Bartow to retire above-market, fixed-rate indebtedness as well as to invest in real estate assets. Following this transaction, we have $46.7 million of remaining capacity to issue equity under our primary shelf registration statement. Avenue Center, located in Bronx, New York. A new anchor, Sleepy’s, opened for business during the second quarter. This Financing and Debt At December 31, 2005, mortgage notes payable aggregated store occupies 6,430 square feet of formerly vacant space. $238.4 million and were collateralized by 20 properties and Costs incurred to date for this project totaled $7.5 million. related tenant leases. Interest rates on our outstanding Our redevelopment program focuses on selecting well-located neighborhood and community shopping centers and creating significant value through re-tenanting and property redevel- opment. During 2005, we did not undertake any significant redevelopment projects within our core portfolio. mortgage indebtedness ranged from 5.0% to 7.6% with maturities that ranged from July 2007 to November 2015. Taking into consideration $92.4 million of notional principal under variable to fixed-rate swap agreements currently in effect, $216.8 million of the portfolio, or 91%, was fixed at a 5.8% weighted average interest rate and $21.6 million, or 9% Additionally, for the year ending December 31, 2006, we cur- was floating at a 5.8% weighted average interest rate. There rently estimate that capital outlays of approximately $5.0 is no debt maturing in 2005 and 2006. In 2007, $17.5 million million to $7.0 million will be required for tenant improve- is scheduled to mature at a weighted average interest rate ments, related renovations and other property improvements. of 5.9%. As we do not anticipate having sufficient cash on Share Repurchase Repurchases of our Common Shares is an additional use of liquidity as discussed in Item 5 of this Form 10-K. SOURCES OF LIQUIDITY We intend on using Fund II as the primary vehicle for our hand to repay such indebtedness, we will need to refinance this indebtedness or select other alternatives based on mar- ket conditions at that time. The following summarizes the financing and refinancing transactions since December 31, 2004: future acquisitions, including investments in the RCP Venture On February 25, 2005, we drew down $20.0 million under an and New York Urban/Infill Redevelopment initiative. Sources existing revolving facility, which bears interest at LIBOR plus of capital for funding our joint venture commitments, other 150 basis points. The proceeds from this drawdown were uti- property acquisitions, redevelopment, expansion and re-ten- lized for the Preferred Equity investment with Levitz SL, LLC. anting, as well as 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, 2005, we had a total of approximately $48.4 million of additional capacity under existing debt facilities, During April 2005, we borrowed $7.4 million under an exist- ing secured revolving facility which was repaid in May 2005. On May 26, 2005, we closed on a $65.0 million cross-collater- alized revolving facility which is collateralized by five of our properties. The facility bears interest at LIBOR plus 130 basis cash and cash equivalents on hand of $39.6 million, and nine points and matures June 1, 2010. At closing, the lender advanced properties that are unencumbered and available as potential $12.0 million, of which $7.4 million was used to refinance collateral for future borrowings. We anticipate that cash flow an existing facility with the same lender. On June 27, 2005, from operating activities will continue to provide adequate an additional $20.0 million was drawn on this line. On Octo- capital for all of our debt service payments, recurring capital ber 21, 2005, $10.0 million was repaid on this line resulting expenditures and REIT distribution requirements. in $22.0 million outstanding under this facility as of Decem- ber 31, 2005. Acadia Realty Trust 2005 Annual Report 32 Management’s Discussion and Analysis continued On August 31, 2005, we closed on a $17.6 million loan, which bears interest at a fixed rate of 4.98%. This loan, which matures Asset Sales Asset sales are an additional source of liquidity for us. September 2015, requires the payment of interest only until During 2005 and 2004, we sold the Berlin Shopping Center October 2010, and thereafter interest and principal based on and East End Centre as discussed in “ASSET SALES AND CAPI- 300-year amortization. The proceeds from this loan were in TAL/ASSET RECYCLING” in Item 1 of this Form 10-K. part used to pay down $15.0 million on an existing line. On October 17, 2005, we closed on a $12.5 million loan, which bears interest at a fixed rate of 5.12%. This loan, which matures Contractual Obligations and Other Commitments At December 31, 2005, maturities on our mortgage notes November 2015, requires the payment of interest only until ranged from July 2007 to January 2016. In addition, we have November 2008, and thereafter interest and principal until non-cancelable ground leases at four of our shopping centers. maturity. The proceeds from this loan were in part used to We also lease space for our White Plains corporate office for pay down $10.0 million on the aforementioned $65.0 million a term expiring in 2010. The following table summarizes our revolving facility. debt maturities and obligations under non-cancelable oper- On December 9, 2005, we closed on a $34.6 million loan, which bears interest at a fixed rate of 5.53%. This loan, which matures January 2016, requires the payment of interest only until January 2010, and thereafter interest and principal until maturity. ating leases of December 31, 2005: (amounts in millions) Contractual obligation Future debt maturities Interest obligations on debt Operating lease obligations Total Payments due by period Total $$ 223388..44 8866..44 3388..22 $$336633..00 Less than 1 year $$ 22..11 1133..66 11..88 $$ 1177..55 1 to 3 years $$ 2288..88 3377..66 33..88 $$ 7700..22 3 to 5 years $$ 4433..77 1188..55 33..66 $$ 6655..88 More than 5 years $$ 116633..88 1166..77 2299..00 $$220099..55 Off Balance Sheet Arangments We have investments in three joint ventures for the purpose of investing in operating properties as follows: We own a 49% interest in two partnerships which own the Crossroads Shopping Center (“Crossroads”). We account for the investment in Crossroads using the equity method of accounting as we have a non-controlling investment in Crossroads, but exercise significant influence. As such, our financial statements reflect our share of income from, but not the assets and liabilities of, Crossroads. Our pro rata share of Crossroads mortgage debt as of December 31, 2005 was $31.4 million. This fixed-rate debt bears interest at 5.4% and matures in December 2014. Reference is made to the discussion of Funds I and II under “Uses of Liquidity” in this Item 7 for additional detail related to our investment in and commitments to Funds I and II. As of December 31, 2005, we own a 22% interest in Fund I and 20% in Fund II for which we also use the equity method of accounting. Our pro rata share of Funds I and II fixed-rate mortgage debt as of December 31, 2005 was $24.4 million at a weighted average interest rate of 6.2%. Our pro rata share of Funds I and II variable-rate mortgage debt as of Decem- ber 31, 2005 was $14.3 million at a weighted average interest rate of 5.8%. Maturities on these loans range from March 2006 to January 2023. Historical Cash Flow The following discussion of historical cash flow compares our cash flow for the year ended December 31, 2005 (“2005’) with our cash flow for the year ended December 31, 2004 (“2004”). Acadia Realty Trust 2005 Annual Report 33 Cash and cash equivalents were $39.6 million and $13.5 million at December 31, 2005 and 2004, respectively. The increase of $26.1 million was a result of the following increases and decreases in cash flows: (amounts in millions) Years Ended December 31, Net cash provided by operating activities Net cash used in investing activities Net cash provided by (used in) financing activities 22000055 $$ 2244..00 ((5599..55)) 6611..66 22000044 $$ 2255..55 ((1166..44)) ((99..88)) Variance $$ ((11..55)) ((4433..11)) 7711..44 The variance in net cash provided by operating activities resulted from an increase of $2.4 million in operating income before non-cash expenses in 2005, which was primarily due to an increase in asset management and service fee income from our fund investments, additional fee income from the acquisition of certain management contracts rights in Janu- ary 2004 and February 2005, promote income on the Mervyn’s investment in 2005, additional interest income resulting from our preferred equity investment in 2005, and a decrease in distributions received from unconsolidated partnerships. These increases were offset by additional general and administrative costs due to increased compensation and other overhead expenses following the expansion of our infrastructure. In addition, a net decrease in cash provided by operating assets and liabilities of $3.9 million resulted pri- marily from an increase in receivables related to third party CRITICAL ACCOUNTING POLICIES Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, lia- bilities, revenues and expenses. We base our estimates on historical experience and assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect the significant judgments and estimates used by us in the preparation of construction cost reimbursements offset by an increase in our consolidated financial statements. income taxes payable related to the Company’s share of the gain realized by Mervyn’s. The increase in net cash used in investing activities resulted primarily from a $19.0 million Preferred Equity investment in 2005, an $18.5 million increase in expenditures for real estate acquisitions, development and tenant installation during 2005 and a decrease of $14.1 million of distributions received from unconsolidated partnerships. These decreases were offset by a $3.7 million decrease in investments in and advances to unconsolidated partnerships in 2005 and $3.9 million of proceeds received from the sale of a property in 2005. The increase in net cash provided by financing activities resulted from the following: Debt repayment in 22000044 Debt repayment in 22000055 Additional borrowings in 22000055 Proceeds from issuance of Common Shares in 22000044 Proceeds of exercise of Stock Options in 22000044 Miscellaneous Total variance $$ 110000..99 ((3399..00)) 4477..88 ((2288..33)) ((99..00)) ((11..00)) $$ 7711..44 Valuation of Property Held for Use and Sale On a quarterly basis, we review the carrying value of both properties held for use and for sale. We record impairment losses and reduce the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those properties are less than their carrying amounts. In cases where we do not expect to recover our carrying costs on properties held for use, we reduce our carrying cost to fair value, and for prop- erties held for sale, we reduce our carrying value to the fair value less costs to sell. For the year ended December 31, 2005, an impairment loss of $0.8 million was recognized related to a property that was sold in July of 2005. Manage- ment does not believe that the value of any properties in its portfolio was impaired as of December 31, 2005 or 2004. Bad Debts We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of tenants to make pay- ments 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, 2005, we had recorded Acadia Realty Trust 2005 Annual Report 34 Management’s Discussion and Analysis continued an allowance for doubtful accounts of $2.8 million. If the financial condition of our tenants were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Inflation Our long-term leases contain provisions designed to mitigate the adverse impact of inflation on our net income. Such pro- visions include clauses enabling us to receive percentage rents based on tenants’ gross sales, which generally increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during 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 our leases are for terms of less than 10 years, which permits us to seek to increase rents upon re-rental at market rates if current rents are below the then existing market rates. Most of our leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation. Recently Issued Accounting Pronouncements Reference is made to the Notes to Consolidated Financial Statements included in Item 8 of this Form 10-K. ITEM 7Ax Quantitative and Qualitative Disclosures About Market Risk Our primary market risk exposure is to changes in interest rates related to our mortgage debt. See the consolidated financial statements and notes thereto included in this Annual Report on Form 10-K for certain quantitative details related to our mortgage debt. Currently, we manage our exposure to fluctuations in inter- est rates primarily through the use of fixed-rate debt and interest rate swap agreements. As of December 31, 2005, we had total mortgage debt of $238.4 million of which $216.8 million, or 91% was fixed-rate, inclusive of interest rate swaps, and $21.6 million, or 9%, was variable-rate based upon LIBOR plus certain spreads. As of December 31, 2005, we were a party to five interest rate swap transactions to hedge our exposure to changes in interest rates with respect to $92.4 million of LIBOR based variable-rate debt. We also have three forward-starting interest rate swaps which com- mence during 2006, and 2007 and mature from 2010 to 2012 that will hedge our exposure to changes in interest rates with respect to $24.5 million of refinanced LIBOR-based vari- able rate debt with the matching maturities. The following table sets forth information as of December 31, 2005 concerning our long-term debt obligations, includ- ing principal cash flows by scheduled maturity and weighted average interest rates of maturing amounts (amounts in millions): Consolidated mortgage debt: Year 22000066 22000077 22000088 22000099 22001100 Thereafter Scheduled Amortization $$ 22..11 33..99 44..44 55..33 11..77 4488..00 $$6655..44 Maturities $$ —— 1122..55 88..00 —— 3366..77 111155..88 $$ 117733..00 Mortgage debt in unconsolidated partnerships (at Company’s pro rata share): Year 22000066 22000077 22000088 22000099 22001100 Thereafter Scheduled Amortization $$ 11..00 11..44 11..55 11..55 00..77 44..66 $$1100..77 Maturities $$ 33..33 88..44 1111..55 —— 11..44 3344..88 $$ 5599..44 Acadia Realty Trust 2005 Annual Report 35 Weighted Average Interest Rate NN//AA 66..55%% 55..77%% NN//AA 66..44%% 55..66%% Weighted Average Interest Rate 44..22%% 55..44%% 44..77%% NN//AA 55..55%% 55..77%% Total $$ 22..11 1166..44 1122..44 55..33 3388..44 116633..88 $$ 223388..44 Total $$ 44..33 99..88 1133..00 11..55 22..11 3399..44 $$ 7700..11 Of our total outstanding debt, $12.5 million will become due ITEM 9x Changes in and Disagreements with Accoun- tants on Accounting and Financial Disclosure On October 6, 2005, the Audit Committee of our Board of Directors agreed, by resolution, not to continue the engage- ment of our independent registered public accounting firm, Ernst and Young, LLP ("Ernst and Young"). The Audit commit- tee further resolved to engage the accounting firm, BDO Seidman, LLP (“BDO”) effective immediately. The decision was based primarily on the Audit Committee's efforts to reduce our costs for accounting services. We have not had any disagreements with Ernst and Young during the interim period from January 1, 2005 through the date of disengagement, nor any disagreements related to any prior years' audits. in 2007. As we intend on refinancing some or all of such debt at the then-existing market interest rates which may be greater than the current interest rate, our interest expense would increase by approximately $0.1 million annu- ally if the interest rate on the refinanced debt increased by 100 basis points. Interest expense on our variable debt as of December 31, 2005 would not increase materially as we only have $21.6 million of floating rate debt after taking into account the effect of interest rate swaps hedging $92.4 mil- lion of notional principal. We may seek additional variable- rate financing if and when pricing and other commercial and financial terms warrant. As such, we would consider hedging against the interest rate risk related