Acadia Realty Trust
Annual Report 2007

Plain-text annual report

2007 Annual Report Focused. Disciplined. Value-Driven. Financial Highlights In thousands 2007 2006 1 2005 1 2004 1 2003 1 Total Revenues $101,569 $ 95,800 $ 93,965 $ 80,283 $ 76,072 Funds from Operations 2 Real Estate Owned, at Cost Common Shares Outstanding Operating Partnership Units Outstanding $ 44,018 $ 39,953 $ 35,842 $ 30,004 $ 27,664 $854,074 $650,051 $ 670,817 $561,370 $ 504,355 32,184 31,773 31,543 31,341 27,409 642 642 653 392 1,139 1Pursuant to the provisions of Emerging Issues Task Force 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 Cer- tain Rights” we determined that we should report our investments in Acadia Strategic Opportunity Fund, LP, Aca- dia Strategic Opportunity Fund II, LLC, Acadia Mervyn Investors I, LLC and Acadia Mervyn Investors II, LLC on a consolidated basis rather than under the equity method of accounting, as we had previously reported such enti- ties. We made an election to retrospectively adjust our historical financial information. In connection with the ret- rospective adjustment of our historical financial information, we reclassified certain properties which were sold subsequent to December 31, 2005 as discontinued operations. The amounts for 2002 through 2005 have been restated to reflect these adjustments. 2The 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 pre- sented to assist investors in analyzing the performance of the Company. It is helpful as it excludes various items included in net income that are not indicative of the operating performance, such as gains (losses) from sales of depreciated property and depreciation and amortization. However, the Company’s method of calculating FFO may be different from methods used by other REITs and, accordingly, may not be comparable to such other REITs. FFO does not represent cash generated from operations as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the purpose of evaluating the Company’s performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. To Our Shareholders: Focused. Disciplined. Value-Driven. 2007 was an incredibly volatile year for the REIT sector, the real estate industry, and the entire financial community. This volatil- ity is continuing in 2008 and in some instances, worsening. It is also beginning to impact the overall economy. Notwithstand- ing this turmoil, 2007 was a year of significant accomplishment for Acadia. Not only in terms of our stock performance, but also in how we positioned ourselves for 2008 and beyond. Kenneth F. Bernstein President and CEO From a shareholder total return perspective, we were fortunate to finish the year up 6% while the REIT sector was down 19% and the retail shopping center sector down almost 15%. Total Returns n Acadia Realty Trust n REIT Sector n Shopping Center Sector Source: Key Banc Capital Markets (January 2, 2008) Although, on an absolute basis, our positive returns were below our historical average, the Company’s outperformance relative to the sector was significant. More importantly, over a three- year basis our total returns were 76% vs. 16% for the REIT sector and over a five-year basis our returns were 327% vs. 105% for the REIT sector. In 2007, Acadia also achieved another year of solid earnings growth of 9%, which is consistent with our average earnings growth over the last three years. All areas of our business contributed to this growth with both our core portfolio and our external growth platforms providing significant contributions. In last year’s letter to shareholders I wrote: “…risk has been re-priced and, in some cases, mis-priced. Many investors are taking too much risk to earn too little incremen- tal return…We shouldn’t assume that a long-running real estate bull market has become a permanent, secular shift that is immune to a correction.” With this concern in mind, in 2007 we focused on both preparing for a re-pricing of risk in the capital markets and positioning ourselves for the resulting opportunities going forward. While many in our industry antic- ipated some level of correction in the capital markets, most of us were nonetheless surprised by the speed and severity of the meltdown. What started as a relatively contained “sub- prime” debt and liquidity issue soon became a global capital markets crisis impacting all components of the real estate industry. In anticipation of a correction, last year we focused on three key initiatives: s Refining our core portfolio by selling properties into a still frothy market s Strengthening our balance sheet to ensure that we had plenty of dry powder to respond to any softening in the economy as well as capitalize on investment opportunities as they emerged s Enhancing an already powerful external growth platform by raising a new $500 million discretionary investment fund which will enable us to almost double our assets under management over the next several years These three initiatives were not only prudent in light of the weakness and distress we began seeing during the second half of last year, they also put us in an extremely strong posi- tion to capitalize on the opportunities that we are beginning to see in 2008. Balance Sheet Strength Debt to Total Market Capitalization Dividend Payout Ratio Based on 2007 Adjusted Funds From Operations n Acadia Realty Trust n Shopping Center Sector Source: Key Banc Capital Markets (January 2, 2008) Acadia Realty Trust 2007 Annual Report 1 Upgrading Core Portfolio Balance Sheet Strength Matters Again 2007 was another great year to sell assets. Last year we sold 15% of our portfolio and recycled some of the proceeds into higher-quality assets in locations such as New York City and Philadelphia. And where we couldn’t find suitable replace- ments, we paid down our debt and sent you the balance in the form of a special dividend. Our goal is to maintain a port- folio of solid retail properties in densely populated, high-qual- ity locations, because in the face of a potential consumer slowdown, we believe that retail properties in more dense, supply-constrained markets will outperform those in less con- centrated areas. Simply put, landlords have better pricing leverage when there is a limited supply of alternate space for tenants to move into, and tenants generally perform better where there are more shoppers. Today, our core portfolio consists of approximately five mil- lion square feet in strong urban infill locations, 85% of which are in New York City, Northern New Jersey and Connecticut. These properties are well-leased and well-managed. Bob Scholem, Director of Property Management, and his team are diligently focusing on the efficient management of both our core portfolio and our Fund assets. Given the economic uncertainties that we are facing in 2008, effective operations and collections are of heightened importance, and nobody does a better job than Bob. We have built a capital structure that is designed to with- stand and take advantage of uncertain times — allowing us to move swiftly when the right opportunity presents itself. For many years, the investment community was less focused on leverage or financial ratios because it appeared that there was an unlimited supply of cheap debt and equity. At Acadia, we are not comfortable with risking our shareholders’ equity on the notion that capital will always be available. As a result of this more conservative strategy, we have maintained some of the strongest financial ratios in our sector. By carefully managing our debt exposure, we have no debt maturities related to our core portfolio until 2011. Equally important, we have enough cash and credit available to fund our equity investment requirements for both our existing AKR Fund II and our recently raised AKR Fund III. Mike Nelsen, Jon Grisham and their finance team have done a tremendous job of maintaining our financial discipline. Sus- taining a safe balance sheet with plenty of liquidity has a cost in terms of short-term earnings growth, but we are convinced that, in the long run, our shareholders are better served by our ability to remain liquid, flexible and opportunistic. Enhanced External Growth Platform Establishing a focused and opportunistic external investment platform with access to dependable discretionary capital has been a critical component of Acadia’s success. Last year we further enhanced our investment platform by launching AKR Fund III — our third institutional investment fund with $500 million of private equity. This fund will allow us to Focused. acquire an additional $1.5 billion of real estate over the next several years — enough to nearly double the Company’s assets under management. We believe that this discretionary fund structure is the ideal vehicle for Acadia to leverage our resources and expertise while maximizing our capital struc- ture and shareholder value. In our view, a successful external growth platform must have three components: s A focused, value-creating investment strategy s The proven ability to execute on that strategy s Availability of appropriate capital sources and structure to maximize profits At Acadia, we take great pride in our capabilities in all three of these areas. Led by Joel Braun, our Chief Investment Officer, over the past several years we have chosen some of the most exciting investment areas to participate in. We have executed profitably. And we have utilized a highly effective capital structure: discretionary institutional investment funds. Our investment focus is in two general areas: Opportunistic Value-Add Opportunistic Historically, opportunistic investing has involved acquiring existing assets from highly motivated or distressed sellers. This has included the purchase of both distressed debt and properties, and it was a significant and successful part of our acquisition activities earlier in the decade. As the real estate market strengthened over the past few years, there were fewer and fewer attractively priced “opportunistic” invest- ments and we spent more of our resources elsewhere. The one opportunistic area where we have been active is our Retailer Controlled Property (RCP) venture. We established our RCP venture in 2004 with our partners Klaff Realty and Lubert-Adler. Our most significant RCP initiatives have been our participation in the acquisition of Mervyns Department Stores and Albertson’s Supermarkets. To date, Acadia, through Funds I and II have received distribu- tions of $99.4 million on initial investments of $47.7 million, representing more than a 200% return on invested equity. Value-Add Our value-add segment is focused on the development and redevelopment of urban properties. While we have always had a value-add component to our business, we have focused on strengthening this area over the past several years. New York Urban/Infill: Most recently, we have focused our value-add efforts in New York City through our New York Urban/Infill redevelopment program. Launched in 2004 with our talented partners at P/A Associates, the program acquires prime properties throughout the five boroughs of New York City. Leveraging our long-standing and strong tenant relation- ships, we strive to bring the best retailers to urban locations previously perceived as too difficult for national tenants to penetrate. Last year we announced three new development projects through this initiative: Our most significant project to date, CityPoint, in Downtown Brooklyn, New York; a retail redevelopment project in Sheepshead Bay, Brooklyn, New York; and a mixed-use redevelopment project in Canarsie, Brooklyn, which will include retail, office and self-storage components. Currently, we are developing 10 projects with over 2.4 million square feet throughout New York City, with values anticipated to be in excess of $1.5 billion. Joe Hogan, our Director of Construction, and his dedicated team have already successfully completed construction on two of the 10 projects, with several more now under way. Constructing projects in New York City is always challenging, and Joe has done a great job of successfully leading his team through this process. Disciplined. Acadia Realty Trust 2007 Annual Report 3 Self-Storage: Over the past few years, we have enhanced our New York Urban/Infill redevelopment platform by incor- porating a self-storage component either on top of, or adja- cent to, four of our urban redevelopments. In all of these developments we have partnered with a talented New York- based self-storage company, Storage Post, as our partner and operator. In 2007, we were presented with the oppor- tunity