to such addi- tional variable-rate debt through interest rate swaps and protection agreements, or other means. ITEM 8x Financial Statements and Supplementary Data The financial statements and supplementary data listed in items 15(a) (1) and 15(a) (2) hereof are incorporated herein by reference. Acadia Realty Trust 2005 Annual Report 36 Management’s Discussion and Analysis continued ITEM 9Ax Controls and Procedures (i) Disclosure Controls and Procedures We conducted an evaluation, under the supervision and with the participation of management including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the our disclosure controls and procedures were effective as of December 31, 2005. (ii) Internal Control Over Financial Reporting (a) Management’s Annual 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 supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2005 as required by the Secu- rities 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 inter- nal control over financial reporting was effective as of December 31, 2005. BDO Seidman, LLP, an independent registered public accounting firm that audited our Financial Statements included in this Annual Report, has issued an attestation report on our management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2005 which appears in this item 9A. Acadia Realty Trust White Plains, New York March 15, 2006 Acadia Realty Trust 2005 Annual Report 37 (b) Attestation report of the independent registered public accounting firm The Shareholders and Trustees of Acadia Realty Trust We have audited management’s assessment, included in the accompanying Management’s Report on Internal Control Over Financial Reporting, that Acadia Realty Trust and subsidiaries maintained effective internal control over financial reporting as of December 31, 2005, 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 evaluating the design and operat- ing effectiveness of internal control, and performing such other procedures as we considered 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 dis- positions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expen- ditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention 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, 2005, 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, 2005, 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, 2005, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year ended December 31, 2005 and our report dated March 8, 2006 expressed an unqualified opinion thereon. BDO Seidman, LLP New York, New York March 8, 2006 (c) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting during our fourth fiscal quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Acadia Realty Trust 2005 Annual Report 38 Management’s Discussion and Analysis continued PART III ITEM 9Bx Other Information None ITEM 10x Directors and Executive Officers of the Company This item is incorporated by reference from the definitive proxy statement for the 2006 Annual Meeting of Sharehold- ers presently scheduled to be held May 15, 2006, to be filed pursuant to Regulation 14A. ITEM 11x ITEM 12x Security Ownership of Certain Beneficial Owners and Management This item is incorporated by reference from the definitive proxy statement for the 2006 Annual Meeting of Share- holders presently scheduled to be held May 15, 2006, to be filed pursuant to Regulation 14A. ITEM 13x Certain Relationships and Related Transactions This item is incorporated by reference from the definitive proxy statement for the 2006 Annual Meeting of Sharehold- ers presently scheduled to be held May 15, 2006, to be filed pursuant to Regulation 14A. Executive Compensation This item is incorporated by reference from the definitive ITEM 14x proxy statement for the 2006 Annual Meeting of Sharehold- ers presently scheduled to be held May 15, 2006, to be filed pursuant to Regulation 14A. Principal Accountant Fees and Services This item is incorporated by reference from the definitive proxy statement for the 2006 Annual Meeting of Sharehold- ers presently scheduled to be held May 15, 2006, to be filed pursuant to Regulation 14A. Acadia Realty Trust 2005 Annual Report 39 PART IV ITEM 15x EXHIBITS, FINANCIAL STATEMENTS SCHEDULES (a) Financial Statements – Form 10-K. The following consolidated financial information is included as a separate section of this Form 10-K Report of Registered Public Accounting Firm for the year ended December 31, 2005. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Report of Registered Public Accounting Firm for the years ended December 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . 48 Consolidated Balance Sheets as of December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . 50 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 . . . . . . . 52 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . 54 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Schedule III – Real Estate and Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule. Acadia Realty Trust 2005 Annual Report 40 Management’s Discussion and Analysis continued Exhibit No. Description 3.1 3.2 3.3 4.1 10.1 10.2 10.3 10.4 10.5 10.6 10.7 10.8 10.9 10.11 10.12 10.14 10.15 10.16 10.17 10.18 10.19 10.20 10.21 10.22 10.23 10.24 10.25 10.26 10.27 10.28 10.29 10.30 10.31 10.32 10.33 10.34 10.35 10.36 10.37 10.38 Declaration of Trust of the Company, as amended (1) Fourth Amendment to Declaration of Trust (4) Amended and Restated By-Laws of the Company (22) Voting Trust Agreement between the Company and Yale University dated February 27, 2002 (14) 1999 Share Option Plan (8) (20) 2003 Share Option Plan (16) (20) Form of Share Award Agreement (17) (21) Form of Registration Rights Agreement and Lock-Up Agreement (18) Registration Rights and Lock-Up Agreement (RD Capital Transaction) (11) Registration Rights and Lock-Up Agreement (Pacesetter Transaction) (11) Contribution and Share Purchase Agreement dated as of April 15, 1998 among Mark Centers Trust, Mark Centers Limited Part- nership, the Contributing Owners and Contributing Entities named therein, RD Properties, L.P. VI, RD Properties, L.P. VIA and RD Properties, L.P. VIB (9) Agreement of Contribution among Acadia Realty Limited Partnership, Acadia Realty Trust and Klaff Realty, LP and Klaff Realty, Limited (18) Employment agreement between the Company and Kenneth F. Bernstein (6) (21) Amendment to employment agreement between the Company and Kenneth F. Bernstein (18) (21) First Amendment to Employment Agreement between the Company and Kenneth Bernstein dated as of January 1, 2001 (12) (21) Letter of employment offer between the Company and Michael Nelsen, Sr. Vice President and Chief Financial Officer dated February 19, 2003 (15) (21) Severance Agreement between the Company and Joel Braun, Sr. Vice President, dated April 6, 2001 (13) (21) Severance Agreement between the Company and Joseph Hogan, Sr. Vice President, dated April 6, 2001 (13) (21) Severance Agreement between the Company and Joseph Napolitano, Sr. Vice President dated April 6, 2001 (18) (21) Severance Agreement between the Company and Robert Masters, Sr. Vice President and General Counsel dated January 2001 (18) (21) Severance Agreement between the Company and Michael Nelsen, Sr. Vice President and Chief Financial Officer dated February 19, 2003 (15) (21) Secured Promissory Note between RD Absecon Associates, L.P. and Fleet Bank, N.A. dated February 8, 2000 (7) Promissory Note between 239 Greenwich Associates, L.P. and Greenwich Capital Financial Products, Inc. dated May 30, 2003 (18) Open-End Mortgage, Assignment of Leases and Rents, and Security Agreement between 239 Greenwich Associates, L.P. and Greenwich Capital Financial Products, Inc. dated May 30, 2003 (18) Promissory Note between Merrillville Realty, L.P. and Sun America Life Insurance Company dated July 7, 1999 (7) Secured Promissory Note between Acadia Town Line, LLC and Fleet Bank, N.A. dated March 21, 1999 (7) Promissory Note between RD Village Associates Limited Partnership and Sun America Life Insurance Company Dated Septem- ber 21, 1999 (7) Amended and Restated Mortgage Note between Port Bay Associates, LLC and Fleet Bank, N.A. dated July 19, 2000 (3) Mortgage and Security Agreement between Port Bay Associates, LLC and Fleet Bank, N.A. dated July 19, 2000 (10) Mortgage Note between Port Bay Associates, LLC and Fleet Bank, N.A. dated December 1, 2003 (18) Mortgage and Security Agreement, and Assignment of Leases and Rents between Port Bay Associates, LLC and Fleet Bank, N.A. dated December 1, 2003 (18) Note Modification Agreement between Port Bay Associates, LLC and Fleet Bank, N.A. dated December 1, 2003 (18) Amended and Restated Promissory Note between Acadia Realty L.P. and Metropolitan Life Insurance Company for $25.2 million dated October 13, 2000 (10) Amended and Restated Mortgage, Security Agreement and Fixture Filing between Acadia Realty L.P. and Metropolitan Life Insurance Company dated October 13, 2000 (10) Term Loan Agreement between Acadia Realty L.P. and The Dime Savings Bank of New York, dated March 30, 2000 (10) Mortgage Agreement between Acadia Realty L.P. and The Dime Savings Bank of New York, dated March 30, 2000 (10) Promissory Note between RD Whitegate Associates, L.P. and Bank of America, N.A. dated December 22, 2000 (10) Promissory Note between RD Columbia Associates, L.P. and Bank of America, N.A. dated December 22, 2000 (10) Term Loan Agreement dated as of December 28, 2001, among Fleet National Bank and RD Branch Associates, L.P., et al (13) Term Loan Agreement dated as of December 21, 2001, among RD Woonsocket Associates Limited Partnership, et al. and The Dime Savings Bank of New York, FSB (13) Acadia Realty Trust 2005 Annual Report 41 Exhibit No. Description 10.39 10.40 10.41 10.42 10.43 10.44 10.45 10.46 10.47 10.48 10.49 10.49a 10.49b 10.49c 10.49d 10.50 10.51 10.52 10.53 10.54 21 23.1 23.2 31.1 31.2 32.1 32.2 99.1 99.2 99.3 99.4 99.5 99.6 Option Extension of Term Loan as of December 19, 2003, between RD Woonsocket Associates Limited Partnership, et al. and Washington Mutual Bank, FA (18) Revolving Loan Promissory Note dated as of November 22, 2002, among RD Elmwood Associates, L.P. and Washington Mutual Bank, FA (15) Revolving Loan Agreement dated as of November 22, 2002, among RD Elmwood Associates, L.P. and Washington Mutual Bank, FA (15) Mortgage Agreement dated as of November 22, 2002, among RD Elmwood Associates, L.P. and Washington Mutual Bank, FA (15) Note Modification Agreement between RD Elmwood Associates, L.P. and Washington Mutual Bank, FA dated December 19, 2003 (18) Prospectus Supplement Regarding Options Issued under the Acadia Realty Trust 1999 Share Incentive Plan and 2003 Share Incentive Plan (19) (21) Acadia Realty Trust 1999 Share Incentive Plan and 2003 Share Incentive Plan Deferral and Distribution Election Form (19) (21) Amended, Restated And Consolidated Promissory Note between Acadia New Loudon, LLC and Greenwich Capital Financial Products, Inc. dated August 13, 2004 (19) Amended, Restated And Consolidated Mortgage, Assignment Of Leases And Rents And Security Agreement between Acadia New Loudon, LLC and Greenwich Capital Financial Products, Inc. dated August 13, 2004 (19) Amended and Restated Term Loan Agreement between Fleet National Bank and Heathcote Associates, L.P., Acadia Town Line, LLC, RD Branch Associates, L.P., RD Abington Associates Limited Partnership, And RD Methuen Associates Limited Partnership dated September 30, 2004 (19) Mortgage Modification Agreement between Fleet National Bank and Acadia Town Line, LLC dated September 30, 2004 (19) Mortgage Modification Agreement between Fleet National Bank and Heathcote Associates, L.P. dated September 30, 2004 (19) Mortgage Modification Agreement between Fleet National Bank and RD Branch Associates dated September 30, 2004 (19) Mortgage Modification Agreement between Fleet National Bank and RD Methuen Associates dated September 30, 2004 (19) Mortgage Modification Agreement between Fleet National Bank and RD Abington Associates Limited Partnership dated Sep- tember 30, 2004 (19) Revolving Loan Agreement between Fleet National Bank and The Bank of China and RD Absecon Associates, L.P., RD Bloomfield Associates, L.P.,RD Hobson Associates, L.P., RD Village Associates, L.P., and RD Woonsocket Associates L.P. dated May 26, 2005 (22) Mortgage, Assignment of Leases and Rents and Security Agreement between Acadia Crescent Plaza, LLC and Greenwich Capital Financial Products, Inc. dated August 31, 2005 (22) Mortgage, Assignment of Leases and Rents and Security Agreement between Pacesetter/Ramapo Associates and Greenwich Capital Financial Products, Inc. dated October 17, 2005 (22) Loan Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance Mortgage, Inc. dated December 9, 2005 (22) Mortgage and Security Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance Mortgage, Inc. dated December 9, 2005 (22) List of Subsidiaries of Acadia Realty Trust (22) Consent of Registered Public Accounting Firm to Form S-3 and Form S-8 (22) Consent of former Registered Public Accounting Firm to Form S-3 and Form S-8 (22) Certification of Chief Executive Officer pursuant to rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (22) Certification of Chief Financial Officer pursuant to rule 13a–14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (22) Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (22) Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002 (22) Amended and Restated Agreement of Limited Partnership of the Operating Partnership (11) First and Second Amendments to the Amended and Restated Agreement of Limited Partnership of the Operating Partnership (11) Third Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership (18) Fourth Amendment to Amended and Restated Agreement of Limited Partnership of the Operating Partnership (18) Certificate of Designation of Series A Preferred Operating Partnership Units of Limited Partnership Interest of Acadia Realty Limited Partnership (2) Certificate of Designation of Series B Preferred Operating Partnership Units of Limited Partnership Interest of Acadia Realty Limited Partnership (18) Acadia Realty Trust 2005 Annual Report 42 Management’s Discussion and Analysis continued Notes: (1) (2) (3) (4) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal Year ended December 31, 1994 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended June 30, 1997 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 1998 (5) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-11 (File No.33-60008) (6) (7) (8) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form10-K filed for the fiscal year ended December 31, 1998 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form10-K filed for the fiscal year ended December 31, 1999 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-8 filed September 28, 1999 (9) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Form 8-K filed on April 20, 1998 (10) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Form 10-K filed for the fiscal year ended December 31, 2000 (11) (12) (13) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Registration Statement on Form S-3 filed on March 3, 2000 Incorporated by reference to the copy thereof filed as an Exhibit to Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2001 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2001 (14) Incorporated by reference to the copy thereof filed as an Exhibit to Yale University’s Schedule 13D filed on September 25, 2002 (15) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2002 (16) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Definitive Proxy Statement on Schedule 14A filed April 29, 2003. (17) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on July 2, 2003 (18) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2003 (19) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. (20) Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Annual Report on Form 10-K filed for the fiscal year ended December 31, 2004. (21) Management contract or compensatory plan or arrangement. (22) Filed herewith. Acadia Realty Trust 2005 Annual Report 43 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized. ACADIA REALTY TRUST (Registrant) By: By: By: /s/ Kenneth F. Bernstein Kenneth F. Bernstein Chief Executive Officer, President and Trustee /s/ Michael Nelsen Michael Nelsen Sr. Vice President and Chief