to buy out Storage Post’s previous institutional capital partners and acquire a 10-property self-storage portfolio located in densely-populated infill locations throughout New York City and New Jersey. The portfolio offers a unique opportunity to gain an even greater foothold in urban loca- tions with high barriers to entry for self-storage. We were able to purchase these properties at an attractive discount to replacement cost — making the investment both strategic and opportunistic. Acadia’s partnership with Storage Post is a natural extension of our urban redevelopment platform, and we look forward to a successful, long-term relationship. The addition of these 10 assets to our four other self-storage development projects produces an overall portfolio of over one million rentable square feet in the New York metro area. Westport, Connecticut: Through AKR Fund III, we purchased a redevelopment property on Main Street in Westport, Con- necticut with the accomplished local development team of David Adam Realty. This project falls into Acadia’s “Main Street” redevelopment program. Along with our properties on Greenwich Avenue in Greenwich, Connecticut, Chestnut Hill in Philadelphia and Lincoln Park in Chicago, we continue to believe that street retail can be a very profitable component of our business. A Talented and Energized Management Team Our goal is to bring focus, discipline and value to all that we do. We are proud to have developed a network of pro- fessional relationships to help drive our continued success in the years to come. We have worked hard to build a reputation that attracts tenants, investors, lenders, sellers and developers, and as a result, we have been presented with opportunities that were far more attractive and prof- itable than the average investment. We are extremely grateful to have a diverse, independent and dedicated Board. In 2007 we were pleased to welcome Bill Spitz, former Vice Chair for Investments and Treasurer of Vanderbilt University, as a Trustee. Bill’s depth of experience in the investment community and extensive history with Acadia only strengthens and complements the outstanding Board of Trustees that Acadia is fortunate to have. Acadia has an outstanding management team, one that is fully committed to taking the Company to even greater levels of success. At a company of our size, every colleague can make a meaningful difference. For example, our legal division, led by my trusted advisor, Robert Masters, works tirelessly to ensure that our Company is in full compliance with all of our obligations and that our transactions are correctly structured, negotiated and closed. Given that our in-house attorneys know all aspects of Acadia, they don’t simply “lawyer” the deals, they add sig- nificant value as well. In 2007, Jon Grisham, whose depth of expertise has signifi- cantly contributed to the organization, was promoted to Senior Vice President, Chief Accounting Officer. In his almost 15 years with Acadia, Jon has played a key role in all components of our finance division, as well as working closely with the investment community. As Acadia has grown, the need to maximize and develop our human capital has become of ever-increasing impor- tance. In 2007, Joe Napolitano was promoted to the role of Chief Administrative Officer, charged with ensuring that the company continues to work and grow together as one team focused on creating significant long-term value for our stake- holders. Anyone who spends time at Acadia quickly sees the important contribution Joe is making. He and our head of human resources, Bobbie Lyons, are keenly focused on ensuring that as we grow, we maintain our core values and entrepreneurial spirit. One of the many contributions Joe made last year was bringing in Deb Miley, Director of Communications, to help us better communicate to all of our constituencies. She is already making a huge contribution. Also in 2007, the Leadership Council, which is comprised of Acadia colleagues throughout the organization, initiated the first-ever Acadia Distinguished Performance Awards. These excellence awards are designed to honor Acadia colleagues who have demonstrated outstanding performance and supe- rior accomplishments above and beyond their core expertise. This year’s award recipients: Geo Chacko, Dot Edwards and German Velez-Rodriguez truly embody the core values of Acadia. We are fortunate to have them on our team. We have spent the last 10 years transforming Acadia, I believe for the best. We have come far together and I con- tinue to be inspired by the dedication of all our colleagues. 2008 and Beyond From a shareholder return perspective, at the close of 2007, Acadia was the best-performing shopping center REIT, as it was for the past three years and five years. In fact, in the last five years, Acadia’s stock price has grown by over 325%. The Acadia team has grown to include over 140 employees. And, although it is hard to believe, in August of 2008, we will be celebrating our 10th anniversary. Where do we go from here? We will continue to focus on strengthening our core portfolio. We will maintain a disci- plined and strong balance sheet. We will continue to drive our growth through opportunistic and value-add acquisitions Annual Dividends Over the last five years we have increased our annual dividend by an average of 9%. utilizing our discretionary investment funds. And we will con- tinue to cultivate our relationships with our partners, tenants, the investment community and most of all, the Acadia Team. We will develop new relationships and stretch our imagina- tions to break ground on even more exciting projects than we’ve created before. We will keep coming up with thought- ful and creative ways to grow this Company and deliver on our commitments to you, our fellow shareholders. We are extremely appreciative for your support, and we look forward to providing exceptional results in 2008 and beyond. Kenneth F. Bernstein President and CEO Value-Driven. Acadia Realty Trust 2007 Annual Report 5 Acadia Core and Joint Venture Properties RETAIL PROPERTIES NEW YORK The Branch Plaza, Smithtown, NY NEW ENGLAND REGION Crescent Plaza, Brockton, MA Crossroads Shopping Center, White Plains, NY The Gateway, South Burlington, VT New Loudon Center, Latham, NY Methuen Shopping Center, Methuen, MA Pacesetter Park Shopping Center, Pomona, NY Walnut Hill Plaza, Woonsocket, RI Tarrytown Centre, Tarrytown, NY Village Commons Shopping Center, Smithtown, NY PENNSYLVANIA NEW YORK CITY Abington Towne Center, Abington, PA Blackman Plaza, Wilkes-Barre, PA 98th Street and Liberty Avenue, Queens, NY Chestnut Hill Shoppes, Philadelphia, PA 200 West 54th Street, New York, NY 216th Street, New York, NY 260 East 161st Street, Bronx, NY 2914 Third Avenue, Bronx, NY Mark Plaza, Edwardsville, PA Plaza 422, Lebanon, PA Route 6 Mall, Honesdale, PA Amboy Shopping Center, Staten Island, NY MID-ATLANTIC REGION Bartow Avenue, Bronx, NY Canarsie Plaza, Brooklyn, NY CityPoint, Brooklyn, NY Fordham Place, Bronx, NY L/A Fitness, Staten Island, NY Brandywine Town Center, Wilmington, DE Haygood Shopping Center, Virginia Beach, VA Market Square Shopping Center, Wilmington, DE Route 202 Shopping Center, Wilmington, DE Pelham Manor Shopping Plaza, Pelham Manor, NY MIDWESTERN REGION Sheepshead Bay Plaza, Brooklyn, NY Sherman Plaza, New York, NY NEW JERSEY A&P Shopping Plaza, Boonton, NJ Bloomfield Town Square, Bloomfield Hills, MI Clark and Diversey, Chicago, IL Granville Center, Columbus, OH Hobson West Plaza, Naperville, IL Mad River Station, Dayton, OH Elmwood Park Shopping Center, Elmwood Park, NJ Merrillville Plaza, Hobart, IN Sterling Heights Shopping Center, Sterling Heights, MI SOUTHEAST REGION Hitchcock Plaza, Aiken, SC Ledgewood Mall, Ledgewood, NJ Marketplace of Absecon, Absecon, NJ CONNECTICUT 125 Main Street, Westport, CT 239 Greenwich Avenue, Greenwich, CT Town Line Plaza, Rocky Hill, CT 6 Acadia Realty Trust 2007 Annual Report MANAGED PROPERTIES MID-ATLANTIC REGION Hechinger McDonalds, Norfolk, VA HK-VB, LLC, Virginia Beach, VA Levitz SL Portfolio, CA, NJ & PA MIDWESTERN REGION Mervyns, Detroit, MI Prairie Towne Center, Schaumburg, IL WESTERN REGION El Paseo Square Shopping Center, Palm Desert, CA Home Depot San Francisco, South San Francisco, CA Levitz Tukwila, Tukwila, WA Levitz, San Francisco, CA STORAGE POST LOCATIONS Brooklyn, NY Bruckner, NY Fordham, NY Jersey City, NJ Lawrence, NY Linden, NJ Long Island City, NY New Rochelle, NY Ridgewood, NY Suffern, NY Webster, NY Yonkers, NY Form 10k Report 2007 United States Securities and Exchange Commission Washington, D.C. 20549 FORM 10-K 4 o ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2007 o 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. 4 YES o NO o 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 o 4 NO o 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. 4 YES o NO o 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 con- tained, 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. o 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). 4 Large Accelerated Filer o Accelerated Filer o Non-accelerated Filer o Indicate by check mark whether the registrant ia a shell company (as defined in Rule 12b-2 of the Act). YES o 4 NO o 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 $835.8 million, based on a price of $25.98 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 February 29, 2008 was 32,184,462. DOCUMENTS INCORPORATED BY REFERENCE Part III: Portions of the registrant’s definitive proxy statement relating to its 2008 Annual Meeting of Shareholders presently scheduled to be held May 14, 2008 to be filed pursuant to Regulation 14A. Acadia Realty Trust 2007 Annual Report Acadia Realty Trust Form 10-K Report 2007 Table of Contents Item No. PART I Page 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4. Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 PART II 5. Market for Registrant’s Common Equity, Related Shareholder Matters, Issuer Purchases of Equity Securities and Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . 31 7A. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . 42 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42 9B. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44 PART III 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 12. Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . . . . . . . . 45 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 PART IV 15. Exhibits, Financial Statements, Schedules. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 Acadia Realty Trust 2007 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 and Exchange Act of 1934 and as such may involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance 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,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the nega- tive 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 “Item 1A. Risk Factors” in this Form 10-K. These risks and uncertainties should be considered in evaluating any forward-looking statements contained or incorporated by reference herein. PART I ITEM 1. BUSINESSx GENERAL Acadia Realty Trust (the “Trust”) was formed on March 4, 1993 as a Maryland real estate investment trust (“REIT”). All references to “Acadia,” “we,” “us,” ”our,” and “Com- pany” refer to Acadia Realty Trust and its consolidated subsidiaries. We are a fully integrated, self-managed and self-administered equity REIT focused primarily on the ownership, acquisition, redevelopment and management of retail properties, including neighborhood and commu- nity shopping centers and mixed-use properties with retail components. We currently operate 76 properties, which we own or have an ownership interest in. These assets are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States, which, in total, comprise approximately eight million square feet. We also have private equity investments in other retail real estate related opportunities including investments for which we provide operational support to the operating ventures in which we have a minority equity interest. 