Financial Officer /s/ Jonathan W. Grisham Jonathan W. Grisham Vice President and Chief Accounting Officer Dated: March 15, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature /s/ Kenneth F. Bernstein (Kenneth F. Bernstein) /s/ Michael Nelsen (Michael Nelsen) /s/ Jonathan W. Grisham (Jonathan W. Grisham) /s/ Douglas Crocker II (Douglas Crocker II ) /s/ Alan S. Forman (Alan S. Forman) /s/ Suzanne Hopgood (Suzanne Hopgood) /s/ Lorrence T. Kellar (Lorrence T. Kellar) /s/ Wendy Luscombe (Wendy Luscombe) /s/ Lee S. Wielansky (Lee S. Wielansky) Title Chief Executive Officer, President and Trustee (Principal Executive Officer) Senior Vice President and Chief Financial Officer (Principal Financial Officer) Vice President and Chief Accounting Officer (Principal Accounting Officer) Trustee Trustee Trustee Trustee Trustee Trustee Date March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 March 15, 2006 Acadia Realty Trust 2005 Annual Report 44 Management’s Discussion and Analysis continued EXHIBIT INDEX The following is an index to all exhibits filed with the Annual Report on Form 10-K other than those incorporated by reference herein: Exhibit No. Description 3.3 Amended and Revised By-Laws of the Company 10.50 Revolving Loan Agreement between Fleet National Bank and The Bank of China and RD Absecon Associates, L.P., RD Bloomfield Associates, L.P.,RD Hobson Associates, L.P.,RD Village Associates, L.P., and RD Woonsocket Associates, L.P., dated May 26, 2005 10.51 Mortgage, Assignment of Leases and Rents and Security Agreement between Acadia Crescent Plaza, LLC and Greenwich Capital Financial Products, Inc. dated August 31, 2005 10.52 Mortgage, Assignment of Leases and Rents and Security Agreement between Pacesetter/Ramapo Associates and Greenwich Capital Financial Products, Inc. dated October 17, 2005 10.53 Loan Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance Mortgage, Inc. dated December 9, 2005 10.54 Mortgage and Security Agreement between RD Elmwood Associates, L.P. and Bear Stearns Commercial Finance 21 23.1 23.2 31.1 Mortgage, Inc. dated December 9, 2005 List of Subsidiaries of Acadia Realty Trust Consent of Registered Public Accounting Firm to Form S-3 and Form S-8 Consent of former Registered Public Accounting Firm to Form S-3 and Form S-8 Certification of Chief Executive Officer pursuant to rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer pursuant to rule 13a – 14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 32.2 Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Acadia Realty Trust 2005 Annual Report 45 ACADIA REALTY TRUST AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Registered Public Accounting Firm for the year ended December 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47 Report of Registered Public Accounting Firm for the years ended December 31, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48 Consolidated Balance Sheets as of December 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49 Consolidated Statements of Income for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . 52 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 . . . . . . . . . . . . . . . . . . . . . . . . 54 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Schedule III – Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79 Acadia Realty Trust 2005 Annual Report 46 Report of Independent Registered Public Accounting Firm The Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheet of Acadia Realty Trust and subsidiaries (the “Company”) as of December 31, 2005 and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these finan- cial statements and schedule based on our audits. 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 the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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, 2005 and the consolidated results of their operations and their cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. 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, 2005, 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 8, 2006 expressed an unqualified opinion thereon. BDO Seidman, LLP New York, New York March 8, 2006 Acadia Realty Trust 2005 Annual Report 47 Report of Independent Registered Public Accounting Firm The Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheet of Acadia Realty Trust and subsidiaries (the “Company”) as of December 31, 2004, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2004. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acadia Realty Trust and subsidiaries at December 31, 2004, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 2004, in conformity with U.S. generally accepted accounting principles. Ernst & Young LLP New York, New York March 10, 2005, except for Note 2B, as to which the date is March 15, 2006 Acadia Realty Trust 2005 Annual Report 48 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 $1,938 Preferred equity investment Investments in and advances to unconsolidated partnerships Rents receivable, net Notes receivable Prepaid expenses Deferred charges, net Acquired lease intangibles Other assets Assets of discontinued operations Liabilities and Shareholders’ Equity Mortgage notes payable Accounts payable and accrued expenses Dividends and distributions payable Derivative instruments Share of distributions in excess of share of income and investment in unconsolidated partnerships 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 31,542,942 and 31,340,637 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. 49 Acadia Realty Trust 2005 Annual Report December 31, 22000055 22000044 $$ 5544,,996633 $$ 5522,,447722 338800,,005533 773355 443355,,775511 111188,,330099 331177,,444422 3399,,661122 551122 55,,339966 33,,117788 1199,,000000 4477,,002211 1111,,888800 1155,,773333 33,,005577 1155,,888800 44,,663388 1155,,770099 —— 335566,,990088 55,,559944 441144,,997744 110055,,227788 330099,,669966 1133,,449999 661122 44,,446677 3,422 —— 2277,,668844 1100,,448855 1100,,008877 22,,999944 1122,,662244 —— 44,,880099 55,,226688 $$ 449999,,005588 $$ 440055,,664477 $$ 223388,,444488 $$ 115533,,336611 77,,331199 66,,008888 118800 1100,,331155 55,,339966 —— 226677,,774466 99,,220044 11,,553322 1100,,773366 3311 222233,,119999 ((1122)) ((22,,664422)) 222200,,557766 77,,662277 55,,559977 22,,113366 99,,330044 33,,009966 5511 118811,,117722 55,,774433 11,,880088 77,,555511 3311 2222,,771155 ((33,,118800)) ((22,,664422)) 221166,,992244 $$ 449999,,005588 $$ 440055,,664477 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 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 Total operating expenses Operating income Equity in earnings of unconsolidated partnerships Interest expense Gain on sale of land Minority interest Income from continuing operations before income taxes Income Taxes Income from continuing operations Discontinued operations: Operating (loss) income from discontinued operations Impairment of real estate (Loss) gain on sale of properties Minority interest (Loss) income from discontinued operations Years Ended December 31, 22000055 22000044 22000033 $$ 5522,,773377 $$5500,,666677 $$ 4488,,110000 774477 1133,,998800 778800 1111,,449922 33,,558822 —— 8833,,331188 1144,,332233 99,,225533 1155,,338822 1166,,776633 5555,,772211 2277,,559977 88,,222288 ((1111,,442233)) —— ((669955)) 2233,,770077 ((22,,114400)) 2211,,556677 ((113388)) ((777700)) ((5500)) 1177 ((994411)) 994488 1122,,998833 662200 44,,776633 11,,446666 221100 7711,,665577 1144,,554444 88,,776622 1100,,446688 1155,,447700 4499,,224444 2222,,441133 11,,779977 ((1100,,443366)) 993322 ((11,,119900)) 1133,,551166 —— 1133,,551166 ((550044)) —— 66,,669966 ((112233)) 66,,006699 998888 1122,,883333 774488 11,,997711 778888 11,,221188 6666,,664466 1144,,441199 88,,220088 1100,,773344 1177,,119955 5500,,555566 1166,,009900 22,,441111 ((99,,889966)) 11,,118877 ((11,,339999)) 88,,339933 —— ((559922)) 559922 —— —— 5522 554400 Net income $$2200,,662266 $$ 1199,,558855 $$ 77,,885533 The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2005 Annual Report 50 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 (Loss) income from discontinued operations Basic earnings per share Diluted Earnings per Sharei Income from continuing operations (Loss) income from discontinued operations Diluted earnings per share The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 22000055 22000044 22000033 $$ 00..6688 ((00..0033)) $$ 00..6655 $$ 00..6677 ((00..0033)) $$ 00..6644 $$00..4466 00..2211 $$ 00..6677 $$00..4455 00..2200 $$00..6655 $$ 00..3322 ((00..0022)) $$ 00..3300 $$ 00..3311 ((00..0022)) $$ 00..2299 Acadia Realty Trust 2005 Annual Report 51 Consolidated Statements of Shareholders’ Equity Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders’ Equity Deficit I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Balance at December 31, 2002 2255,,225577 $$ 2255 $$ 117700,,885511 $$ ((66,,887744)) $$ ((22,,667799)) $$ 116611,,332233 Conversion of 2,058,804 OP Units to Common Shares by limited partners of the Operating Partnership 22,,005599 Conversion of 632 Series A Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee restricted share award Settlement of vested options Dividends declared ($0.595 per Common Share) Employee exercise of 250 options Unrealized gain on valuation of swap agreements Common Shares purchased under Employee Stock Purchase Plan Net income 8844 88 —— —— —— —— 11 —— Balance at December 31, 2003 2277,,440099 Conversion of 746,762 OP Units to Common Shares by limited partners of the Operating Partnership Shares issued to trustees and employees Employee restricted share award Settlement of vested options Dividends declared ($0.6525 per Common Share) Employee and trustee exercise of 1,262,000 options Unrealized gain on valuation of swap agreements Common Shares issued under Employee Stock Purchase Plan Issuance of 1,890,000 Common Shares, net of issuance costs Net income Balance at December 31, 2004 774477 55 2222 —— —— 11,,226622 —— 66 11,,889900 — 3311,,334411 2 — — — —— — —— — —— 2277 11 —— —— —— —— 11 —— —— 22 — 3311 14,898 632 410 (750) ((88,,116600)) 2 —— 8 —— — — — — —— — — — — — 14,900 632 410 (750) ((77,,885533)) — ((1166,,001133)) 2 11,,336699 —— 11,,336699 — —— — 77,,885533 8 77,,885533 117777,,889911 ((55,,550055)) ((22,,667799)) 116699,,773344 66,,339955 444433 339944 ((6677)) —— 99,,226655 —— 8844 2288,,331100 — 222222,,771155 —— —— —— —— —— —— 22,,332255 —— —— — —— —— —— —— 66,,339966 444433 339944 ((6677)) ((1199,,554488)) ((1199,,554488)) —— —— —— —— 1199,,558855 99,,226666 22,,332255 8844 2288,,331122 1199,,558855 ((33,,118800)) ((22,,664422)) $$ 221166,,992244 Acadia Realty Trust 2005 Annual Report 52 Consolidated Statements of Shareholders’ Equity continued Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Total Shareholders’ Equity Deficit I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Conversion of 796 Series A Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee restricted share award Dividends declared ($0.69 per Common Share) Employee and trustee exercise of 51,200 options Unrealized gain on valuation of swap agreements Common Shares purchased under Employee Stock Purchase Plan Net income 9922 5522 —— 5511 —— 77 —— Balance at December 31, 2005 3311,,554433 $$—— —— $$ 669966 11,,003300 $$ —— —— $$ —— $$ —— 669966 11,,003300 —— —— —— —— —— 3311 ((11,,669911)) 334455 —— 110044 —— 222233,,119999 —— —— 33,,116688 —— —— ((1122)) ((2200,,662266)) ((2222,,331177)) —— —— —— 2200,,662266 334455 33,,116688 110044 2200,,662266 ((22,,664422)) 222200,,557766 The accompanying notes are an integral part of these consolidated financial statements Acadia Realty Trust 2005 Annual Report 53 Consolidated Statements of Cash Flows I N T H O U S A N D S , E X C E P T P E R S H A R E A M O U N T S Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Gain on sale of land (Loss) gain on sale of property Impairment of real estate Minority interests Equity in earnings of unconsolidated partnerships Distributions of operating income from unconsolidated partnerships Amortization of derivative settlement included in interest expense Provision for bad debts Amortization of FAS 141 above-market rent Changes in assets and liabilities: Restricted cash Funding of escrows, net Rents receivable Prepaid expenses Other assets Accounts payable and accrued expenses Due to/from related parties Other liabilities Net cash provided by operating activities Cash Flows from Investing Activities Expenditures for real estate and improvements Payment of accrued expense related to redevelopment project Investment in and advances to unconsolidated partnerships Return of capital from unconsolidated partnerships Collections on notes receivable Payment of deferred leasing costs Advances of notes receivable Preferred equity investment Proceeds from sale of land Proceeds from sale of property Net cash (used in) provided by investing activities The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 22000055 22000044 22000033 $$ 2200,,662266 $$1199,,558855 $$ 77,,885533 1166,,885533 —— 5500 777700 667788 ((88,,222288)) 559966 444400 448811 221177 110000 ((992299)) ((11,,551177)) ((2299)) ((99,,008877)) 664466 —— 22,,229922 2233,,995599 2255,,662299 —— ((1122,,771111)) 11,,001111 11,,886688 ((11,,003344)) ((77,,991144)) ((1199,,000000)) —— 33,,993311 ((5599,,447788)) 1166,,007777 ((993322)) ((66,,669966)) —— 11,,331133 ((11,,779977)) 11,,664455 9999 778833 —— ((110088)) ((11,,112255)) ((11,,228888)) 9999 ((33,,000044)) 22,,446644 ((997744)) ((667733)) 2255,,446688 ((77,,113399)) —— ((1166,,442222)) 1155,,113366 33,,992299 ((22,,337788)) ((1100,,442299)) —— 993322 —— 1177,,990099 ((11,,118877)) —— —— 11,,334477 ((22,,441111)) 11,,554400 —— 552233 —— ((550044)) 110055 ((33,,995588)) ((11,,008855)) ((889911)) 221188 ((112266)) 778855 2200,,111188 ((1133,,553311)) ((22,,448888)) ((66,,003322)) 6622 33,,223322 ((22,,118833)) —— —— —— —— ((1166,,337711)) ((2200,,994400)) Acadia Realty Trust 2005 Annual Report 54 Acadia Realty Trust 2005 Annual Report 54 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 Common Shares issued under Employee Stock Purchase Plan Settlement of options to purchase Common Shares Exercise of options to purchase Common Shares Termination of derivative instrument Issuance of Common Shares Net cash provided by (used in) financing activities Increase (decrease) in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period Supplemental Disclosure of Cash Flow Informationi Years Ended December 31, 22000055 22000044 22000033 $$ ((3399,,001144)) $$((110000,,992288)) $$ ((3322,,991177)) 112244,,110000 ((11,,119933)) ((2211,,886699)) ((338800)) ((334422)) ((111199)) 110044 —— 334455 —— —— 6611,,663322 2266,,113333 1133,,449999 7766,,225511 ((11,,663300)) ((1188,,550077)) ((441166)) ((228833)) ((660066)) 8844 ((6677)) 9,340 ((11,,330077)) 2288,,331144 ((99,,775577)) ((666600)) 1144,,115599 2211,,000000 ((224411)) ((1144,,889966)) ((11,,220077)) ((119999)) ((998855)) 88 ((775500)) — —— —— ((3300,,118877)) 3311,,000099 4455,,116688 $$ 3399,,661122 $$ 1133,,449999 $$ 1144,,115599 Cash paid during the period for interest $$ 1111,,445566 $$ 1111,,777777 $$ 1111,,664455 Supplemental Disclosure of Non-Cash Investing and Financing Activitiesi Acquisition of management contract rights through issuance of Preferred Operating Partnership Units Acquisition of property through issuance of Preferred Operating Partnership Units $$ 44,,000000 $$ 220000 $$ $$ 44000000 —— $ $ —— —— The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2005 Annual Report Acadia Realty Trust 2005 Annual Report 55 55 Notes to Consolidated Statements In thousands, except per share amounts Note 1i Organization, Basis of Presentation and Summary of Significant Account- ing Policies Acadia Realty Trust (the “Company”) is a fully integrated, self-managed and self-administered equity real estate investment trust (“REIT”) focused primarily on the owner- ship, acquisition, redevelopment and management of retail properties, including neighborhood and community shopping centers and mixed-use properties with retail components. 