1 Acadia Realty Trust 2007 Annual Report All of our investments are held by, and all of our opera- tions are conducted through, Acadia Realty Limited Part- nership (the “Operating Partnership”) and entities in which the Operating Partnership owns a controlling interest. As of December 31, 2007, the Trust controlled 98% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The lim- ited partners represent entities or individuals, which con- tributed their interests in certain properties or entities to the Operating Partnership in exchange for common or preferred units of limited partnership interest (“Common OP Units” or “Preferred OP Units”). Limited partners hold- ing Common OP Units are generally entitled to exchange their units on a one-for-one basis for our common shares of beneficial interest (“Common Shares”). This structure is referred to as an umbrella partnership REIT or “UPREIT.” BUSINESS OBJECTIVES AND STRATEGIES Our primary business objective is to acquire, develop and manage commercial retail properties that will provide cash for distributions to shareholders while also creating the potential for capital appreciation to enhance investor returns. We focus on the following fundamentals to achieve this objective: n Own and operate a portfolio of community and neigh- borhood shopping centers and mixed-use properties with a retail component located in markets with strong demographics. n Generate internal growth within the portfolio through aggressive redevelopment, re-anchoring and leasing activities. n Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelopment and leasing and/or transactions requiring creative capital structuring to facilitate the transactions. n Partner with private equity investors for the purpose of making investments in operating retailers with sig- nificant embedded value in their real estate assets. n Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth. Investment Strategy — External Growth through Opportunistic Acquisition Platforms The requirements that acquisitions be accretive on a long-term basis based on our cost of capital, as well as increase the overall portfolio quality and value, are core to our acquisition program. As such, we constantly evalu- ate the blended cost of equity and debt and adjust the amount of acquisition activity to align the level of invest- ment activity with capital flows. We may also engage in discussions with public and private entities regarding busi- Consolidated Financial Statements beginning on page 52 of this Form 10-K. Our acquisition program was executed primarily 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-market anchor leases with the potential to create significant additional value through re-tenanting, timely capital improvements and property redevelopment. ness combinations. In addition to our direct investments On January 4, 2006, Fund I recapitalized a one million in real estate assets, we have also capitalized on our square foot retail portfolio located in Wilmington Delaware expertise in the acquisition, redevelopment, leasing and (“Brandywine Portfolio”) through a merger of interests management of retail real estate by establishing discre- with affiliates of GDC Properties (“GDC”). The Brandy- tionary opportunity fund joint ventures in which we earn, wine Portfolio was recapitalized through a “cash-out” in addition to a return on our equity interest and carried merger of the 77.8% interest, which was previously held interest (“Promote”), fees and priority distributions for our by the institutional investors in Fund I, to GDC at a valua- services. To date, we have launched three discretionary tion of $164.0 million. The Operating Partnership, through opportunity fund joint ventures, Acadia Strategic Opportu- a subsidiary, retained its existing 22.2% interest and con- nity Fund, LP (“Fund I”), Acadia Strategic Opportunity tinues to operate the Brandywine Portfolio and earn fees Fund II, LLC (“Fund II”) and Acadia Strategic Opportunity for such services. At the closing of the merger, the Fund I Fund III, LLC (“Fund III”). Due to our control, we consoli- investors received a return of all of their capital invested date these funds. Fund I During September of 2001, we and four of our institutional shareholders formed a joint venture, Fund I, and during August of 2004 formed a limited liability company, Acadia Mervyn Investors I, LLC (“Mervyns I”), whereby the investors committed $70.0 million for the purpose of acquiring real estate assets. The Operating Partnership committed an additional $20.0 million in the aggregate to Fund I and Mervyns I, as the general partner with a 22% in Fund I and their unpaid preferred return, thus triggering the payment to the Operating Partnership of its additional 20% Promote in all future Fund I distributions. During June 2006, the Fund I investors received $36.0 million of additional proceeds from this transaction following the replacement of bridge financing which they provided, with permanent mortgage financing, triggering $7.2 million in additional Promote due the Operating Partnership, which was paid from the Fund I investor’s share of the remaining assets in Fund I. interest. In addition to a pro-rata return on its invested As of December 31, 2007, there were 29 assets com- equity, the Operating Partnership is entitled to a Promote prising approximately 1.5 million square feet remaining based upon certain investment return thresholds. Cash in Fund I in which the Operating Partnership’s interest in flow is distributed pro-rata to the partners (including the cash flow and income has increased from 22.2% to 37.8% Operating Partnership) until they have received a 9% as a result of the Promote. cumulative return (“Preferred Return”) on, and a return of all capital contributions. Fund II Following our success with Fund I, during June of 2004 Thereafter, remaining cash flow is distributed 80% to the we formed a second, larger acquisition joint venture, partners (including the Operating Partnership) and 20% Fund II, and during August of 2004, formed Acadia Mervyn to the Operating Partnership as a Promote. The Operating Investors II, LLC (“Mervyns II”), with the investors from Partnership also earns fees and/or priority distributions for Fund I as well as two additional institutional investors. asset management services equal to 1.5% of the allocated With $300.0 million of committed discretionary capital, invested equity, as well as for property management, leas- Fund II and Mervyns II, combined, expect to be able to ing and construction services. All such fees and priority acquire up to $900.0 million of real estate assets on a distributions are reflected as a reduction in the minority leveraged basis. The Operating Partnership is the manag- interest share in income from opportunity funds in the ing member with a 20% interest in Fund II and Mervyns II. Acadia Realty Trust 2007 Annual Report 2 The terms and structure of Fund II and Mervyns II are n Invest in operating retailers through private equity joint substantially the same as Fund I and Mervyns I with the ventures. exception that the Preferred Return is 8%. As of December 31, 2007, $182.0 million of Fund II’s capital was invested and the balance of $118.0 million was committed to exist- ing investments. As the demand for retail real estate has significantly increased in recent years, there has been a commensurate n Work with financially healthy retailers to create value from their surplus real estate. n Acquire properties, designation rights or other control of real estate or leases associated with retailers in bankruptcy. increase in selling prices. In an effort to generate superior n Complete sale leasebacks with retailers in need of capital. risk-adjusted returns for our shareholders and fund investors, we have channeled our acquisition efforts through Fund II in two opportunistic strategies described below — the Retailer Controlled Property Venture and the New York Urban Infill Redevelopment Initiative. Retailer Controlled Property Venture (the “RCP Venture”) On January 27, 2004, through Funds I and II, we entered into the RCP Venture with Klaff Realty, L.P. (“Klaff”) and Lubert-Adler Management, Inc. (“Lubert-Adler”) for the purpose of making investments in surplus or underutilized properties owned by retailers. The expected size of the RCP Venture is approximately $300 million in equity, of which our share is $60 million, based on anticipated investments of approximately $1 billion. Each participant in the RCP Venture has the right to opt out of any potential investment. Affili- ates of Mervyns I and II and Fund II have invested $55.4 million in the RCP Venture to date on a non-recourse basis. While we are not required to invest any additional capital into any of these investments, should additional capital be required and we elect not to contribute our share, our proportionate share in the investment will be reduced. As Fund I is fully invested, Fund II and Fund III will provide the remaining portion of our original share of the equity in future RCP Venture investments. Cash flow from any RCP investments is to be distributed to the participants 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 Klaff (“Klaff’s Promote”) and 80% to the partners (including Klaff). The Operating Part- nership may also earn market-rate fees for property man- agement, leasing and construction services on behalf of the RCP Venture. While we are primarily a passive partner in the investments made through the RCP Venture, histori- cally we have provided our support on reviewing potential acquisitions and operating and redevelopment assistance in areas where we have both a presence and expertise. We seek to invest opportunistically with the RCP Venture primarily in the following four ways: 3 Acadia Realty Trust 2007 Annual Report During 2004, we made our first RCP Venture investment with our participation in the acquisition of Mervyns. During 2006 and 2007, we made additional investments as further discussed in “PROPERTY ACQUISITIONS” below. New York Urban Infill Redevelopment Initiative During September of 2004, through Fund II, we launched our New York Urban Infill Redevelopment initiative. As retailers continue to recognize that many of the nation’s urban markets are underserved from a retail standpoint, we are poised to capitalize on this trend by investing in redevelopment projects in dense urban areas where retail tenant demand has effectively surpassed the supply of available sites. During 2004, Fund II, together with an unaffiliated partner, P/A Associates, LLC (“P/A”), formed Acadia-P/A Holding Company, LLC (“Acadia-P/A”) for the purpose of acquiring, constructing, developing, owning, operating, leasing and managing certain retail or mixed-use real estate properties in the New York City metropolitan area. P/A agreed to invest 10% of required capital up to a maximum of $2.2 million and Fund II, the managing member, agreed to invest the balance to acquire assets in which Acadia-P/A agrees to invest. See Item 7 of this Form 10K for further information on the Acadia P/A Joint Venture as detailed in “Liquidity and Capital Resources.” To date, Fund II has invested in nine projects, eight of which are in conjunction with P/A, as discussed further in “PROPERTY ACQUISITIONS” below. Fund III Following the success of Fund I and the full investment of Fund II, we formed a third discretionary opportunity fund, Acadia Strategic Opportunity Fund III, LLC (“Fund III”) during 2007, with 14 institutional investors, including a majority of the investors from Fund I and Fund II. With $503.0 million of committed discretionary capital, Fund III expects to be able to acquire or develop approximately $1.5 billion of assets on a leveraged basis. The Operating Partnership’s share of the committed capital is $100.0 million and it is the sole managing member with a 19.9% interest in Fund III. The terms and structure of remainder, if any, of the conversion value in excess of the Fund III are substantially the same as the previous Funds, principal amount. The Notes mature December 15, 2026, including the Promote structure, with the exception that although the holders of the Notes may require the Com- the Preferred Return is 6%. To date, Fund III has invested pany to repurchase their Notes, in whole or in part, on in two projects, one of which is under our New York December 20, 2011, December 15, 2016, and December Urban Infill Redevelopment Program, as discussed further 15, 2021. After December 20, 2011, we have the right in “PROPERTY ACQUISITIONS” in this Item 1 of this to redeem the Notes in whole or in part at any time. The Form 10-K. Other Investments We may also invest in preferred equity investments, mort- gage loans, other real estate interests and other invest- ments. The mortgage loans in which we invest may be either first or second mortgages, where we believe the underlying value of the real estate collateral is in excess of its loan balance. As of December 31, 2007 our invest- ments in first