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 majority owned part- nerships. As of December 31, 2005, the Company controlled 98% of the Operating Partnership as the sole general part- ner. As the general partner, the Company is entitled to share, in proportion to its percentage interest, in the cash distribu- tions and profits and losses of the Operating Partnership. The limited partners represent entities or individuals who contributed their interests in certain properties or partner- ships to the Operating Partnership in exchange for common or preferred 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 structure is com- monly referred to as an umbrella partnership REIT or “UPREIT.” As of December 31, 2005, the Company operated 71 properties, which it owns or has an ownership interest in, principally located in the Northeast, Mid-Atlantic and Midwest regions of the United States. Principles of Consolidation The consolidated financial statements include the consoli- dated accounts of the Company and its majority owned partnerships, including the Operating Partnership. All sig- nificant intercompany balances and transactions have been eliminated in consolidation. Investments in partnerships for which the Company has the ability to exercise significant influence over, but does not have financial or operating con- trol, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings (or loss) of these partnerships are included in consolidated net income. “Consolidation of Variable Interest Entities” (“FIN 46-R”) are required to be consolidated by their primary beneficiary. The primary beneficiary of a variable interest 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 has evaluated the applicability of FIN 46-R to its investments in certain joint ventures and determined that these joint ventures do not meet the requirements of a variable interest entity and, therefore, consolidation of these ventures is not required. Accordingly, these investments are accounted for using the equity method. Use of Estimates Accounting principles generally accepted in the United States of America (“GAAP”) require the Company’s manage- ment to make estimates and assumptions that affect the amounts reported in the financial statements and accompa- nying notes. The most significant assumptions and estimates relate to the valuation of real estate, depreciable lives, revenue recognition and the collectability of trade accounts receivable. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, actual results could differ from these estimates. Real Estate Real estate assets are stated at cost less accumulated depre- ciation. Expenditures for acquisition, development, construc- tion and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Construction in progress includes costs for significant shopping center expansion and redevelopment. Depreciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for buildings and the shorter of the useful life or lease term for improvements, furniture, fixtures and equip- ment. Expenditures for maintenance and repairs are charged to operations as incurred. Upon acquisitions of real estate, the Company assesses the fair value of acquired assets (including land, buildings and improvements, and identified intangibles such as above and below market leases and acquired in-place leases and cus- tomer relationships) and acquired liabilities in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations” and SFAS No. 142,” Goodwill and Other Intangible Assets,” and allocates purchase price based on these assessments. The Company assesses fair value based on estimated cash flow projections that utilize Variable interest entities within the scope of Financial appropriate discount and capitalization rates and available Accounting Statements Board (“FASB”) Interpretation No. 46, market information. Estimates of future cash flows are Acadia Realty Trust 2005 Annual Report 56 Notes to Consolidated Statements continued Notes to Consolidated Statements continued based on a number of factors including the historical operat- The Company makes estimates of the uncollectability of ing results, known trends, and market/economic conditions its accounts receivable related to base rents, expense reim- that may affect the property. The Company reviews its long-lived assets used in operations for impairment when there is an event, or change in circum- stances that indicates impairment in value. The Company records impairment losses and reduces the carrying value of properties when indicators of impairment are present and the expected undiscounted cash flows related to those prop- bursements and other revenues. An allowance for doubtful accounts has been provided against certain tenant accounts receivable that are estimated to be uncollectible. Once the amount is ultimately deemed to be uncollectible, it is written off. Rents receivable at December 31, 2005 and 2004 are shown net of an allowance for doubtful accounts of $2,843 and $2,841, respectively. erties are less than their carrying amounts. In cases where Interest income from notes receivable is recognized on an the Company does not expect to recover its carrying costs accrual basis based on the contractual terms of the notes. on properties held for use, the Company reduces its carrying cost to fair value, and for properties held for sale, the Com- pany reduces its carrying value to the fair value less costs to sell. During the year ended December 31, 2005, an impairment loss of $770 was recognized related to a property that was sold in July of 2005. Management does not believe that the values of its properties within the portfolio are impaired as of December 31, 2005. Deferred Costs Fees and costs paid in the successful negotiation of leases have been deferred and are being amortized on a straight- line basis over the terms of the respective leases. Fees and costs incurred in connection with obtaining financing have been deferred and are being amortized over the term of the related debt obligation. Management Contracts Income from management contracts, net of submanage- ment fees of $303 and $1,591 for the years ended December 31, 2005 and 2004, respectively, 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. Revenue Recognition and Accounts Receivable Leases with tenants are accounted for as operating leases. Minimum rents are recognized on a straight-line basis over the term of the respective leases. As of December 31, 2005 and 2004 unbilled rents receivable relating to straight-lining of rents were $6,988 and $6,506, respectively. Certain of these leases also provide for percentage rents based upon 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. Restricted Cash and Cash in Escrow Restricted cash and cash in escrow consists principally of cash held for real estate taxes, property maintenance, insur- ance, minimum 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 believes it qualifies as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended (the “Code”). To maintain REIT status for Federal income tax purposes, the Company is generally required to distribute to its stockhold- ers at least 90% of its REIT taxable income as well as comply with certain other requirements as defined by the Code. Accordingly, the Company is not subject to federal corporate income tax to the extent that it distributes 100% of its REIT taxable income each year. Although it may qualify for REIT status for Federal income tax purposes, the Company is subject to state income or franchise taxes in certain states in which some of its proper- ties are located. In addition, taxable income from non-REIT activities managed through the Company’s taxable REIT subsidiaries (“TRS”) are subject to Federal, state and local income taxes. the level of sales achieved by the tenant. Percentage rents TRS income taxes are accounted for under the asset and lia- are recognized in the period when the tenants’ sales break- bility method as required by SFAS No. 109, “Accounting for point is met. In addition, leases typically provide for the Income Taxes.” Under the asset and liability method, deferred reimbursement to the Company of real estate taxes, insurance income taxes are recognized for the temporary differences and other property operating expenses. These reimburse- between the financial reporting basis and the tax basis of ments are recognized as revenue in the period the expenses the TRS assets and liabilities. are incurred. Acadia Realty Trust 2005 Annual Report 57 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 June 30, 2005, the Company adopted the fair value method of recording stock-based compensation contained in SFAS No. 123R, “Accounting for Stock-Based Compensation.” 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 compen- sation was granted. As provided for in SFAS No. 123, the Com- pany 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 have effective date did not have a material effect on the Company’s consolidated financial statements. On December 16, 2004, the FASB issued SFAS No. 123R (Revised 2004), “Share-Based Payment.” SFAS 123R replaces SFAS No. 123, which the Company adopted on January 1, 2003. SFAS No. 123R requires that the compensation cost relating to share-based payment transactions be recognized in financial statements 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 report- ing 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. been applied to all employee awards granted, modified or In May 2005, the FASB issued SFAS No. 154, “Accounting 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 com- pensation for vested stock options granted prior to January 1, 2002. See Note 11 – “Share Incentive Plan” for the assumptions utilized in valuing the below vested stock options: Years Ended December 31, 2005 2004 2003 Net income: As reported Pro forma Basic earnings per share: As reported Pro forma Diluted earnings per share: As reported Pro forma $19,585 $7,853 19,561 7,829 $ 0.67 $ 0.30 0.67 0.29 $ 0.65 $ 0.29 0.65 0.29 Recent Accounting Pronouncements On December 16, 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29.” The amendments made by SFAS No. 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have “commercial substance.” SFAS No. 153 is effective for non- monetary asset exchanges occurring in fiscal periods begin- ning after June 15, 2005. The adoption of SFAS No. 153 on its Changes and Error Corrections – A Replacement of APB Opinion No. 20 and SFAS No. 3.” SFAS No. 154 changes the requirements for the accounting and reporting of a change in accounting principle by requiring that a voluntary change in accounting principle be applied retrospectively with all prior periods’ financial statements presented on the new accounting principle, unless it is impracticable to do so. SFAS No. 154 also requires that a change in depreciation or amortization for long-lived, nonfinancial assets be accounted for as a change in accounting estimate effected by a change in accounting principle and corrections of errors in previously issued financial statements should be termed a “restatement.” SFAS No. 154 is effective for accounting changes and correc- tions of errors made in fiscal years beginning after Decem- ber 15, 2005. The Company believes that the adoption of SFAS No. 154 will not have a material effect on its consolidated financial statements. In 2005, the Emerging Issues Task Force (“EITF”) reached a consensus that the general partners in a limited partnership should determine whether they control a limited partnership based on the application of the framework as discussed in EITF 04-5, “Determining Whether a General Partner, or the General Partners as a Group, Controls a Limited Partnership or Similar Entity When the Limited Partners Have Certain Rights.” Under EITF 04-5, the general partners in a limited partnership are presumed to control that limited partner- ship regardless of the extent of the general partners’ owner- ship interest in the limited partnership. The assessment of whether the rights of the limited partners should overcome the presumption of control by the general partners is a matter of judgment that depends on facts and circumstances. If the limited partners have either (a) the substantive ability to dissolve (liquidate) the limited partnership or otherwise Acadia Realty Trust 2005 Annual Report 58 Notes to Consolidated Statements continued remove the general partners without cause or (b) substantive pertains to a beneficial interest other than another deriva- participating rights, the general partners do not control the tive financial instrument. This Statement is effective for all limited partnership. EITF 04-5 was effective immediately for financial instruments acquired or issued after the beginning new partnerships formed and existing limited partnerships of an entity’s first fiscal year that begins after September 15, for which the partnership agreements are modified on or 2006. The Company believes that the adoption of SFAS No. after June 29, 2005, and, for all other partnerships, EITF 04-5 155 will not have a material effect on its consolidated finan- would be effective no later than the beginning of the first cial statements. reporting period in fiscal years beginning after December 15, 2005. The provisions of EITF 04-5 may be initially applied through either one of two methods: (1) similar to a cumula- tive effect of a change in accounting principle or (2) retro- spective application. The Company is currently assessing the impact of EITF 04-5 as it relates to the method of accounting utilized for its investments in Funds I and II (note 4), which Comprehensive income The following table sets forth comprehensive income for the years ended December 31, 2005, 2004 and 2003: Years Ended December 31, 2005 2004 2003 $20,626 $19,585 $ 7,853 are currently accounted for under the equity method of Net income accounting. There would be no impact on net income or shareholders’ equity for any of the reported periods in the accompanying consolidated financial statements if the Com- pany were to consolidate these investments. If the Company was required to consolidate these investments, total assets, total liabilities and minority interest as of December 31, 2005 Other comprehensive income (loss)1 3,168 2,325 1,369 Comprehensive income 1Relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges. $ 23,794 $ 21,910 $ 9,222 and December 31, 2004 would be as follows: The following table sets forth the change in accumulated December 31, other comprehensive loss for the years ended December 31, Total assets Total liabilities Minority interest 2005 $ 816,732 484,473 $ 111,683 2004 $624,387 343,741 $ 63,722 In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments — an amendment of FASB Statements No. 133 and No. 14.” This Statement amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguish- ments of Liabilities” and resolves issues addressed in SFAS No. 133 Implementation Issue No. D1, “Application of SFAS No. 133 to Beneficial Interests in Securitized Financial Assets.” This Statement (a) permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, (b) clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, (c) establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives 2005, 2004 and 2003: Years Ended December 31, 2005 2004 2003 Beginning balance $3,180 $ 5,505 $ 6,874 Unrealized gain on valuation of derivative instruments (3,168) (2,325) (1,369) Ending balance $ 12 $ 3,180 $ 5,505 Reclassifications Certain 2004 and 2003 amounts were reclassified to con- form to the 2005 presentation. Note 2i Acquisition and Disposition of Properties and Discontinued Operations A. Acquisition and Disposition of Properties Currently the primary vehicle for the Company’s acquisitions or that are hybrid financial instruments that contain an is through its acquisition joint ventures (Note 4). embedded derivative requiring bifurcation, (d) clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and (e) amends SFAS No. 140 to eliminate the prohibition on a qualifying special-purpose entity from holding a derivative financial instrument that Dispositions relate to the sale of shopping centers and land. Gains from these sales are recognized in accordance with the provisions of SFAS No. 66, “Accounting for Sales of Real Estate.” Acadia Realty Trust 2005 Annual Report 59 Acquisitions During July of 2005, the Company purchased 4343 Amboy The combined results of operations and assets and liabilities of the properties classified as discontinued operations are Road located in Staten Island, New York for $16,635 in cash summarized as follows: and $200 in Common OP Units. Dispositions On July 7, 2005, the Company sold the