mortgages and mezzanine debt aggregated $57.7 million. Capital Strategy — Balance Sheet Focus and Access to Capital Our primary capital objective is to maintain a strong and flexible balance sheet through conservative financial prac- tices while ensuring access to sufficient capital to fund future growth. We intend to continue financing acquisi- tions and property redevelopment with sources of capital determined by management to be the most appropriate based on, among other factors, availability, pricing and other commercial and financial terms. The sources of capi- tal may include the issuance of public equity, unsecured debt, mortgage and construction loans, and other capital alternatives including the issuance of Operating Partner- ship Units. We manage our interest rate risk primarily through the use of fixed rate-debt and, where we use variable rate debt, we use certain derivative instruments, including LIBOR swap agreements and interest rate caps as discussed further in Item 7A of this Form 10-K. During December of 2006 and January of 2007, we issued $115.0 million of 3.75% unsecured Convertible Notes (the “Notes”). Interest on the Notes is payable semi-annually. The Notes have an initial conversion rate of 32.4002 of our Common Shares for each $1,000 principal amount, representing a conversion price of approximately $30.86 per Common Share, or a conversion premium of approximately 20.0% based upon our Common Share price on the date of the issuance of the Notes. The Notes are redeemable for cash up to their principal amount plus accrued interest and, at our option, cash, our Common Shares, or a combination thereof with respect to the $112.1 million in proceeds, net of related costs, were used to retire variable rate debt, provide for future Fund capital commitments and for general working capital purposes. During January 2007, we filed a shelf registration on Form S-3 providing for offerings of up to a total of $300.0 million of Common Shares, Preferred Shares and debt securities. To date, we have not issued any securities pursuant to this shelf registration. Common and Preferred OP Unit Transactions On January 27, 2004, we issued 4,000 Series B Preferred OP Units to Klaff in connection with the acquisition from Klaff of its rights to provide asset management, leasing, disposition, development and construction services for an existing portfolio of retail properties. These units have a stated value of $1,000 each and are entitled to a quarterly preferred distribution of the greater of (i) $13.00 (5.2% annually) per Preferred OP Unit or (ii) the quarterly distri- bution attributable to a Preferred OP Unit if such unit were converted into a Common OP Unit. 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. Klaff may redeem them at par for either cash or Common OP Units (at our option). In 2007, Klaff converted all 4,000 Series B Preferred OP Units into 312,013 Common OP Units and ultimately into Common Shares. Effective February 15, 2005, we acquired the balance of Klaff’s rights to provide the above services as well as cer- tain potential future revenue streams. The consideration for this acquisition was $4.0 million in the form of 250,000 restricted Common 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 trans- action we also assumed all operational and redevelopment responsibility for the Klaff Properties a year earlier than was contemplated in the January 2004 transaction. Operating Strategy — Experienced Management Team with Proven Track Record Our senior management team has decades of experience in the real estate industry. We believe our management team has demonstrated the ability to create value internally Acadia Realty Trust 2007 Annual Report 4 through anchor recycling, property redevelopment and PROPERTY ACQUISITIONS strategic non-core dispositions. Our team has built several successful acquisition platforms including our New York Urban Infill Redevelopment Initiative and RCP Venture. RCP Venture Albertson’s We have also capitalized on our expertise in the acquisi- In June 2006, the RCP Venture made its second major tion, redevelopment, leasing and management of retail investment with its participation in the acquisition of 699 real estate by establishing joint ventures, such as Funds I, stores from Albertson’s, the nation’s second largest grocery II and III, in which we earn, in addition to a return on our and drug chain and 26 Cub Food stores. The total price equity interest and Promote, fees and priority distributions. paid by the investment consortium, which included Cer- Operating functions such as leasing, property manage- ment, construction, finance and legal (collectively, the “Operating Departments”) are provided by our personnel, providing for fully integrated property management and development. By incorporating the Operating Departments in the acquisition process, acquisitions are appropriately priced giving effect to each asset’s specific risks and returns. Also, because of the Operating Departments involvement with, and corresponding understanding of, the acquisition process, transition time is minimized and management can immediately execute on its strategic plan for each asset. We typically hold our core properties for long-term invest- ment. As such, we continuously review the existing port- folio and implement programs to renovate and modernize targeted centers to enhance the property’s market posi- tion. This in turn strengthens the competitive position of the leasing program to attract and retain quality tenants, increasing cash flow and consequently property value. berus, Schottenstein and Kimco Realty, to Albertson’s for the portfolio was $1.9 billion, which was funded with $0.3 billion of equity and $1.6 billion of financing. Mervyns II’s share of equity invested totaled $20.7 million. The Operat- ing Partnership’s share was $4.2 million. As with the Mervyns investment (see below), we anticipate investing in Albertson’s add-on real estate opportunities. During February of 2007, Mervyns II received cash distri- butions totaling approximately $44.4 million from its own- ership position in Albertson’s. The Operating Partnership’s share of this distribution amounted to approximately $8.9 million. The distributions primarily resulted from proceeds received by Albertson’s in connection with its disposition of certain stores, refinancing of the remaining assets held in the entity and excess cash from operations. Mervyns II received additional distributions from this investment total- ing $8.8 million during the balance of the year ended December 31, 2007. The Operating Partnership’s share of these distributions was $1.0 million. We also periodically identify certain properties for disposi- For the years ended December 31, 2007 and 2006, tion and redeploy the capital to existing centers or acquisi- Mervyns II made additional add-on investments in Albert- tions with greater potential for capital appreciation. Our son’s totaling $2.8 million and received distributions total- core portfolio consists primarily of neighborhood and com- ing $0.8 million in the aggregate from these add-on munity shopping centers, which are generally dominant centers in high barrier-to-entry markets. The anchors at these centers typically pay market or below-market rents. 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 opportunities to increase rental income. investments. The Operating Partnership’s share of such amounts was $0.4 million and $0.1 million, respectively. Mervyns Department Stores In September 2004, we made our first RCP Venture investment with our participation in the acquisition of Mervyns. Through Mervyns I and Mervyns II, we invested in the acquisition of Mervyns as part of an investment consortium of Sun Capital and Cerberus that acquired During 2007, 2006 and 2005 we sold seven non-core prop- Mervyns from Target Corporation. As of the date of acqui- erties and redeployed the capital to acquire seven retail sition, Mervyns was a 257-store discount retailer with a properties as further discussed in “ASSET SALES AND very strong West Coast concentration. The total acquisi- CAPITAL/ASSET RECYCLING” below. 5 Acadia Realty Trust 2007 Annual Report tion price was approximately $1.2 billion which was financed with $800 million of debt and $400 million of equity. Mervyns I and Mervyns II share of equity invested aggregated $23.9 million on a non-recourse basis and was divided equally between them. The Operating Partnership’s share was $4.9 million. During November 2007, Mervyns Other Investments II made an additional investment of $2.2 million in Mervyns. During 2006, Fund II invested $1.1 million in Shopko, a For the year ended December 31, 2005, Mervyns I and Mervyns II made add-on investments in Mervyns proper- ties totaling $1.3 million. The Operating Partnerships share of this amount was $0.3 million. regional multi-department retailer with 358 stores located throughout the Midwest, Mountain and Pacific Northwest and $0.7 million in Marsh, a regional supermarket chain operating 271 stores in central Indiana, Illinois and west- ern Ohio. The Operating Partnership’s share of these During 2005, Mervyns made a distribution to the investors investments totaled $0.2 million. For the year ended from the proceeds from the sale of a portion of the port- December 31, 2007, Fund II received a $1.1 million distri- folio and the refinancing of existing debt, of which a total bution from the Shopko investment, of which the Operat- of $42.7 million was distributed to Mervyns I and Mervyns ing Partnership’s share was $0.2 million. II. The Operating Partnership’s share of this distribution amounted to $10.2 million. In addition, during 2006, Mervyns distributed additional cash totaling $4.6 million. The Operating Partnership’s share of this distribution totaled $1.4 million. During July 2007, Mervyns II invested $2.7 million in REX Stores Corporation which is comprised of electronic retail stores located in 27 states. The Operating Partnership’s share was $0.5 million. The following table summarizes the RCP Venture invest- ments from inception through December 31, 2007: (dollars in millions) Investor Investment Mervyns I and Mervyns II Mervyns Mervyns I and Mervyns II Mervyns add-on investments Mervyns II Mervyns II Fund II Fund II Mervyns II Total Albertson’s Albertson’s add-on investments 2006/2007 Shopko Marsh Rex 2006 2006 2007 Year acquired Invested capital 2004 2005 2006 $26.1 1.3 20.7 2.8 1.1 0.7 2.7 Operating Partnership Share Distributions $ 46.0 Invested capital $ 4.9 Distributions $ 11.3 1.3 53.2 0.8 1.1 — — 0.3 4.2 0.4 0.2 0.1 0.5 0.3 9.8 0.1 0.2 — — $55.4 $102.4 $10.6 $ 21.7 New York Urban/Infill Redevelopment Initiative CityPoint: During February of 2007, Acadia-P/A entered Sheepshead Bay: During November of 2007, Fund III acquired a property in Sheepshead Bay, Brooklyn for approximately $20.0 million. Our redevelopment plan includes the demolition of the existing structures and the construction of a 240,000 square foot shopping center on the site. The total cost of the redevelopment, including acquisition costs, is expected to be approxi- mately $109.0 million. into an agreement for the purchase of the leasehold inter- est in The Gallery at Fulton Street in downtown Brooklyn. The fee position in the property is owned by the City of New York and the agreement includes an option to pur- chase this fee position at a later date. Acadia P/A has partnered with MacFarlane Partners (“MacFarlane”) to co-develop the project. On June 13, 2007, Acadia P/A and MacFarlane acquired the leasehold interest for approxi- mately $115.0 million. Redevelopment plans for the prop- Canarsie: During October of 2007, Acadia P/A acquired erty, renamed as CityPoint, include the demolition of the a 530,000 square foot warehouse building in Canarsie, existing structure and the development of a 1.6 million Brooklyn for approximately $21.0 million. The development square foot mixed-use complex. The proposed develop- plan for this property includes the demolition of a portion ment calls for the construction of a combination of retail, of the warehouse and the construction of a 320,000 office and residential components, all of which are cur- square foot mixed-use project consisting of retail, office, rently allowed as of right. Acadia P/A, together with Mac- cold-storage and self-storage. The total cost of the rede- Farlane, will develop and operate the retail component, velopment, including acquisition costs, is expected to be which is anticipated to total 475,000 square feet of retail