Berlin Shopping Center Assets: for $4,000. An impairment loss of $770 was recognized for the year ended December 31, 2005, to reduce the carrying value of this asset to fair value less costs to sell. On November 22, 2004, the company disposed of the East End Centre, a 308,000 square foot shopping center in Wilkes- Barre, Pennsylvania, for approximately $12,405 resulting in a $6,696 gain on the sale. Net real estate Rents receivable, net Prepaid expenses Total Assets Liabilities and Deficit: Accounts payable and accrued expenses 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 Corpora- tion for $1,540 after closing and other related costs. The joint Other liabilities Total liabilities Surplus venture received a $1,632 note receivable for the net purchase Total liabilities and surplus price and additional reimbursements due from the buyer and deferred recognition of the gain on sale in accordance with SFAS No. 66. The note was paid in full on January 10, 2003, and as such, the Company’s share of the deferred gain, or $634, was recognized in 2003. Additional amounts held in escrow from the closing of $932 were released to the Com- pany during 2004 and recognized as additional gain. Of this amount, $466 was attributable to the Company’s joint venture partner and reflected in minority interest in the Company’s consolidated statement of income. B. Discontinued Operations SFAS No. 144 requires discontinued operations presentation for disposals of a “component” of an entity. In accordance Total revenue Total expenses Impairment of real estate (Loss) gain on sale of properties Minority interest (Loss) Income from December 31, 2005 2004 $4,827 406 35 $5,268 13 38 51 $ 5,217 $5,268 Years Ended December 31, 2005 2004 2003 $438 $ 2,554 $2,799 576 3,058 3,391 (504) (592) (138) (770) — (50) 6,696 17 (123) — — 52 discontinued operations $(941) $6,069 $ (540) with SFAS No. 144, for all periods presented, the Company Note 3i reclassified its consolidated statements of income to reflect income and expenses for properties which became held for sale subsequent to December 31, 2001, as discontinued oper- ations and reclassified its consolidated balance sheets to reflect assets and liabilities related to such properties as assets and liabilities related to discontinued operations. The combined results of operations of either sold properties or properties held for sale are reported separately as discon- tinued operations for the years ended December 31, 2005, 2004 and 2003. These are related to the Berlin Shopping Center, which was sold on July 7, 2005 and the East End Centre, which was sold on November 22, 2004. 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 reportable segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. The fol- lowing table sets forth certain segment information for the Company, reclassified for discontinued operations, as of and for the years ended December 31, 2005, 2004, and 2003 (does not include unconsolidated partnerships): Acadia Realty Trust 2005 Annual Report 60 Notes to Consolidated Statements continued 2005 2004 2003 Retail Multi-Family All Retail Multi-Family All Retail Multi-Family Properties Properties Other Total Properties Properties Other Total Properties Properties All Other Total $ 61,540 $ 7,688 $14,090 $ 83,318 $ 57,600 $ 7,596 $6,461 $ 71,657 $ 55,351 $ 7,318 $ 3,977 $ 66,646 19,323 4,253 — 23,576 2,141 267 12,974 15,382 19,172 3,733 4,134 — 23,306 18,440 4,187 — 490 6,245 10,468 7,892 1,005 1,837 22,627 10,734 $ 40,076 $ 3,168 $ 1,116 $ 44,360 $ 34,695 $ 2,972 $ 216 $ 37,883 $ 29,019 $ 2,126 $ 2,140 $ 33,285 $ 14,847 $ 1,465 $ 451 $ 16,763 $ 13,709 $ 1,433 $ 328 $ 15,470 $ 15,538 $ 1,336 $ 321 $ 17,195 $ 10,068 $ 1,355 $ — $ 11,423 $ 8,918 $ 1,518 $ — $ 10,436 $ 8,366 $ 1,530 $ — $ 9,896 $ 394,118 $ 41,633 $ — $ 435,751 $374,359 $ 40,615 $ — $ 414,974 $367,446 $ 39,774 $ — $ 407,220 $ 413,158 $ 37,295 $48,605 $499,058 $348,026 $ 36,872 $20,749 $405,647 $ 337,724 $36,830 $13,630 $ 388,184 $ 19,759 $ 1,018 $ — $ 20,777 $ 6,314 $ 842 $ — $ 7,156 $ 11,971 $ 1,378 $ — $ 13,349 $ 87,389 $ 73,784 $ 68,286 Revenues Property operating expenses and real estate taxes Other Expenses Net property income before depreciation and amortization Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Revenues Total revenues for reportable segments (1,290) (708) (129) — $ 71,657 $ 24,432 (1,126) — $ 23,306 $ 37,883 (15,470) 1,797 (10,436) 932 6,069 — (1,190) $ 19,585 (1,340) (300) — — $ 66,646 $ 23,784 (1,157) — $ 22,627 $ 33,285 (17,195) 2,411 (9,896) 1,187 (540) — (1,399) $ 7,853 Elimination of intersegment management fee income (1,514) Elimination of intersegment asset management fee income (1,143) Elimination of intersegment service fees and interest income (878) Elimination of promote fee income (536) $ 83,318 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 Elimination of intersegment interest expense $ 25,191 (1,273) (342) Total consolidated expenses $ 23,576 Reconciliation to Net Income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Gain on sale of property Loss from discontinued operations Income taxes Minority interest Net income $ 44,360 (16,763) 8,228 (11,423) — (941) (2,140) (695) $ 20,626 Acadia Realty Trust 2005 Annual Report 61 Note 4i Investments in Unconsolidated Partnerships buildings and improvements are being amortized over the life of the related property. Acadia Strategic Opportunity Fund, LP (“Fund I”) In 2001, the Company formed a joint venture, Fund I, with Crossroads The Company owns a 49% interest in Crossroads Joint Ven- four of its institutional investors for the purpose of acquiring real estate assets. The Company is the sole general partner ture LLC and Crossroads II LLC (collectively, “Crossroads”) with 22% interest in the joint venture and is also entitled to which collectively own a 311,000 square foot shopping cen- a profit participation in excess of its invested capital based ter in White Plains, New York. The Company accounts for its on certain investment return thresholds. The Company also investment in Crossroads using the equity method. Sum- earns market-rate fees for asset management as well as for mary financial information of Crossroads and the Company’s property management, construction and leasing services. investment in and share of income from Crossroads follows: Decisions made by the general partner as it relates to pur- Balance Sheets Assets: Rental property, net Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity Total liabilities and partners’ equity December 31, 2005 2004 chasing, financing and disposition of properties are subject to the unanimous disapproval of the Advisory Committee, which is comprised of representatives from each of the four institutional investors. $ 6,458 $ 6,939 5,543 6,129 $ 12,001 $ 13,068 $64,000 $64,000 2,359 2,481 (54,358) (53,413) As of December 31, 2005, Fund I owns or has an ownership interest in ten shopping centers and 25 anchor-only super- market leases comprising 2.7 million square feet. Acquisitions completed during 2004 and 2003 were as follows: On March 11, 2004, Fund I, in conjunction with the Company’s long-time investment partner, Hendon Properties (“Hendon”), purchased a $9,600 first mortgage loan from New York Life Insurance Company for $5,500. The loan, which was secured by the Hitchcock Plaza in Aiken, South Carolina, was in default $ 12,001 $ 13,068 at acquisition. Fund I and Hendon acquired the loan with the Company’s investment $ (10,315) $ 9,304 intention of pursuing ownership of the property securing the debt. Fund I provided 90% of the equity capital and Hendon Years Ended December 31, provided the remaining 10% of the equity capital used to 2005 2004 2003 acquire the loan. Hendon is entitled to receive profit partici- Statements of Income Total revenue Operating and other expenses Interest expense Depreciation and amortization Net income Company’s share of net income Amortization of excess investment (see below) Income from partnerships $8,772 $8,160 $ 8,324 2,581 3,632 2,707 2,740 2,465 2,542 654 778 570 $1,905 $ 1,935 $ 2,747 pation in excess of its proportionate equity interest. Subse- quent to the acquisition of the loan, Fund I and Hendon obtained fee title to this property. The Company provided $3,150 of mortgage financing to the project in connection with the purchase of the first mortgage loan. The note matures March 9, 2006, and bears interest at 7% for the first year and 6% for the second year. In addition to this loan, the Company invested approximately $900, primarily 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 $1,500. $ 988 $ 1,112 $ 1,377 The 35,000 square foot center is located in front of and 392 392 392 adjacent to Hitchcock Plaza. Related to this transaction, the Company provided an additional $750 mortgage loan to the $ 596 $ 720 $ 985 project with a March 2006 maturity and interest at 7% for The unamortized excess of the Company’s investment over its share of the net equity in Crossroads at the date of acqui- sition was $19,580. The portion of this excess attributable to the first year and 6% for the second year. During May 2004, Fund I acquired a 50% interest in Haygood Shopping Center and Sterling Heights Shopping Center for Acadia Realty Trust 2005 Annual Report 62 Notes to Consolidated Statements continued an aggregate investment of $3,184. These assets are part of the portfolio that the Company currently manages as a result of its January 2004 acquisition of certain management con- Balance Sheets tracts (note 7). Assets: During May 2004, Fund I and an unaffiliated partner, each Rental property, net with a 50% interest, acquired a 35,000 square foot shopping Other assets center in Tarrytown, New York, for approximately $5,300. Related to this acquisition, the Company loaned $2,000 to Fund I which bears interest at the prime rate and matured May 2005. This loan has been converted to a demand note. Total assets Liabilities and partners’ equity Mortgage note payable December 31, 2005 2004 $189,188 $187,046 20,835 13,077 $210,023 $200,123 $113,888 $120,188 16,756 79,379 24,060 55,875 $210,023 $200,123 $ 17,072 $ 12,155 Years Ended December 31, 2005 2004 2003 $ 30,605 $26,664 $ 26,008 5,282 5,807 5,017 2,284 6,568 9,166 284 2,106 6,673 8,731 166 207 — 2,171 6,399 8,055 157 — — Other liabilities Partners’ equity Total liabilities and partners’ equity Company’s investment Statements of Income Total revenue Operating and other expenses Management and other fees Interest expense Depreciation and amortization Minority interest Equity in earnings (loss) in unconsolidated subsidiary Provisions for income taxes (235) 53 Net income $ 7,203 $ 2,974 $ 4,209 Company’s share of net income $ 2,228 $ 1,170 $ 1,426 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 institu- tional investors for the purpose of acquiring real estate assets. The Company is the sole managing member with 20% interest in the joint venture and is also entitled to a During January 2003, Fund I and an unaffiliated joint venture party acquired a one million square foot supermarket port- folio consisting of twenty-five anchor-only leases with either Kroger or Safeway supermarkets (“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 of existing fixed-rate debt which bears interest at a weighted-average rate of 6.6%. The mortgage debt fully amortizes through 2009, which is coterminous with the pri- mary lease term of the supermarket leases. Fund I invested $11,250 of the equity capitalization of which the Company’s share was $2,500. Also during 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 Wilm- ington, Delaware (“Brandywine Portfolio”). A portion of one of the properties is currently unoccupied, which Fund I will pay for on an “earn-out” basis only when it is leased. To date, Fund I has incurred costs of $30,302 for earn-out space. At closing, Fund I assumed $38,082 of fixed-rate debt which bears interest at a weighted-average rate of 6.2% as well as obtained an additional fixed-rate loan of $30,000 which bears interest at 4.7%. Fund I invested equity of $19,270 in the acquisition, of which the Company’s share was $4,282. On January 4, 2006, the Company recapitalized the Brandy- wine Portfolio (note 21). The Company accounts for its investment in Fund I using profit participation in excess of its invested capital based the equity method. Summary financial information of Fund I on certain investment return thresholds. The Company also and the Company’s investment in and share of income from earns market-rate fees for asset management as well as for Fund I is as follows: Acadia Realty Trust 2005 Annual Report 63 property management, construction, legal and leasing serv- ices. 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 with five five-year options at the current rent plus one 15- of the six institutional investors. year option at fair market value. The tenant has exercised On September 29, 2004, in conjunction with an investment the first five-year option which expires in October 2011. partner, P/A Associates, LLC (“P/A”), Fund II, through Acadia- In December 2005, Acadia-P/A acquired a 65,000 square P/A Holding Company, LLC (“Acadia-P/A”), purchased 400 East foot parking garage located at 10th Avenue in Manhattan, Fordham Road in the Bronx, NY for $30,197, inclusive of clos- New York. The purchase price was $5,310, including closing ing and other related acquisition costs. The Company had and other acquisition costs. Concurrent with the closing, provided a bridge loan of $18,000 to Fund II in connection Acadia-P/A obtained a $4,900 short term loan which with this acquisition. Subsequent to the acquisition, Fund II matures on March 31, 2006 and bears interest at LIBOR repaid this loan from the Company with $18,000 of proceeds plus 125 basis points. from a new loan from a bank which bears interest at LIBOR plus 175 basis points and matures November 2007. On Febru- ary 25, 2005, Acadia-P/A purchased a parcel of land adjacent to 400 E. Fordham Road for $867, inclusive of closing and related acquisition costs. On October 1, 2004, Acadia-P/A entered into a 95-year ground lease to redevelop a 16-acre site in Pelham Manor, Westchester County, New York. On April 6, 2005, Acadia-P/A purchased a 140,000 square foot building located in the Washington Heights section of Manhattan, NY. The building was acquired for a purchase price of $25,000. In September 2005, Acadia-P/A obtained a mortgage loan of $19,000 secured by this property which requires monthly payments of interest only at a fixed inter- est rate of 5.26% and matures September 2007. Also in December 2005, Acadia-P/A acquired the remaining 40-year term of a leasehold interest on land located at Lib- erty Avenue in Queens, New York for $308. During the year of 2005, Fund II drew down a total of $24,400 (net of $10,000 of repayments) under an existing subscription credit facility, which bears interest at LIBOR plus 75 basis points. The line proceeds were utilized for various acquisitions during the year of 2005. The Company accounts for its investment in Fund II using the equity method. Summary financial information of Fund II and the Company’s investment in and share of income from Fund II as follows: During July 2005, Fund II, in conjunction with its partners in Balance Sheets the Retailer Controlled Property Venture, invested $1,000 for Assets: a 50% interest in a leasehold located in Rockville, Maryland. On August 5, 2005, Acadia-P/A purchased 260 East 161st Rental property, net Other assets Street in the Bronx, NY for $49,374, inclusive of closing and Total assets other related acquisition costs. Concurrent with the closing, Acadia-P/A obtained a short term loan of $12,066 which bears interest at LIBOR plus 150 basis points and matures March 2006. On November 3, 2005, Fund II acquired a 36-year ground lease interest for a 112,000 square foot building located at Oakbrook Center in the Chicago Metro Area for $6,906, including closing and other acquisition costs. The term of the ground lease expires in July 2017 with three 10-year options. The current tenant’s lease expires in October 2006 Liabilities and partners’ equity Mortgage notes payable Other liabilities Partners’ equity Total liabilities and partners’ equity December 31, 2005 2004 $ 117,389 $ 29,058 16,662 4,434 $ 134,051 $ 33,492 $ 78,366 $ 18,000 7,717 47,968 321 15,171 $ 134,051 $ 33,492 Company’s investment in Fund II $ 9,328 $ 2,760 