approximately $70.0 million. space. Acadia P/A will also participate in the development of the office component with MacFarlane, which is Acadia Realty Trust 2007 Annual Report 6 expected to include at least 125,000 square feet of office 4650 Broadway: On April 6, 2005, Acadia-P/A acquired space. MacFarlane plans to develop and operate up to 4650 Broadway located in the Washington Heights/Inwood 1,000 residential units with underground parking. Acadia section of Manhattan. The property, a 140,000 square foot P/A does not plan on participating in the development of, building, which was occupied by an agency of the City of or have an ownership interest in, the residential compo- New York and a commercial parking garage, was acquired nent of the project. Atlantic Avenue: During May 2007, we, through Fund II and in partnership with a self-storage partner at several of the other New York urban projects, acquired a property on Atlantic Avenue in Brooklyn, New York for $5.0 million. Redevelopment plans for the property call for the demoli- tion of the existing structure and the construction of a for a purchase price of $25.0 million. During 2007 we relo- cated the office tenant to Acadia P/A’s 216th St. redevel- opment as discussed above. We are currently reviewing various alternatives to redevelop the site to include retail and office components totaling over 216,000 square feet. Expected costs for Acadia P/A to complete the redevelop- ment are estimated at $30.0 million. modern climate controlled self-storage facility consisting Pelham Manor: On October 1, 2004, Acadia-P/A entered of approximately 110,000 square feet. into a 95-year, inclusive of extension options, ground lease Liberty Avenue: On December 20, 2005, Acadia-P/A acquired the remaining 40-year term of a leasehold inter- est in land located at Liberty Avenue and 98th Street in Queens (Ozone Park). Development of this project is com- plete and includes approximately 30,000 square feet of to redevelop a 16-acre site in Pelham Manor, Westchester County, New York. We have demolished the existing industrial and warehouse buildings, and are constructing a multi-anchor community retail center at a total estimated cost of $45.0 million. retail anchored by a CVS drug store, which is open and Fordham Road: On September 29, 2004, Acadia-P/A operating. The project also includes a 95,000 square foot purchased 400 East Fordham Road, Bronx, New York. self-storage facility, which is open and currently operated Sears, a former tenant that operated on four levels at this by Storage Post. Storage Post is a partner in the self-stor- property, has signed a new lease to occupy only the con- age complex, and is anticipated to be a partner in future course level after redevelopment. We have commenced retail projects in New York City where self-storage will redevelopment at this site, which is expected to include be a potential component of the redevelopment. The total four levels of retail and office space totaling 285,000 cost to Acadia P/A of the redevelopment was approximately square feet when completed. The total cost of the project $15 million. to Acadia P/A, including the acquisition cost of $30 million, 216th Street: On December 1, 2005, Acadia-P/A acquired is expected to be $120.0 million. a 65,000 square foot parking garage located at 10th Avenue Other Investments and 216th Street in the Inwood section of Manhattan for $7.0 million. During 2007, construction of the 60,000 square foot office building was completed and we relocated an agency of the City of New York, which was a tenant at another of our Urban/Infill Redevelopment projects. Inclu- sive of acquisition costs, total costs to Acadia P/A for the project, which also includes a 100-space rooftop parking deck, was approximately $27 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. The ultimate redevelopment plan for the property, a 100% occupied, 10-story office building, is to reconfigure the property so that approximately 50% of the income from the building will eventually be derived from retail tenants. Additional redevelopment costs to Acadia P/A are anticipated to be approximately $16 million. 7 Acadia Realty Trust 2007 Annual Report In addition to the New York Urban/Infill projects discussed above, through Fund II and Fund III, we also acquired the following: During November 2007, Fund III acquired 125 Main Street, Westport, Connecticut for approximately $17.0 million. Our plan is to redevelop the existing building into 30,000 square feet of retail, office and residential use. During November 2005, Fund II acquired a ground lease 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. During July 2005, Fund II acquired for $1.0 million, a 50% equity interest in an entity which has a leasehold interest in a former Levitz Furniture store located in Rockville, Maryland. Fund I Brandywine Portfolio and the sale of Amherst Marketplace To date, through Fund I we have purchased a total of and Sheffield Crossing as discussed below, there are 29 35 assets totaling approximately 3.0 million square feet. assets comprising 1.5 million square feet remaining in During January 2006, we recapitalized the Brandywine Fund I (in which the Operating Partnership’s interest in Portfolio as discussed further in “BUSINESS OBJECTIVES cash flow and income has increased from 22.2% to 37.8% AND STRATEGIES.” Following the recapitalization of the as a result of the Promote) as follows: Location Year Acquired GLA Shopping Center New York Region New York Tarrytown Centre Mid-Atlantic Region Virginia Westchester Haygood Shopping Center Virginia Beach Midwest Region Ohio Granville Centre Michigan Columbus Sterling Heights Shopping Center Detroit Various Regions Kroger/Safeway Portfolio Various Total 2004 2004 2002 2004 2003 35,291 178,533 134,997 154,835 1,018,100 1,521,756 During November 2007, Fund I sold Amherst Marketplace Core Portfolio and Sheffield Crossing, community shopping centers in During March of 2007, the Operating Partnership pur- Ohio, for $26.0 million, resulting in a $7.5 million gain. chased a 52,000 square foot single-tenant building located In November 2006, Fund I acquired the remaining 50% interest from our unaffiliated partner in the Tarrytown Centre for $3.5 million. During February 2006, Fund I finalized an agreement with our unaffiliated partner in the Hitchcock Plaza whereby we converted our common equity interest in the proper- at 1545 East Service Road in Staten Island, New York for $17.0 million. During March of 2007, the Operating Partnership purchased a retail commercial condominium at 200 West 54th Street located in Manhattan, New York. The 10,000 square foot property was acquired for $36.4 million. ties to a preferred equity position with a 15% preferred During September of 2006, the Operating Partnership return payable currently and a 20% profit interest after all purchased 2914 Third Avenue in the Bronx, New York for invested capital and preferred returns are paid. In connec- $18.5 million. The 41,305 square foot property is 100% tion with this agreement, our partner assumed all opera- leased and is located in a densely populated, high barrier- tional, redevelopment and leasing responsibilities. In to-entry, infill area. August 2007, the Operating Partnership provided a $5.6 million loan to the third party investor in Hitchcock Plaza who invested the proceeds into the partnership and were used to liquidate Fund I’s preferred equity investment and During June of 2006, the Operating Partnership purchased 8400 and 8625 Germantown Road in Philadelphia, Penn- sylvania for $16.0 million. cumulative preferred return. Fund I retains a 20% profits During January of 2006, the Operating Partnership closed interest, behind the return of our partner’s equity and on a 20,000 square foot retail building in the Lincoln Park cumulative preferred return. district in Chicago. The property was acquired from an affiliate of Klaff for $9.9 million. Acadia Realty Trust 2007 Annual Report 8 During January of 2006, the Operating Partnership acquired advanced additional proceeds bringing the total outstand- a 60% interest in the A&P Shopping Plaza located in ing amount to $31.3 million. The loan matures on May 31, Boonton, New Jersey. The property, located in northeast- 2008 and bears interest at a rate of 10.5%. During 2006, ern New Jersey, is a 63,000 square foot shopping center Levitz SL sold one of the Levitz Properties located in North- anchored by a 49,000 square foot A&P Supermarket. The ridge, California and used $20.4 million of the proceeds to remaining 40% interest is owned by a principal of P/A. pay down the loan. During 2007, Levitz SL sold an addi- The interest was acquired for $3.2 million. tional Levitz Property located in St. Paul Minnesota and During July 2005 the Operating Partnership purchased 4343 Amboy 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 drug store, and is subject to a 23-year ground lease. Other Investments During March of 2005 the Operating Partnership invested $20.0 million in a preferred equity position (“Preferred Equity Investment”) in Levitz SL, L.L.C. (“Levitz SL”), the owner of fee and leasehold interests in 30 current or for- mer Levitz Furniture Store locations (the “Levitz Proper- ties”), totaling 2.5 million square feet. During June 2006, the Operating Partnership converted the Preferred Equity Investment to a first mortgage loan and used $4.8 million of the proceeds to pay down the first mortgage loan. As of December 31, 2007, the loan balance amounted to $6.1 million and was secured by fee and lease- hold mortgages as well as a pledge of the entities owning 13 of the remaining Levitz Properties totaling 1.3 million square feet. Although Levitz Furniture filed for Chapter 7 bankruptcy protection during November 2007, we believe the underlying value of the real estate is sufficient to recover the principal and interest due under the mortgage. 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. Since January 1, 2005, we have sold the following core portfolio assets: Shopping Center Location Colony and GHT Apartments Soundview Marketplace Bradford Towne Centre Greenridge Plaza Pittston Plaza Luzerne Street Shopping Center Berlin Shopping Center Columbia, Missouri Long Island, New York Towanda, Pennsylvania Scranton, Pennsylvania Pittston, Pennsylvania Scranton, Pennsylvania Central New Jersey Date Sold December 2007 December 2006 November 2006 November 2006 November 2006 November 2006 July 2005 Total GLA 625,545 183,815 257,123 191,767 79,498 58,035 188,688 1,584,471 Sales price (dollars in thousands) $ 15,512 24,000 16,000 10,600 6,000 3,600 4,000 $ 79,712 Proceeds from these sales in part have been used to fund building now occupied by Drexel Heritage and Panera Bread. the core portfolio acquisitions as discussed in “PROPERTY The new tenants opened and commenced paying rent dur- ACQUISITIONS” above. ing 2006, and are paying a combined base rent at a 127% PROPERTY REDEVELOPMENT AND EXPANSION Our redevelopment program focuses on selecting well- located neighborhood and community shopping centers within our core portfolio and creating significant value through re-tenanting and property redevelopment. increase over that of the former tenant. In addition, we have leased approximately 26,000 square feet to Circuit City, which opened and commenced paying rent during September of 2007 at a 79% increase over that of the for- mer tenants. Total costs for this project were $4.6 million. COMPETITION There are numerous entities that compete with us in seek- During 2006, we commenced the redevelopment and ing properties for acquisition and tenants who will lease re-tenanting of the Bloomfield Town Square, located in space in our properties. Our competitors include other Bloomfield Hills, Michigan. A former out-parcel building REIT’s, financial institutions, insurance companies, pension was demolished and replaced with a 17,500 square foot funds, private companies and individuals. Our properties 9 Acadia Realty Trust 2007 Annual Report compete for tenants with similar properties primarily on request. Information included or referred to on our website the basis of location, total occupancy costs (including base is not incorporated by reference in or otherwise a part of rent and operating expenses), services provided, and the this Form 10-K. design and condition of the improvements. FINANCIAL INFORMATION ABOUT MARKET SEGMENTS We have three reportable segments: core portfolio, oppor- CODE OF ETHICS AND WHISTLE- BLOWER POLICIES The Board of Trustees adopted a Code of Ethics for Senior Financial Officers that applies to our Chief Executive Officer, tunity funds and other, which primarily consists of manage- Chief Financial Officer, Chief Accounting Officer, Controller, ment fee income and interest income. We evaluate property Director of Financial Reporting, Director of Taxation and performance primarily based on net operating income Assistant Controllers. The Board also adopted a Code of before depreciation, amortization and certain non-recurring Business Conduct and Ethics applicable to all employees, items. Investments in our core portfolio are typically held as well as a “Whistleblower Policy.” Copies of these docu- long-term. Given the finite life of the opportunity funds, ments are available in the Investor Information section of these investments are typically held for shorter terms. Fees our website. earned by us as general partner/member of the opportu- nity funds are eliminated in our consolidated financial ITEM 1A. RISK FACTORSx statements. We do not have any foreign operations. We previously reported two reportable segments, retail prop- erties and multi-family properties. During December of 2007, we sold the majority of our multi-family properties and realigned our segments to reflect the way we now manage our business. See Note 3 to our consolidated financial statements, which begin on page 52 of this Form 10-K for certain information regarding each of our segments. 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. As of December 31, 2007, we had 142 employees, of which 120 were located at our executive office, six at the Pennsylvania regional office and the remaining property management personnel were located on-site at our properties. COMPANY WEBSITE All of our filings with the Securities and Exchange Com- If any of the following risks actually occur, our business, results of operations and financial condition would likely suffer. This section includes or refers to certain forward- looking statements. Refer to the explanation of the qualifi- cations and limitations on such forward-looking statements discussed in the beginning of this Form 10-K. We rely on revenues derived from major tenants. We derive significant revenues from certain anchor ten- ants that occupy space in more than one center. We could be adversely affected in the event of the bankruptcy or insolvency 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 cus- tomer 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 mission, including our annual reports on Form 10-K, quarterly rent for the balance of the lease term, or the departure of reports on Form 10-Q and current reports on Form 8-K and an anchor tenant that owns its own property. In addition, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are available free of charge at our website at 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, www.acadiarealty.com, as soon as reasonably practicable or pay a reduced rent based on a percentage of the tenant’s after we electronically file such material with, or furnish it sales, at the affected property, which could adversely to, the Securities and Exchange Commission. These filings affect the future income from such property. See “Item 2. can also be accessed through the Securities and Exchange Properties — Major Tenants” for quantified information Commission’s website at www.sec.gov. Alternatively, we with respect the percentage of our minimum rents will provide paper copies of our filings free of charge upon received from major tenants. Acadia Realty Trust 2007 Annual Report 10 Tenants may seek the protection of the bankruptcy laws, of properties through the Operating Partnership in exchange which could result in the rejection and termination of their for interests in the Operating Partnership may permit certain leases and thereby cause a reduction in the cash flow tax deferral advantages to limited partners who contribute available for distribution by us. Such reduction could be properties to the Operating Partnership. Since properties material if a major tenant files bankruptcy. See the risk contributed to the Operating Partnership may have unreal- factor titled, “The bankruptcy of, or a downturn in the ized gain attributable to the difference between the fair business of, any of our major tenants may adversely affect market value and adjusted tax basis in such properties prior our cash flows and property values” below. to contribution, the sale of such properties could cause Limited control over joint venture investments. Our opportunity fund investments may involve risks not otherwise 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 deci- sions, such as a sale, because neither we nor a joint ven- ture partner would have full control over the joint venture. Also, there is no limitation under our organizational docu- ments 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 in addition to the risks associated with real estate invest- ments, including among other risks, human capital issues, adequate supply of product and material, and merchandis- ing issues. adverse tax consequences to the limited partners who contributed such properties. Although we, as the general partner of the Operating Partnership, generally have no obligation to consider 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 consequences to the limited partners who contribute such properties. Such restrictions could result in significantly reduced flexibility to manage our assets. There are risks relating to investments in real estate. 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 During 2007 and 2006, our joint ventures provided Promote maintenance and insurance and to control variable operat- income. There can be no assurance that the joint ventures ing costs. Shopping centers, in particular, may be affected will continue to operate profitably and thus provide addi- by changing perceptions of retailers or shoppers regarding tional Promote income in the future. the safety, convenience and attractiveness of the shopping Under the terms of our Fund III joint ventures, we are required to first offer to Fund III all of our opportunities to acquire retail shopping centers. Only if (i) our joint venture partner elects not to approve Fund III’s pursuit of an acqui- sition opportunity; (ii) the ownership of the acquisition opportunity by Fund III 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 attrac- tive acquisitions directly and may only receive a minority interest in such acquisitions through Fund III. We operate through a partnership structure, which could have an adverse effect on our ability to man- age our assets. 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. A significant portion 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 significant 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 landlord. 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 Our primary property-owning vehicle is the Operating Part- from the investment. nership, of which we are the general partner. Our acquisition 11 Acadia Realty Trust 2007 Annual Report The bankruptcy of, or a downturn in the business of, any of our major tenants may adversely affect our cash flows and property values. The bankruptcy of, or a downturn in the business of, any of our major tenants causing them to reject their leases, or not renew their leases as they expire, or renew at lower rental rates may adversely affect our cash flows and prop- erty values. Furthermore, the impact of vacated anchor space and the potential reduction in customer traffic may adversely impact the balance of tenants at the center. Certain of our tenants have experienced financial difficul- ties 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 satis- faction 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, 2004, there have been three significant tenant bankruptcies within our portfolio: On January 14, 2004, KB Toys (“KB”) filed for protection under Chapter 11 Bankruptcy. KB operated in five locations in our core portfolio totaling approximately 41,000 square feet. Rental revenues from KB at these locations aggre- gated $0.3 million for each of the years ended December 31, 2007, 2006 and 2005, respectively. KB rejected the lease at three of these locations and continues to operate in two of our core portfolio locations but has neither assumed nor rejected these two leases. On September 27, 2007, the Bombay Company, Inc. (“Bombay”) filed for protection under Chapter 11 Bank- ruptcy. Bombay operated in one of our core portfolio loca- tions, leasing 8,965 square feet. Rental revenues from Bombay totaled $0.2 million for the years ended Decem- ber 31, 2007, 2006 and 2005, respectively. Bombay has rejected the lease at this location. On June 11, 2007, Tweeter Home Entertainment Group, Inc. (“Tweeter”) filed for protection under Chapter 11 Bankruptcy. Tweeter is operating in one of our core port- folio locations, leasing 12,799 square feet. Rental rev- enues from Tweeter totaled $0.3 million, $0.1 million and $0.0 million for the years ended December 31, 2007, 2006 and 2005, respectively. Tweeter has neither assumed or rejected the lease. We could be adversely affected by poor market conditions where properties are geographically concentrated. Our performance depends on the economic conditions in markets in which our properties are concentrated. We have significant exposure to the New York region, from which we derive 35% of the annual base rents within our Core portfolio. Our operating results could be adversely affected if market conditions, such as an oversupply of space or a reduction in demand for real estate, in this area become more competitive relative to other geographic areas. Our ability to change our portfolio is limited because real estate investments are illiquid. Equity investments in real estate are relatively illiquid and, therefore, our ability to change our portfolio promptly in response to changed conditions will be limited. 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. 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. Recent disruptions in the financial markets could affect our ability to obtain debt financing on reason- able terms and have other adverse effects on us. The United States credit markets have recently experi- enced significant dislocations and liquidity disruptions which have caused the spreads on prospective debt financings to widen considerably. These circumstances have materially impacted liquidity in the debt markets, making financing terms for borrowers less attractive, and in certain cases have resulted in the unavailability of cer- tain types of debt financing. Continued uncertainty in the credit markets may negatively impact our ability to access Acadia Realty Trust 2007 Annual Report 12 additional debt financing at reasonable terms, which may of these counterparties will enable them to fulfill their obli- negatively affect our ability to make acquisitions. A pro- gations under these agreements. longed downturn in the credit markets may cause us to seek alternative sources of potentially less attractive financing, and may require us to adjust our business plan accordingly. In addition, these factors may make it more difficult for us to sell properties or may adversely affect the price we receive for properties that we do sell, as prospective buyers may experience increased costs of debt financing or difficulties in obtaining debt financing. These events in the credit markets have also had an adverse effect on other financial markets in the United States, which may make it more difficult or costly for us to raise capital through the issuance of our equity securi- ties. These disruptions in the financial markets may have other adverse effects on us or the economy generally. 