Acadia Realty Trust 2005 Annual Report 64 Notes to Consolidated Statements continued Period from June 15, 2004 Year ended (inception) to December 31, December 31, 2005 2004 Statements of Operations Total revenue $ 4,685 $ 885 Operating and other expenses Management and other fees Interest expense Depreciation and amortization Minority interest Equity in earnings of unconsolidated partnership 2,388 4,286 2,124 1,972 (65) 318 935 2,039 262 248 (27) 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 Realty L.P. (“Klaff”) is a managing member of Levitz SL. The Preferred Equity receives a return of 10%, plus a minimum return of capital of $2,000 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. In October 2005, Levitz Furniture filed for bankruptcy 0 under Chapter 11. The Company has a preferred equity Net loss Company’s share of net loss1 $ (6,338) $ (2,572) $ (390) $ (93) 1The Company’s pro-rata share of net income is before Management and other fees as these amounts are paid to the Company. Retailer Controlled Property Venture On January 27, 2004, the Company entered into the Retailer Controlled Property Venture (“RCP Venture”) with Klaff Realty, L.P. (“Klaff”) and Klaff’s long-time capital partner Lubert-Adler Management, Inc. for the purpose of making investments in surplus or underutilized properties owned by retailers. On September 2, 2004, affiliates of Fund I and Fund II, through newly-formed limited liability companies, invested, on a nonrecourse basis, in the acquisition of Mervyn’s through the RCP Venture, which, as part of an investment consortium of Sun Capital Partners, Inc. and Cer- investment of $19,000 at December 31, 2005. Levitz was in arrears in minimum return of capital by $0.5 million. This investment was not made based on Levitz remaining as a tenant, but rather based on the underlying value of the real estate, which management believes is sufficient to recover our equity investment and the return attributable thereto. Accordingly, no reserve is required at December 31, 2005. Note 5i Deferred Charges Deferred charges consist of the following as of December 31, 2005 and 2004: December 31, 2005 2004 Deferred financing costs $ 6,537 $ 7,263 berus Capital Management L.P., acquired Mervyn’s from Tar- Deferred leasing and other costs get Corporation. The total acquisition price was $1,175,000, with such affiliates’ combined $23,520 share of the invest- ment divided equally between them. The Company’s share of the acquisition totaled $4,965. During the year ended December 31, 2005, affiliates of Funds I and II contributed an Accumulated amortization 20,815 16,889 27,352 24,152 (11,472) (11,528) $15,880 $ 12,624 additional total of $1,040 into the Mervyn’s investment, of Note 6i which the Company’s share was $220. During the year ended December 31, 2005, the Company recognized $5,793 of income from the Mervyn’s investment representing its share of net income from this investment. In addition, the Com- pany recognized $979 as a result of its 20% carried interest in the Mervyn’s investment, which is included in Manage- ment Fee Income in the Consolidated Statements of Income. Preferred Equity Investment In March of 2005, the Company invested $20,000 in a pre- ferred equity position (“Preferred Equity”) with Levitz SL, Mortgage Loans At December 31, 2005, mortgage notes payable aggregated $238,448 and were collateralized by 20 properties and related tenant leases. Interest rates ranged from 5.0% to 7.6%. Mort- gage payments are due in monthly installments of principal and/or interest and mature on various dates through 2016. Certain loans are cross-collateralized and cross-defaulted. The loan agreements contain customary representations, covenants and events of default. Certain loan agreements require the Company to comply with certain affirmative and Acadia Realty Trust 2005 Annual Report 65 negative covenants, including the maintenance of certain On August 31, 2005, the company closed on a $17,600 loan, debt service coverage and leverage ratios. which bears interest at a fixed rate of 4.98%. This loan, which On February 25, 2005, the Company drew down $20,000 under an existing revolving facility, which bears interest at LIBOR plus 150 basis points. The proceeds from this drawdown were uti- lized for the Preferred Equity investment (Note 4). During April 2005, the company borrowed $7,400 under an existing secured revolving facility. matures September 2015, requires the payment of interest only until October 2010, and thereafter interest and principal based on 30-year amortization. The proceeds from this loan were in part used to pay down $15,000 on an existing line. On October 17, 2005, the Company closed on a $12,500 loan, which bears interest at a fixed rate of 5.12%. This loan, which matures November 2015, requires the payment of interest On May 26, 2005, the Company closed on a $65,000 cross- only until November 2008, and thereafter interest and prin- collateralized revolving facility which is collateralized by five cipal until maturity. The proceeds from this loan were in part of the Company’s properties. The facility bears interest at used to pay down $10,000 on the aforementioned $65,000 LIBOR plus 130 basis points and matures June 1, 2010. At revolving facility. closing, the lender advanced $12,000, of which $7,400 was used to refinance an existing facility with the same lender. On June 27, 2005, an additional $20,000 was drawn on this line. On October 21, 2005, $10,000 was repaid on this line resulting in $22,000 outstanding under this facility as of December 31, 2005. On December 9, 2005, the Company closed on a $34,600 loan, which bears interest at a fixed rate of 5.53%. This loan, which matures January 2016, requires the payment of inter- est only until January 2010, and thereafter interest and prin- cipal until maturity. Acadia Realty Trust 2005 Annual Report 66 Notes to Consolidated Statements continued The following table summarizes the Company’s mortgage indebtedness (exclusive of mortgage debt of discontinued opera- tions) as of December 31, 2005 and 2004: DECEMBER 31, 2005 2004 Interest Rate at December 31, 2005 Properties Monthly Maturity Encumbered Payment Terms Mortgage notes payable – variable-rate Washington Mutual Bank, FA Bank of America, NA Bank of America, NA Bank of America, NA Bank of America, NA Interest Rate Swaps Total variable-rate debt Mortgage notes payable – fixed-rate Bank of America, NA RBS Greenwich Capital RBS Greenwich Capital SunAmerica Life Insurance Company RBS Greenwich Capital RBS Greenwich Capital Bear Stearns Commercial Mortgage, Inc. Fleet National Bank — Interest Rate Interest Rate Swaps Total fixed-rate debt Notes: (1) Bradford Towne Centre Ledgewood Mall (2) Branch Shopping Center Abington Towne Center Methuen Shopping Center $ 29,131 $ 29,900 5.89% (LIBOR + 1.50%) 44,485 10,082 8,338 22,000 44,485 5.79% (LIBOR + 1.40%) 10,252 5.79% (LIBOR + 1.40%) 8,473 5.79% (LIBOR + 1.40%) — 5.69% (LIBOR + 1.30%) 04/01/11 06/29/12 06/29/12 12/01/08 06/01/10 (92,376) (86,156) 21,660 6,954 15,882 15,000 15,894 12,936 17,600 12,500 34,600 16,062 7.55% 15,000 5.64% 16,000 5.19% 13,189 6.46% — 6.46% — 6.46% — 6.46% 92,376 86,156 5.77% 216,788 146,407 $238,448 $ 153,361 01/01/11 09/06/14 06/01/13 07/01/07 09/06/15 11/06/15 01/01/16 (16) (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (13) (13) (17) (13) (12) (15) (13) (13) (18) (19) (6) GHT Apartments/Colony (17) Interest only monthly (7) New Loudon Center (18) Interest only until 11/08; monthly principal (8) 239 Greenwich Avenue (9) Merrillville Plaza and interest thereafter (19) Interest only until 1/10; monthly principal and interest thereafter (3) Smithtown Shopping Center (10) Crescent Plaza (4) Soundview Marketplace; there is additional (11) Pacesetter Park Shopping Plaza capacity of $5,000 on this facility (5) Bloomfield Town Square Walnut Hill Plaza Hobson West Plaza Marketplace of Absecon Village Apartments There is additional capacity of $43,000 on this facility (12) Elmwood Park Shopping Center (13) Monthly principal and interest (14) Annual principal and monthly interest (15) Interest only until 5/05; monthly principal and interest thereafter (16) Maturing between 10/1/06 and 1/1/11 Acadia Realty Trust 2005 Annual Report 67 The scheduled principal repayments of all mortgage indebt- Shares. The repurchased shares are reflected as a reduction edness as of December 31, 2005 are as follows: of par value and additional paid-in capital. 2006 2007 2008 2009 2010 Thereafter $ 2,141 16,383 12,447 5,328 38,445 163,704 $238,448 Note 7i Shareholders’ Equity and Minority Interests Minority Interests Minority interest in the Operating Partnership represents (i) the limited partners’ interest of 653,360 and 392,255 Common OP Units at December 31, 2005 and 2004, respectively, (ii) 884 and 1,580 Series A Preferred OP Units at December 31, 2005 and 2004, respectively, with a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribu- tion of the greater of (a) $22.50 per unit (9% annually) per Series A Preferred OP Unit or (b) the quarterly distribution attributable to a Series A Preferred OP Unit if such unit were converted into a Common OP Unit, and (iii) 4,000 Series B Preferred OP Units at both December 31, 2005 and 2004 with Common Shares In March of 2004, a secondary public offering was completed a nominal value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $13.00 for a total of 5,750,000 Common Shares. The selling share- (5.2% annually) per unit or (b) the quarterly distribution holders, Yale University and its affiliates (“Yale”) and Ross attributable to a Series B Preferred OP Unit if such unit were Dworman, a former trustee, sold 4,191,386 and 1,558,614 converted into a Common OP Unit. Minority interests in Common Shares, respectively. The Company did not sell any majority-owned partnerships represent third-party interests Common Shares in the offering and did not receive any pro- in three partnerships in which the Company has a majority ceeds from the offering. ownership position. During November 2004, the Company issued 1,890,000 During July 2005, the Company issued to a third party 11,105 Common Shares (the “Offering”). The $28,312 in proceeds Restricted Common OP Units valued at $18.01 per unit in from the Offering, net of related costs, was used to retire connection with the purchase of 4343 Amboy Road. The above-market, fixed-rate indebtedness as well as to invest holder of the Common OP Units was restricted from selling in real estate assets. Yale and Kenneth F. Bernstein, the these for six months from the date of the transaction. Company’s Chief Executive Officer, also sold 1,000,000, and 110,000 Common Shares, respectively, 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 February 2005, the Company issued $4,000 (250,000 Restricted Common OP Units valued at $16.00 each) of Restricted Common OP Units to Klaff in consideration for the 25% balance of certain management contract rights as well as the rights to 25% of certain potential future revenue In October 2005, the Board of Trustees approved a resolution streams. This followed the acquisition of 75% of the man- permitting one of its institutional shareholders, which at the agement contract rights and 75% of certain potential future time owned approximately 3.8% of the Company’s outstand- revenue streams from Klaff in January 2004 as reflected ing Common Shares, to acquire additional shares through below. The Restricted Common OP Units are convertible into open market purchases. This waiver of the Company’s share the Company’s Common Shares on a one-for-one basis after ownership limitation permitted this shareholder to acquire a five-year lock-up period. $1,116 of the purchase price was up to an additional 6% of the Company’s shares through allocated to investment in management contracts in the December 31, 2005, or an aggregate of up to 9.8% of the consolidated balance sheet and is being amortized over the Company’s Common Shares. Through December 31, 2005, the Company had repurchased 2,051,605 Common Shares at a total cost of $11,650 (of which 2,009,509 of these Common Shares have been subsequently estimated remaining life of the contracts. The remainder of the purchase price has been allocated to deferred charges in the consolidated balance sheet and will be allocated to future revenue streams as identified. reissued) under its share repurchase program that allows for During 2005 and 2004, various limited partners converted a the repurchase of up to $20,000 of its outstanding Common total of 746,762 and 2,058,804 Common OP Units into Com- mon Shares on a one-for-one basis, respectively. Mr. Dworman, Acadia Realty Trust 2005 Annual Report 68 Notes to Consolidated Statements continued a trustee of the Company, received 34,841 of Common OP The Company also earns fees in connection with its rights Units through various affiliated entities during 2003 (Note 8). to provide asset management, leasing, disposition, develop- The Series A Preferred OP Units were issued on November 16, 1999 in connection with the acquisition of all the partnership interests of the limited partnership which owns the Pace- setter Park Shopping Center. Certain Series A Preferred OP Unit holders converted 696 Series A Preferred OP Units into 92,800 Common OP Units and then into Common Shares during 2005. The Series A Preferred OP Units are currently convertible into Common OP Units based on the stated ment and construction services for an existing portfolio of retail properties and/or leasehold interests in which Klaff, a preferred OP unit holder, has an interest. Net fees earned by the Company in connection with this portfolio were $3,602 and $885 for the years ended December 31, 2005 and 2004, respectively. These amounts are net of the payment of sub- management fees to Klaff of $303 and $1,591 for the years ended December 31, 2005 and 2004, respectively. value divided by $7.50. After the seventh anniversary follow- The Company managed one property in which a major ing their issuance, either the Company or the holders can shareholder of the Company had an ownership interest call for the conversion of the Series A Preferred OP Units at and earned a management fee of 3% of tenant collections. the lesser of $7.50 or the market price of the Common Management fees earned by the Company under this con- Shares as of the conversion date. tract aggregated $142 for the year ended December 31, 2004. 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 Preferred OP Units are convertible into Common OP Units based on the stated value of $1,000 divided by $12.82 at any time. Additionally, In addition, the Company earned leasing commission of $157 related to this property for the year ended December 31, 2004. In connection with the sale of the property on July 12, 2004, the management contract was terminated and the Company earned a $75 disposition fee. Klaff may redeem them at par for either cash or Common Lee Wielansky, the Lead Trustee of the Company, was paid OP Units after the earlier of the third anniversary of their a consulting fee of $100 for both years ended December 31, issuance, or the occurrence of certain events including a 2005 and 2004. change in the control of the Company. Finally, after the fifth anniversary of the issuance, the Company may redeem the Preferred OP Units and convert them into Common OP Units at market value as of the redemption date. Note 8i Related Party Transactions In February 2005, the Company issued $4,000 of Restricted Common OP Units to Klaff for the balance of certain man- agement contract rights as well as the rights to certain potential future revenue streams (Note 7). On March 19, 2004, Ross Dworman, a former trustee of the Company, and certain entities controlled by Mr. Dworman converted 1,000,000 share options and 548,614 OP Units held by them in connection with a secondary public offering. Included in the Common OP Units converted to Common Shares during 2003 were 2,300 Common OP Units converted by Mr. Dworman who then transferred them to a charitable foundation in accordance with a pre-existing arrangement. During the year ended December 31, 2004, Kenneth F. Bern- stein, President and Chief Executive Officer, and certain trustees of the Company exercised 400,000 and 20,000 In March 2005, the Company completed a $20,000 Preferred options to purchase Common Shares, respectively. Equity Investment with Levitz SL, of which Klaff, a common and preferred OP unit holder, is the managing member. Note 9i The Company earns certain management and service fees in connection with its investment in Fund I and Fund II Tenant Leases Space in the shopping centers and other retail properties is (Note 4). Such fees earned by the Company aggregated leased to various tenants under operating leases that usu- $7,890, $3,504 and $1,689 for the years ended December 31, ally grant tenants renewal options and generally provide for 2005, 2004 and 2003, respectively. additional rents based on certain operating expenses as well as tenants’ sales volume. 