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 may not be able to renew current leases and the terms of re-letting (including the cost of conces- sions 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 prop- erties or if the rental rates we receive upon re-letting are significantly 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 of their leases. See “Item 2. Properties — Lease Expirations” in this Annual Report on Form 10-K for additional information as to the scheduled lease expira- We have incurred, and expect to continue to incur, tions in our portfolio. indebtedness in furtherance of our activities. Neither our Declaration of Trust nor any policy statement formally adopted by our board of trustees limits either the total amount of indebtedness 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 operations and our ability to make distributions. Our loan agreements contain customary representations, covenants and events of default. Certain loan agreements require us to comply with certain affirmative and negative covenants, including the maintenance of certain debt serv- ice coverage and leverage ratios. Interest expense on our variable debt as of December 31, 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 liability without regard to whether we knew of, or were responsible for, the presence or disposal of those substances. This liability may be imposed on us in connection with the activities of an operator of, or tenant at, the property. The cost of any required remediation, removal, fines or personal or property damages and our liability therefore could exceed the value of the property 2007 would increase by $1.2 million annually for a 100 basis and/or our aggregate assets. In addition, the presence of point increase in interest rates. We may seek additional those substances, or the failure to properly dispose of or variable-rate financing if and when pricing and other com- remove those substances, may adversely affect our ability mercial and financial terms warrant. As such, we would consider hedging against the interest rate risk related to to sell or rent that property or to borrow using that prop- erty as collateral, which, in turn, would reduce our revenues such additional variable-rate debt through interest rate and ability to make distributions. swaps and protection agreements, or other means. We enter into interest-rate hedging transactions, including interest rate swaps and cap agreements, with counterpar- A property can also be adversely affected either through physical contamination or by virtue of an adverse effect upon value attributable to the migration of hazardous or ties. There can be no guarantee that the financial condition toxic substances, or other contaminants that have or may 13 Acadia Realty Trust 2007 Annual Report have emanated from other properties. Although our tenants that we wish to purchase. In addition, retailers at our are primarily responsible for any environmental damages properties face increasing competition from outlet malls, and claims related to the leased premises, in the event of discount shopping clubs, internet commerce, direct mail the bankruptcy or inability of any of our tenants to satisfy and telemarketing, which could (i) reduce rents payable any obligations with respect to the property leased to that to us; (ii) reduce our ability to attract and retain tenants tenant, we may be required to satisfy such obligations. In at our properties; and (iii) lead to increased vacancy rates addition, we may be held directly liable for any such dam- at our properties. 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 environ- mental 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: n The discovery of previously unknown environmental conditions; n Changes in law; n Activities of tenants; and n Activities relating to properties in the vicinity of our properties. Changes in laws increasing the potential liability for envi- ronmental conditions existing on properties or increasing the restrictions on discharges or other conditions may result in significant unanticipated expenditures or may otherwise adversely affect the operations of our tenants, which could adversely affect our financial condition or results of operations. We have pursued, and may in the future continue to pursue, extensive growth opportunities which may result in significant demands on our opera- tional, administrative and financial resources. We have pursued extensive growth opportunities. This expansion has placed significant demands on our opera- tional, administrative and financial resources. The contin- ued growth of our real estate portfolio can be expected to continue to place a significant strain on our resources. Our future performance 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 that may affect the value of real estate. There can be no assurance that we will have sufficient resources to identify and manage acquired prop- erties 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 earnings growth strategy is based on the acquisition and development of additional properties, including acqui- sitions through co-investment programs such as joint ven- tures. In the context of our business plan, “development” generally means an expansion or renovation of an existing property. The consummation of any future acquisitions will be subject to satisfactory completion of our extensive valuation analysis and due diligence review and to the negotiation of definitive documentation. We cannot be sure that we will be able to implement our strategy Competition may adversely affect our ability to pur- chase properties and to attract and retain tenants. because we may have difficulty finding new properties, negotiating with new or existing tenants or securing There are numerous commercial developers, real estate acceptable financing. 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 other REIT’s, financial institutions, insurance com- panies, pension funds, private companies and individuals. This competition may result in a higher cost for properties Acquisitions of additional properties entail the risk that investments will fail to perform in accordance with expec- tations, including operating and leasing expectations. Redevelopment is subject to numerous risks, including risks of construction delays, cost overruns or uncontrol- lable events that may increase project costs, new project Acadia Realty Trust 2007 Annual Report 14 commencement risks such as the receipt of zoning, occu- qualification as a REIT or the federal income tax conse- pancy and other required governmental approvals and per- quences of such qualification. If we do not qualify as a REIT, mits, and the incurrence of development costs in connection we would not be allowed a deduction for distributions to with projects that are not pursued to completion. shareholders in computing our net taxable income. In addi- A component of our growth strategy is through private- equity type investments made through our RCP Venture. These include investments in operating retailers. The inabil- ity of the retailers to operate profitably would have an adverse impact on income realized from these investments. Our board of trustees may change our investment policy without shareholder approval. tion, our income would be subject to tax at the regular corporate rates. We also could be disqualified from treat- ment 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 distributions. Although we currently intend to Our board of trustees will determine our investment and continue to qualify as a REIT, it is possible that future financing policies, our growth strategy and our debt, capi- economic, market, legal, tax or other considerations may talization, distribution, acquisition, disposition and operat- cause us, without the consent of the shareholders, to ing policies. Our board of trustees may establish investment revoke the REIT election or to otherwise take action that criteria or limitations as it deems appropriate, but currently would result in disqualification. 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 election of trustees, and changes made by our board of trustees may not serve the interests of all of our share- holders and could adversely affect our financial condition or results of operations, including our ability to distribute cash to shareholders 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 purposes, we are generally required to distribute to our shareholders 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 exclud- ing net capital gains. To the extent that we satisfy the distribution requirement, 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% nondeductible excise tax on the amount, if any, by which our distributions 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; We believe that we have met the requirements for quali- (iii) 100% of our undistributed taxable income from prior fication as a REIT for federal income tax purposes begin- years. We intend to continue to make distributions to our ning with our taxable year ended December 31, 1993, and shareholders to comply with the distribution requirements we intend to continue to meet these requirements in the of the Internal Revenue Code and to reduce exposure to future. However, qualification as a REIT involves the appli- federal income and nondeductible excise taxes. Differences cation of highly technical and complex provisions of the in timing between the receipt of income and the payment Internal Revenue Code, for which there are only limited of expenses in determining our income and the effect of judicial or administrative interpretations. No assurance can required debt amortization payments could require us to be given that we have qualified or will remain qualified as borrow funds on a short-term basis to meet the distribu- a REIT. The Internal Revenue Code provisions and income tion requirements that are necessary to achieve the tax tax regulations applicable to REIT’s are more complex than benefits associated with qualifying as a REIT. those applicable to corporations. The determination of vari- ous factual matters and circumstances not entirely within our control may affect our ability to continue to qualify as a REIT. In addition, no assurance can be given that legislation, regulations, administrative interpretations or court deci- sions will not significantly change the requirements for Uninsured losses or a loss in excess of insured lim- its could adversely affect our financial condition. We carry comprehensive liability, fire, extended coverage and rent loss insurance on most of our properties, with policy specifications and insured limits customarily carried 15 Acadia Realty Trust 2007 Annual Report for similar properties. However, with respect to those properties where the leases do not provide for abatement Adverse legislative or regulatory tax changes could have an adverse effect on us. of rent under any circumstances, we generally do not There are a number of issues associated with an invest- maintain rent loss insurance. In addition, there are certain ment in a REIT that are related to the federal income tax types of losses, such as losses resulting from wars, ter- laws, including, but not limited to, the consequences of rorism or acts of God that generally are not insured failing to continue to qualify as a REIT. At any time, the because they are either uninsurable or not economically federal income tax laws governing REIT’s or the adminis- insurable. Should an uninsured loss or a loss in excess trative interpretations of those laws may be amended. of insured limits occur, we could lose capital invested in Any of those new laws or interpretations may take effect a property, as well as the anticipated future revenues from retroactively and could adversely affect us or our share- a property, while remaining obligated for any mortgage holders. Recently enacted legislation reduces tax rates indebtedness or other financial obligations related to the applicable to certain corporate dividends paid to most property. Any loss of these types would adversely affect domestic noncorporate shareholders. REIT dividends gen- our financial condition. Limits on ownership of our capital shares. For the Company to qualify as a REIT for federal income tax purposes, among other requirements, not more than 50% of the value of our capital shares may be owned, directly or indirectly, by five or fewer individuals (as defined erally are not eligible for reduced rates because a REIT’s income generally is not subject to corporate level tax. As a result, investment in non-REIT corporations may be viewed as relatively more attractive than investment in REIT’s by domestic noncorporate investors. This could adversely affect the market price of the Company’s shares. in the Internal Revenue Code to include certain entities) Concentration of ownership by certain investors. during the last half of each taxable year after 1993, and Ten institutional shareholders own 5% or more individually, such capital shares must be beneficially owned by 100 or and 67.9% in the aggregate, of our Common Shares. more persons during at least 335 days of a taxable year of A significant concentration of ownership may allow an 12 months or during a proportionate part of a shorter tax- investor to exert a greater influence over our management able year (in each case, other than the first such year). Our and affairs and may have the effect of delaying, deferring Declaration of Trust includes certain restrictions regarding or preventing a change in control of us. transfers of our capital shares and ownership limits that are intended to assist us in satisfying 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. 