69 Acadia Realty Trust 2005 Annual Report Minimum future rentals to be received under non-can- from time to time on a fully diluted basis. However, not more cellable leases for shopping centers and other retail proper- than 4,000,000 of the Common Shares in the aggregate ties as of December 31, 2005 are summarized as follows: may be issued pursuant to the exercise of options and no 2006 2007 2008 2009 2010 Thereafter $ 46,281 43,456 38,619 34,344 29,229 184,869 $ 376,798 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 10 years at the grant date. Vesting of options is at the discretion Minimum future rentals above include a total of $4,108 for of the Committee with the exception of options granted three tenants (with four leases), which have filed for bank- to non-employee Trustees, which vest in five equal annual ruptcy protection. None of these leases have been rejected installments beginning on the date of grant. nor affirmed. During the years ended December 31, 2005, 2004 and 2003, no single tenant collectively accounted for more than 10% of the Company’s total revenues. Note 10i Lease Obligations The Company leases land at five of its shopping centers, The 1999 Plan also provides for the granting of share appre- ciation rights, restricted shares and performance units/shares. Share appreciation rights provide for the participant to receive, upon exercise, cash and/or Common 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 Commit- which are accounted for as operating leases and generally tee will determine the award and restrictions placed on provide the Company with renewal options. Ground rent restricted shares, including the dividends thereon and the expense was $796, $791 and $780 for the years ended term of such restrictions. The Committee also determines December 31, 2005, 2004 and 2003, respectively. The leases the award and vesting of performance units and performance terminate during during 2008 to 2066. Three of these leases shares based on the attainment of specified performance provides the Company with options to renew for additional objectives of the Company within a specified performance terms aggregating from 20 to 44 years. The Company leases period. Through December 31, 2005, no share appreciation space for its White Plains corporate office for a term expiring rights or performance units/shares have been awarded. in 2010. Office rent expense under this lease was $412, $239 and $242 for the years ended December 31, 2005, 2004 and 2003, respectively. Future minimum rental payments required for leases having remaining non-cancelable lease terms are as follows: 2006 2007 2008 2009 2010 Thereafter Note 11i $ 1,792 1,848 1,930 1,939 1,731 28,974 $38,214 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 During 2003, the Company adopted the 2003 Share Incen- tive Plan (the “2003 Plan”) because no Common Shares remained available for future grants under the 1999 Plan. The 2003 Plan provides for the granting of options, share appreciation rights, restricted shares and performance units (collectively, “Awards”) to officers, employees and trustees of the Company and consultants to the Company. The 2003 Plan is generally identical to the 1999 Plan, except that the maximum number of Common Shares that the Company may issue pursuant to the 2003 Plan is four percent of the Common Shares outstanding from time to time on a fully diluted basis. However, no participant may receive more than 1,000,000 Common Shares during the term of the 2003 Plan with respect to Awards. Pursuant to the 2003 Plan, non- employee Trustees receive an automatic grant of 3,000 options following each Annual Meeting of Shareholders. As of December 31, 2005, the Company has 437,242 options outstanding to officers and employees. These fully vested options are for 10-year terms from the grant date and vested Acadia Realty Trust 2005 Annual Report 70 Notes to Consolidated Statements continued in three equal annual installments which began on the grant For the years ended December 31, 2005, 2004 and 2003, $1,029, date. In addition, 40,000 options have been issued to non- $764 and $410, respectively, were recognized in compensa- employee Trustees of which 13,400 options were vested as tion expense related to Restricted Share grants. Unearned of December 31, 2005. compensation of $3,541 as of December 31, 2005 will be rec- During 2005, the Company issued a total of 109,826 restricted ognized in expense as such shares vest. Common Shares (“Restricted Shares”) to executive officers Effective January 1, 2002, the Company adopted the fair (“Officers”) and 23,642 Restricted Shares (net of subsequent value method of recording stock-based compensation forfeitures) to certain employees (“Employees”) of the Com- contained in SFAS No. 123, “Accounting for Stock-Based Com- pany. In general, the Restricted Shares carry all the rights of pensation.” As such, stock-based compensation awards are Common Shares including voting and dividend rights, but expensed over the vesting period based on the fair value at may not be transferred, assigned or pledged until the Recipi- the date the stock-based compensation was granted. ents have a vested non-forfeitable right to such shares. Vest- ing with respect to the Restricted Shares issued to Officers, which is subject to the recipients’ continued employment with the Company through the applicable vesting dates, is ratably over four years commencing on the first anniversary of the Grant Date and each of the next three anniversaries thereafter. In addition, vesting on 50% of these Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares. Vesting with respect to the Restricted Shares issued to Employees, which is subject to the Recipients’ continued employment with the Company through the applicable vesting dates, is ratably over five years commencing on the Grant Date and each of the next four anniversaries thereafter. In addition, vesting on 25% of these Restricted Shares is also subject to certain total shareholder returns on the Company’s Common Shares. The Company has used the Binomial method for 2005 and the Black-Scholes option-pricing model in previous years for purposes of estimating the fair value in determining com- pensation expense for options granted for the years ended December 31, 2005, 2004 and 2003. 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 had also accounted for these employee stock options under the fair value method. The fair value for the options issued by the Company was estimated at the date of the grant using the following weighted-average assumptions resulting in: Years Ended December 31, 2005 2004 2003 4.0% 4.0% 4.2% 4.2% 4.4% 5.8% 7.5 yrs. 7.5 yrs. 10.0 yrs. The total value of the above Restricted Share awards on the date of grant was $2,179 which will be recognized in compen- Risk-free interest rate sation expense over the vesting period. For the year ended December 31, 2004, 126,853 Restricted Dividend yield Expected life Shares (net of forfeitures) were issued pursuant to the 2003 Expected volatility 18.0% 18.0% 18.0% Plan. The total value of the Restricted Share awards on the date of grant was $1,586 which will be recognized in expense over the vesting period. No awards of share appreciation rights or performance units/shares were granted for the years ended December 31, 2005, 2004 and 2003. Fair value at date of grant (per option) $ 2.57 $ 2.17 $0.82 Acadia Realty Trust 2005 Annual Report 71 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, 2005 464,650 69,296 $16.35 — 437,242 — 56,704 — 477,242 2004 2,095,150 19,000 $12.55–$14.13 — 446,850 39,500 1,610,000 — 464,650 2003 2,472,400 8,000 $9.11-$11.66 — 2,082,750 385,000 250 — 2,095,150 $5.75–$16.35 $5.75–$14.13 $4.89–$11.66 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, 2005, 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 and Deferred Share Plan In 2003, the Company adopted the Acadia Realty Trust Employee Stock Purchase Plan (the “Purchase Plan”), which allows eligible employees of the Company to purchase Com- mon 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 expense will be recognized by the Company 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 partici- pant’s continuous service with the Company, as defined in the agreement. In December 2004, optionees exercised 346,000 options pursuant to the Deferred Share Election and tendered 155,513 Common Shares in consideration of the option exercise price. In 2004 the Company issued 155,513 Common Shares to optionees and 190,487 Share Units. During 2005 there were no additional Shared Units contributed to the plan. Note 13i Employee 401(k) Plan The Company maintains a 401(k) plan for employees under to the extent of the above discount to the average closing which the Company currently matches 50% of a plan partici- price of the Common Shares with respect to the applicable pant’s contribution up to 6% of the employee’s annual salary. quarter. During 2005, 2004 and 2003, 6,412, 6,397 and 810 A plan participant may contribute up to a maximum of 15% Common Shares, respectively, were purchased by Employees of their compensation but not in excess of $14 for the year under the Purchase Plan and the associated compensation ended December 31, 2005. The Company contributed $128, expense was $16, $15 and $1 respectively. $109, and $110 for the years ended December 31, 2005, 2004 In August of 2004, the Company adopted a Deferral and Distribution Election pursuant to the 1999 Share Incentive Plan and 2003 Share Incentive 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 participants owned for at least six months prior to the option exercise and 2003, respectively. Note 14i Dividends and Distributions Payable On November 8, 2005, the Company declared a cash divi- dend for the quarter ended December 31, 2005 of $0.185 per Common Share. The dividend was paid on January 13, 2006 to shareholders of record as of December 31, 2005. Acadia Realty Trust 2005 Annual Report 72 Notes to Consolidated Statements continued Note 15i Federal Income Taxes The Company has elected to qualify as a REIT in accordance with the Internal Revenue Code (the “Code”) and intends at all times to qualify as a REIT under Sections 856 through 860 of the Internal Revenue Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of orga- nizational and operational requirements, including a require- ment that it currently distribute at least 90% of its annual REIT taxable income to its shareholders. As a REIT, the Com- pany generally will not be subject to corporate Federal income tax, provided that distributions to its shareholders equal at least the amount of its REIT taxable income as defined under the Code. As the Company distributed sufficient taxable income for the years ended December 31, 2005,2004 and 2003 no U.S. Federal income or excise taxes were incurred. If the Company fails to qualify as a REIT in any taxable year, it will be subject to Federal income taxes at the regular cor- porate rates (including any applicable alternative minimum tax) and may not be able to qualify as a REIT for the four subsequent taxable years. Even though the Company quali- fies for taxation as a REIT, the Company is subject to certain state and local taxes on its income and property and Federal income and excise taxes on any undistributed taxable income. In addition, taxable income from non-REIT activities managed through the Company’s TRS’s are subject to Federal, state and local income taxes. The primary difference between the GAAP and tax reported amounts of the Company’s assets and liabilities is a higher GAAP basis in its real estate properties. This is primarily the result of assets acquired as a result of property contributions in exchange for OP Units . Reconciliation between GAAP Net Income and Federal Taxable Income The following table reconciles GAAP net income to taxable income for the years ended December 31, 2005, 2004 and 2003: GAAP net Income Less: GAAP net income of TRS 2005 (estimated) $20,626 1,349 GAAP net income from REIT operations1 Book/tax difference in depreciation and amortization Book/tax difference on exercise of options to purchase Common Shares Book/tax difference on capital transactions Other book/tax differences, net 19,277 5,163 (26) (50) (748) 2004 (actual) $19,585 — 19,585 3,438 (8,970) (1,354) 1,953 2003 (Actual) $7,853 — 7,853 3,828 — — (326) REIT taxable income before dividends paid deduction 1All adjustments to GAAP net income from REIT operations are net of amounts attributable to minority interest and TRS. $14,652 $23,616 $11,355 Characterization of Distributions: The Company has determined that the cash distributed to Taxable REIT Subsidiaries (“TRS”) Income taxes have been provided for on the asset and liabil- the shareholders is characterized as follows for Federal ity method as required by SFAS No. 109. The Company’s TRS income tax purposes: Ordinary income Section 1250 gain Return of capital Years Ended December 31, 2005 95% 3% 2% 2004 59% 32% 9% 2003 100% — — 100% 100% 100% income and provision for income taxes for the year ended December 31, 2005 is summarized as follows: TRS income before income taxes Less provision for income taxes: Federal State and Local Total provision for income taxes GAAP net income TRS 2005 (Estimated) $ 3,458 1,601 508 2,109 $ 1,349 Acadia Realty Trust 2005 Annual Report 73 The Company has provided a full valuation allowance against mortgage notes payable are $235,297 and $153,612, respectively, its deferred tax asset of $247 due to the current uncertainty by discounting future cash payments utilizing a discount rate of its realization and as such is not included in the accompa- equivalent to the rate at which similar mortgage notes payable nying Consolidated Balance Sheets at December 31, 2005. would be originated under conditions then existing. This deferred tax asset relates primarily to the differences in the timing of the recognition of income/(deductions) and gain/(loss) between the GAAP and tax basis of accounting for (i) real estate joint ventures activities, (ii) capital transac- tions and (iii) other deductible temporary differences. The income tax provision differs from the amount computed by applying the statutory federal income tax rate to taxable income before income taxes as follows: 2005 $ 1,210 330 476 208 (115) 31 $ 2,140 Federal provision at statutory tax rate (35%) State and local taxes, net of federal benefit Tax effect of: Permanent differences Valuation allowance against deferred tax asset Utilization of loss and deduction carry forwards Other Total provision for income taxes Note 16i 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. Cash and Cash Equivalents, Restricted Cash, Cash in Escrow, Rents Receivable, Notes Receivable, Prepaid Expenses, Other Assets, Accounts Payable and Accrued Expenses, Dividends and Distributions Payable, Due to Related Parties and Other Liabilities. The carrying amount of these assets and liabilities approximates fair value due to the short-term nature of such accounts. Derivative Instruments: The fair value of these instruments is based upon the estimated amounts the Company would receive or pay to terminate the contracts as of December 31, 2005 and 2004 and is determined using interest rate market pricing models. Mortgage Notes Payable: As of December 31, 2005 and 2004, the Company has determined the estimated fair value of its Derivative Financial Instruments: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, establishes 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 derivatives 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 forecasted 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 derivative is initially reported in other comprehensive income (outside of earnings) and subsequently reclassified to earnings when the hedged transaction affects earnings, and the ineffective portion of changes in 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 fair value or cash flows of the derivative hedging instrument 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. As of December 31, 2005 and 2004, no derivatives were 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 purposes and currently does not have any derivatives that are not designated as hedges. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2005. The notional value does not represent exposure to credit, interest rate or market risks: Acadia Realty Trust 2005 Annual Report 74 Notes to Consolidated Statements continued Hedge Type LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap Interest rate swap receivable LIBOR Swap LIBOR Swap Interest rate swap liability Notional Value $ 36,778 20,000 15,149 11,719 8,730 4,640 Rate 4.35% 4.53% 4.32% 4.11% 4.47% 4.71% Forward Interest Start Date Maturity N/A N/A N/A N/A N/A 10/2/06 1/1/11 10/1/06 1/1/07 1/1/07 1/1/07 1/1/10 $ 11,410 8,434 4.90% 5.14% 10/2/06 6/1/07 10/1/11 3/1/12 Fair Value $ 615 24 62 72 31 5 $ 809 $ (59) (121) $ (180) As of December 31, 2005, the derivative instruments were The Company’s interest rate hedges are designated as cash reported at fair value as reflected above. The interest rate flow hedges and hedge the future cash outflows on mort- swap receivable is included in Other Assets in the Consoli- gage debt. Interest rate swaps that convert variable payments dated Balance Sheets. As of December 31, 2004, the deriva- to fixed payments, such as those held by the Company, as tive instruments were reported at fair value as a derivative well as interest rate caps, floors, collars, and forwards are cash instrument liability of $2,136. As of December 31, 2005 and flow hedges. The unrealized gains and losses in the fair value 2004, unrealized losses totaling $12 and $3,219, respectively, of these hedges are reported on the balance sheet with a represented the fair value of the aforementioned derivatives, corresponding adjustment to either accumulated other of which $12 and $3,180, respectively, were reflected in accu- comprehensive income or earnings depending on the type mulated other comprehensive loss, and $0 and $39, respec- of hedging relationship. For cash flow hedges, offsetting gains tively, as a reduction of minority interest in the Operating and losses are reported in accumulated other comprehensive Partnership. For the years ended December 31, 2004 and income. Over time, the unrealized gains and losses held in 2003, the Company recorded in interest expense an unreal- accumulated other comprehensive income will be reclassified ized loss of $37 and unrealized gain of $51, respectively, due to earnings. This reclassification occurs over the same time to partial ineffectiveness on one of the swaps which was period in which the hedged items affect earnings. terminated in November 2004. The ineffectiveness resulted from differences between the derivative notional and the principal amount of the hedged variable rate debt. Acadia Realty Trust 2005 Annual Report 75 Note 17i Earnings Per Common Share Basic earnings per share was determined by dividing the applicable net income to common shareholders for the year by the weighted average number of Common Shares out- standing during each year consistent with SFAS No. 128. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. The following table sets forth the computation of basic and diluted earnings per share from continuing operations for the periods indicated: Numerator: Income from continuing operations — basic earnings per share $21,567 $ 13,516 $ 8,393 Years Ended December 31, 2005 2004 2003 Effect of dilutive securities: Preferred OP Unit distributions Numerator for diluted earnings per share Denominator: — 21,567 — 13,516 — 8,393 Weighted average shares — basic earnings per share 31,949 29,341 26,640 Effect of dilutive securities: Employee stock options Dilutive potential Common Shares 265 265 571 571 592 592 Denominator for diluted earnings per share 32,214 29,912 27,232 Basic earnings per share from continuing operations $ 0.68 $ 0.46 $ 0.32 Diluted earnings per share from continuing operations $ 0.67 $ 0.45 $ 0.31 The weighted average shares used in the computation of basis. The income allocable to such units is allocated on this basic earnings per share include unvested restricted shares same basis and reflected as minority interest in the accom- (Note 11) and Share Units (Note 12) that are entitled to receive panying consolidated financial statements. As such, the dividend equivalent payments. The effect of the conversion assumed conversion of these units would have no net impact of Common OP Units is not reflected in the above table as on the determination of diluted earnings per share. they are exchangeable for Common Shares on a one-for-one Acadia Realty Trust 2005 Annual Report 76 Notes to Consolidated Statements continued Note 18i Summary of Quarterly Financial Information (unaudited) The quarterly results of operations of the Company for the years ended December 31, 2005 and 2004 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 $19,613 4,360 85 4,445 $ 0.14 0.00 $ 0.14 $ 0.14 0.00 $ 0.14 $ 0.1725 June 30 $20,346 5,044 (699) 4,345 $ 0.16 (0.02) $ 0.14 $ 0.16 (0.02) $ 0.14 2005 September 30 December 31 Total For Year $20,745 7,294 (69) 7,225 $ 0.23 (0.00) $ 0.23 $ 0.22 (0.00) $ 0.22 $22,614 4,869 (258) 4,611 $ 0.15 (0.01) $ 0.14 $ 0.15 (0.01) $ 0.14 $ 83,318 21,567 (941) 20,626 $ 0.68 0.03 $ 0.65 $ 0.67 (0.03) $ 0.64 $0.1725 $ 0.1725 $ 0.185 $0.7025 Basic Diluted 31,867,185 31,898,644 29,459,175 32,017,316 31,948,610 32,139,833 32,144,529 29,953,528 32,293,926 32,214,231 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 March 31 $17,685 3,124 (274) 2,850 $ 0.11 (0.01) $ 0.10 $ 0.11 (0.01) $ 0.10 June 30 $17,466 3,966 (202) 3,764 $ 0.13 0.00 $ 0.13 $ 0.13 0.00 $ 0.13 2004 September 30 December 31 Total For Year $18,087 $18,878 $ 71,657 3,097 (202) 2,895 $ $ 0.11 0.00 0.11 $ 0.10 0.00 $ 0.10 3,329 6,747 10,076 $ 0.11 0.22 $ 0.33 $ 0.11 0.21 $ 0.32 13,516 6,069 19,585 $ 0.46 0.21 $ 0.67 $ 0.45 0.20 $ 0.65 Cash dividends declared per Common Share $ 0.16 $ 0.16 $ 0.16 $0.1725 $0.6525 Weighted average Common Shares outstanding: Basic Diluted 27,890,065 29,333,184 29,459,175 27,431,982 29,340,992 28,763,751 29,793,310 29,953,528 28,305,567 29,912,405 Acadia Realty Trust 2005 Annual Report 77 Note 19i Commitments and Contingencies Under various Federal, state and local laws, ordinances and regulations relating to the protection of the environment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, on, at, under, or in a property. As such, the Company may be potentially liable for costs associated with any potential environmental reme- diation at any of its formerly or currently owned properties. The Company conducts Phase I environmental reviews with respect to properties it acquires. These reviews include an investigation for the presence of asbestos, underground storage tanks and polychlorinated biphenyls (PCBs). Although such reviews are intended to evaluate the environmental condition of the subject property as well as surrounding properties, there can be no assurance that the review con- ducted by the Company will be adequate to identify environ- mental or other problems that may exist. Where a Phase I assessment is so recommended, a Phase II assessment was conducted to further determine the extent of possible envi- believe would have a material adverse impact on the Com- pany’s financial position or results of operations. Manage- ment is unaware of any instances in which it would incur significant environmental 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 expenditure will not arise in the future. For the year ended December 31, 2004, the Company accrued a reserve for $730 related to flood damage incurred at one of its properties. 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. During the first quarter of 2005, the Com- pany reduced the reserve by $480 due to the settlement of the insurance claim. The Company is involved in various matters of litigation aris- ing in the normal course of business. While the Company is unable to predict with certainty the amounts involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting lia- bility, if any, will not have a significant effect on the Com- pany’s consolidated financial position or results of operations. ronmental contamination. In all instances where a Phase I or II assessment has resulted in specific recommendations Note 20i for remedial actions, the Company has either taken or sched- uled the recommended remedial action. To mitigate unknown Subsequent Events On January 4, 2006, the institutional investors of Fund I risks, the Company has obtained environmental insurance merged their 78% interest in the Brandywine Portfolio into for most of its properties, which covers only unknown envi- affiliates of GDC Properties Incorporated (“GDC”) in exchange ronmental risks. The Company believes that it is in compliance in all material respects with all Federal, state and local ordinances and reg- ulations regarding hazardous or toxic substances. Manage- ment is not aware of any environmental liability that they for cash. The Company merged its 22% share of the Brandy- wine Portfolio into GDC in exchange for a 22% interest in GDC. Prior to the closing of this transaction, the Company provided $17.6 million of mortgage financing to GDC secured by certain properties within the Brandywine Portfolio. Acadia Realty Trust 2005 Annual Report 78 Schedule III: Real Estate And Accumulated Depreciation December 31, 2005 Encum- brances Land Buildings & Improvements Costs capitalized Subsequent to Acquisition Land Buildings & Improvements Total Accumulated Depreciation Date of Acquisition (a) Construction(c) $ 17,600 $ 1,147 $ 7,425 $ 822 $ 1,147 $ 8,247 $ 9,394 $ 4,344 1984(a) 15,000 505 4,161 10,840 505 15,001 15,506 8,024 1982(a) (1) — — — — — — — (1) (2) (3) (3) 619 5,434 33,096 619 38,530 39,149 25,506 1983(a) — 35 120 4,268 315 — 4,765 1,722 — 35 9,033 9,033 5,709 1968(c) 2,037 2,072 1,141 1983(a) 1,599 120 1,599 1,719 587 1968(c) 1,335 6,314 2,292 1,335 8,606 9,941 4,652 1986(c) 190 3,004 720 190 3,724 3,914 2,714 1972(c) — 1,500 — — 1,691 5,803 — — 12,695 1,664 11,031 12,695 4,262 1995(c) 5,956 1,521 5,935 7,456 2,139 1995(c) 11,909 11,909 11,909 1,691 5,847 7,538 133 145 2002(c) 2005(a) 44 — — 817 — 16,100 15,283 16,100 6,158 1994(c) 799 3,197 1,994 799 5,191 5,990 1,182 1998(a) 3,443 13,774 4,684 3,443 18,458 21,901 3,561 1998(a) 3,122 12,488 844 3,122 13,332 16,454 2,983 1998(a) Description Shopping Centers Crescent Plaza Brockton, MA New Loudon Center Latham, NY Ledgewood Mall Ledgewood, NJ Mark Plaza Edwardsville, PA Luzerne Street Plaza Scranton, PA Blackman Plaza Wilkes-Barre, PA Greenridge Plaza Scranton, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Pittston Mall Pittston, PA — Bartow Avenue Bronx, NY Amboy Rd. Shopping Ctr. — Staten Island, NY Bradford Towne Centre Towanda, PA Abington Towne Center Abington, PA Bloomfield Town Square Bloomfield Hills, MI Walnut Hill Plaza Woonsocket, RI Elmwood Park Plaza Elmwood Park, NJ 34,600 3,248 12,992 14,764 3,800 27,205 31,005 5,178 1998(a) 12,936 Merrillville Plaza Hobart, IN Soundview Marketplace 8,338 Port Washington, NY 4,288 17,152 1,199 4,288 18,351 22,639 3,723 1998(a) 2,428 9,711 5,994 3,227 14,904 18,131 3,355 1998(a) Marketplace of Absecon Absecon, NJ (3) 2,573 10,294 2,467 2,573 12,761 15,334 2,501 1998(a) Acadia Realty Trust 2005 Annual Report 79 December 31, 2005 Description Hobson West Plaza Naperville, IL Smithtown Shopping Center Smithtown, NY Town Line Plaza Rocky Hill, CT Branch Shopping Center Village of the Branch, NY The Methuen Shopping Center Methuen, MA Gateway Shopping Center Burlington, VT Mad River Station Dayton, OH Pacesetter Park Shopping Center Ramapo, NY 239 Greenwich Greenwich, CT Residential Properties Gate House, Holiday House, Tiger Village Columbia, MO Village Apartments Winston-Salem, NC Colony Apartments Columbia, MO Undeveloped land Encum- brances Land Buildings & Improvements Costs capitalized Subsequent to Acquisition Land Buildings & Improvements Total Accumulated Depreciation Date of Acquisition (a) Construction(c) $ (3) $ 1,793 $ 7,172 $ 687 $ 1,793 $ 7,859 $ 9,652 $ 1,700 1998(a) 10,082 3,229 12,917 1,230 3,229 14,147 17,376 3,173 1998(a) 878 3,510 7,048 909 10,528 11,437 6,304 1998(a) (2) 3,156 12,545 619 3,156 13,164 16,320 2,523 1998(a) (2) 956 3,826 — 956 3,826 4,782 705 1998(a) (2) 1,273 5,091 11,517 1,273 16,608 17,881 1,851 1999(a) — 2,350 9,404 419 2,350 9,823 12,173 1,763 1999(a) 12,500 1,475 5,899 971 1,475 6,870 8,345 1,223 1999(a) 15,894 1,817 15,846 359 1,817 16,205 18,022 2,761 1999(c) 10,588 2,312 9,247 3,092 2,312 12,339 14,651 3,053 1998(a) (3) 3,429 13,716 2,727 3,429 16,443 19,872 3,769 1998(a) 5,294 1,118 4,470 1,522 1,118 5,992 7,110 1,487 1998(a) 250 250 250 $238,448 $50,829 $ 231,884 $ 153,038 $54,963 $380,788 $ 435,751 $ 118,309 1. These properties serve as collateral for the financing with Washington Mutual Bank, FA in the amount of $29,131 (Note 6) 2. These properties serve as collateral for the financing with Bank of America, FA in the amount of $44,485 (Note 6) 3. These properties serve as collateral for the financing with Bank of America, NA in the amount of $22,000 (Note 6). 4. Depreciation and investments in buildings and improvements reflected in the statements of income is calculated over the estimated useful life of the assets as follows: Buildings: 30 to 40 years Improvements: Shorter of lease term or useful life 5. The aggregate gross cost of property included above for Federal income tax purposes was $373,098 as of December 31, 2005. 6. (a) Reconciliation of Real Estate Properties: Acadia Realty Trust 2005 Annual Report 80 Schedule III: Real Estate And Accumulated Depreciation continued The following table reconciles the real estate properties from January 1, 2003 to December 31, 2005: Balance at beginning of year Other Improvements Reclassification of tenant improvement activities Depreciation related to Real estate Balance at end of year (b) Reconciliation of Accumulated Depreciation: 2005 $ 414,974 8,868 — 11,909 Years Ended December 31, 2004 $ 407,220 6,909 845 — 2003 $ 393,652 13,568 — — $ 435,751 $ 414,974 $ 407,220 The following table reconciles accumulated depreciation from January 1, 2003 to December 31, 2005: Balance at beginning of year Reclassification of tenant improvement activities Depreciation related to Real estate Balance at end of year Years Ended December 31, 2005 $ 105,278 — 13,031 $ 118,309 2004 $ 91,777 660 12,841 $105,278 2003 $76,454 — 15,323 $91,777 Acadia Realty Trust 2005 Annual Report 81 Trustees and Officers Shareholder Information 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 Robert Scholem Sr. Vice President, Director of Property Management Corporate Headquarters Acadia Realty Trust 1311 Mamaroneck Avenue, Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Internet Address Visit us online at www.acadiarealty.com for more information about Acadia Realty Trust and its real estate portfolio. The 2005 Annual Report is available online, as well as current news and quarterly financial and operational supplementary information. Legal Counsel Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Annual Meeting Acadia’s Board of Trustees has sched- uled the Annual Shareholders Meeting for Monday, May 15, 2006 at 10:00 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 determination of shareholders entitled to vote is March 31, 2006. Independent Auditors BDO Seidman, LLP 330 Madison Avenue New York, NY 10017 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 dividend reinvestment plan that enables its shareholders to automatically reinvest dividends as well as make voluntary cash payments toward the purchase of additional shares. To participate, contact Acadia Realty Trust’s dividend reinvestment agent at 800.937.5449 ext. 6820 or write to: American Stock Transfer & Trust Company Attn: Dividend Reinvestment Dept. 59 Maiden Lane Plaza Level New York, NY 10038 For further information contact Investor Relations. 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 E 

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