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 pre- ferred 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 Actual or constructive ownership of our capital shares in could be in the best interest of the shareholders. excess of the share ownership limits contained in our Dec- laration of Trust would cause the violative transfer or own- ership 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 rules for these limits are com- plex and groups of related individuals or entities may be deemed a single owner and consequently in violation of the share ownership limits. In addition, we have entered into an employment agree- ment 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 and either the termination of their employ- ment without cause (as defined) or their resignation for good reason (as defined), 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), which could deter a change of control of us that could be in our best interest. Acadia Realty Trust 2007 Annual Report 16 The loss of a key executive officer could have an adverse effect on us. We had 545 leases as of December 31, 2007. A majority of our rental revenues were from national tenants. A Our success depends on the contribution of key manage- majority of the income from the properties consists of rent ment members. The loss of the services of Kenneth F. received under long-term leases. These leases generally Bernstein, President and Chief Executive Officer, or other provide for the payment of fixed minimum rent monthly key executive-level employees could have a material adverse effect on our results of operations. We have in advance and for the payment by tenants of a pro-rata share of the real estate taxes, insurance, utilities and com- entered into an employment agreement with Mr. Bern- mon area maintenance of the shopping centers. Minimum stein; however, it could be terminated by Mr. Bernstein. rents and expense reimbursements accounted for approxi- We have not entered into employment agreements with mately 84% of our total revenues for the year ended other key executive level employees. December 31, 2007. ITEM 1B. UNRESOLVED STAFF COMMENTSx None. ITEM 2. PROPERTIESx Shopping Center Properties The discussion and tables in this Item 2 include properties held through consolidated and unconsolidated joint ventures in which we own a partial interest (“Consolidated Joint Venture Portfolio” and “Unconsolidated Joint Venture Portfolio,” respectively). Except where noted, it does not include our partial interest in 25 anchor-only leases with Kroger and Safeway supermarkets. These are detailed As of December 31, 2007, approximately 35% of our existing leases also provided for the payment of percent- age 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 2007 rev- enues of the Company. Seven of our shopping center properties are subject to long-term ground leases in which a third party owns and has leased the underlying land to us. We pay rent for the use of the land at seven locations and are responsible for all costs and expenses associated with the building and separately within this Item 2 as the majority of these prop- improvements at all seven locations. erties are free-standing and all are triple-net leases. No individual property contributed in excess of 10% of our total revenues for the years ended December 31, 2007, 2006 and 2005. Reference is made to our consolidated financial statements beginning on page 52 of this Annual Report on form 10-K for information on the mortgage debt pertaining to our properties. The following sets forth more specific information with respect to each of our shopping centers at December 31, 2007: As of December 31, 2007, we owned and operated 51 commercial properties as part of our core portfolio and opportunity fund portfolios. The properties are primarily neighborhood and community shopping centers, mixed- use centers and one multi-family property. Ten of these properties are currently under redevelopment. Our shop- ping centers, which total approximately 7.5 million square feet of gross leaseable area (“GLA”), are located in 13 states and are generally well-established, anchored com- munity and neighborhood shopping centers. The operating properties are diverse in size, ranging from approximately 10,000 to 875,000 square feet with an average size of 150,000 square feet. As of December 31, 2007, our core portfolio and the opportunity fund portfolios (excluding properties under redevelopment) were 94.9% and 93.7% occupied, respectively. Our shopping centers are typically anchored by supermarkets or value-oriented retail. 17 Acadia Realty Trust 2007 Annual Report Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Anchor Tenants Occupancy (1) % Current Lease Expiration/ Lease Option Expiration 12/31/07 Core Portfolio NEW YORK REGION Connecticut 239 Greenwich Avenue New Jersey Elmwood Park Shopping Center Greenwich 1998 (A) Fee 16,834 (3) 100% Restoration Hardware 2014/2024 Coach 2016/2021 Elmwood Park 1998 (A) Fee 149,491 100% A&P 2017/2052 Walgreens 2022/2062 A&P Shopping Plaza Boonton 2006 (A) Fee 62,908 100% A&P 2024/2069 New York Village Commons Shopping Center Branch Shopping Plaza Smithtown Smithtown 1998 (A) 1998 (A) Fee LI (4) 87,169 125,751 98% 99% Daffy’s 2008/2028 A&P 2013/2028 CVS 2010/— Amboy Road Staten Island 2005 (A) LI (4) 60,090 100% A&P/Waldbaum’s 2028/— Bartow Avenue Pacesetter Park Shopping Center 2914 Third Avenue West Shore Expressway West 54th Street Crossroads Shopping Center Bronx Pomona Bronx Staten Island Manhattan White Plains 2005 (C) 1999 (A) 2006 (A) 2007 (A) 2007 (A) 1998 (A) Fee Fee Fee Fee Fee 14,676 96,698 42,400 55,000 9,945 JV (7) 310,624 Duane Reade 2008/2018 Sleepy’s 2009/2014 Stop & Shop 2020/2040 Dr. J’s 2021/— LA Fitness 2021/— Stage Deli 2011/— A&P/Waldbaum’s 2012/2032 87% 93% 79% 100% 82% 97% Kmart 2012/2032 B. Dalton 2012/2022 Modell’s 2009/2019 Pier 1 2012/— Pay Half 2007/— Total New York Region NEW ENGLAND REGION Connecticut Town Line Plaza Massachusetts Methuen Shopping Center Crescent Plaza New York New Loudon Center Rhode Island Walnut Hill Plaza Vermont The Gateway Shopping Center Total New England Region 1,031,586 97% Rocky Hill 1998 (A) Fee 206,356 (2) 99% Stop & Shop 2023/2063 Wal-Mart (2) Methuen Brockton 1998 (A) LI/Fee (4) 130,021 100% DeMoulas Market 2015/2020 1984 (A) Fee 218,141 99% Wal-Mart 2012/2052 Shaw’s 2012/2042 Home Depot 2021/2056 Latham 1982 (A) Fee 255,826 100% Price Chopper 2015/2035 Marshall’s 2014/2029 Bon Ton 2014/2034 Raymour and Flanigan 2019/2034 AC Moore 2009/2024 Woonsocket 1998 (A) Fee 284,717 89% Shaw’s 2013/2028 Sears 2008/2033 CVS 2009/2014 South Burlington 1999 (A) Fee 101,784 1,196,845 96% 97% Shaw’s 2024/2053 Acadia Realty Trust 2007 Annual Report 18 Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Anchor Tenants Occupancy (1) % Current Lease Expiration/ Lease Option Expiration 12/31/07 MIDWEST REGION Illinois Hobson West Plaza Naperville 1998 (A) Fee 98,908 98% Bobak’s Market & Restaurant 2012/2032 Clark Diversey Chicago 2006 (A) Fee 19,265 100% Papyrus 2010/2015 Starbucks 2010/2015 Nine West 2009/— The Vitamin Shoppe 2014/2024 Indiana Merrillville Plaza Michigan Bloomfield Town Square Ohio Mad River Station Merrillville 1998 (A) Fee 235,685 96% TJ Maxx 2009/2014 JC Penney 2008/2018 Office Max 2008/2028 K&G 2017/2027 Pier 1 2009/— David’s Bridal 2010/2020 Bloomfield Hills 1998 (A) Fee 232,181 98% TJ Maxx 2009/2014 Marshalls 2011/2026 Home Goods 2010/2020 Circuit City 2023/2038 Office Max 2010/2025 Dayton 1999 (A) Fee 155,838 (6) 81% Babies ‘R’ Us 2010/2020 Office Depot 2010/— Pier 1 2010/— Total Midwest Region 741,877 94% 19 Acadia Realty Trust 2007 Annual Report Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Anchor Tenants Occupancy (1) % Current Lease Expiration/ Lease Option Expiration 12/31/07 MID-ATLANTIC REGION New Jersey Marketplace of Absecon Absecon 1998 (A) Fee 105,135 95% Acme 2015/2055 Eckerd Drug 2020/2040 Ledgewood Mall Ledgewood 1983 (A) Fee 517,151 89% Wal-Mart 2019/2049 Macy’s 2010/2025 The Sports Authority 2012/2037 Circuit City 2020/2040 Marshalls 2014/2034 Ashley Furniture 2010/2020 Barnes and Noble 2010/2035 Delaware Brandywine Town Center Wilmington 2003 (A) JV (10) 874,908 98% Drexel Heritage 2016/2026 Michaels 2011/2026 Old Navy (The Gap) 2011/2016 PetSmart 2017/2042 Thomasville Furniture 2011/2021 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 2018/2058 TransUnion Settlement 2013/2018 Lane Home Furnishings 2015/2030 MJM Designer 2015/2030 World Market 2015/— Christmas Tree Shops 2028/2048 Target Expansion 2011/2363 Market Square Shopping Center Wilmington 2003 (A) JV (10) 102,662 89% TJ Maxx 2011/2016 Naamans Road Pennsylvania Blackman Plaza Mark Plaza Plaza 422 Route 6 Mall Wilmington 2006 (C) LI/JV (10) (4) 19,970 100% Tweeters 2026/2046 Trader Joe’s 2013/2028 Wilkes-Barre 1968 (C) Fee 125,264 93% Kmart 2009/2049 Eckerd 2016/— Edwardsville 1968 (C) LI/Fee (4) 216,401 93% Redner’s Markets 2018/2028 Lebanon Honesdale 1972 (C) 1994 (C) Fee Fee 155,149 175,505 69% 100% Kmart 2009/2049 Home Depot 2028/2058 Kmart 2020/2070 Eckerd 2011/2026 Fashion Bug 2016/— Chestnut Hill (13) Philadelphia 2006 (A) Fee 40,570 100% Borders 2010/2020 Express 2009/— Abington Towne Center Abington 1998 (A) Fee 216,355 (5) 99% TJ Maxx 2010/2020 Total Mid-Atlantic Region Total Core Properties Target (5) 2,549,070 5,519,378 94% 95% Acadia Realty Trust 2007 Annual Report 20 Shopping Center Location Acquired (A) Interest GLA Year Constructed (C) Ownership Anchor Tenants Occupancy (1) % Current Lease Expiration/ Lease Option Expiration 12/31/07 Opportunity Fund Portfolio Fund I Properties Ohio Granville Centre Virginia Haygood Shopping Center New York Tarrytown Shopping Center VARIOUS REGIONS Kroger/Safeway Portfolio Total Fund I Properties Fund II Properties Illinois Oakbrook New York Liberty Avenue 216th Street Total Fund II Properties Total Opportunity Fund Operating Properties Properties Under Redevelopment Sterling Heights Shopping Center Detroit 161st Street 400 E. Fordham Road Bronx Bronx Pelham Manor Shopping Plaza Westchester Sherman Avenue CityPoint Atlantic Avenue Canarsie Plaza Westport Sheepshead Bay Total Redevelopment Properties New York Brooklyn Brooklyn Brooklyn Westport Brooklyn Columbus 2002 (A) JV (8) 134,997 41% Lifestyle Family Fitness 2017/2027 Virginia Beach 2004 (A) JV (8) 178,533 93% Eckerd Drug 2009/— Farm Fresh 2026/2101 Marshalls 2017/— Westchester 2004 (A) JV (8) 35,291 85% Walgreens 2080/— Various 2003 (A) JV (8) 1,018,100 100% 25 Kroger/Safeway Supermarkets 1,366,921 93% 2009/— Oakbrook 2005 (A) JV (4) (9) 112,000 100% Neiman Marcus 2011/2036 New York New York 2005 (A) 2005 (A) JV (4) (9) JV (9) 17,088 60,000 CVS 2032/2052 NY Dept. of Citywide Admin Svcs 2027/2042 100% 100% 100% 94% 189,088 1,556,009 2004 (A) JV (8) 154,835 69% Burlington Coat Factory 2024/— 2005 (A) 2004 (A) 2004 (A) 2005 (A) 2007 (A) 2007 (A) 2007 (A) 2007 (A) 2007 (A) JV (9) JV (9) LI/JV (4) (9) JV (9) JV (9) JV (9) JV (9) JV (12) JV (12) 223,521 87% City of New York 2011/— Rite-Aid 2026/2046 (11) (11) (11) (11) (11) (11) (11) (11) 378,356 (11) (11) (11) (11) (11) (11) (11) (11) 80% Notes: (6) The GLA for this property includes 28,205 square feet of office space. (1) Does not include space leased for which rent had not yet commenced as of (7) We have a 49% investment in this property. December 31, 2007. (2) Includes a 97,300 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) We are a ground lessee under a long-term ground lease. (5) Includes a 157,616 square foot Target Store that is not owned by the Company. (8) We have invested in this asset through Fund I. (9) We have invested in this asset through Fund II. (10) We have invested in this asset with Ginsburg Development Corp. (GDC). (11) Under redevelopment. (12) We have invested in this asset through Fund III. (13) Property consists of two buildings. 21 Acadia Realty Trust 2007 Annual Report Major Tenants No individual retail tenant accounted for more than 6.3% of minimum rents for the year ended December 31, 2007 or 8.7% of total leased GLA as of December 31, 2007. The following table sets forth certain information for the 20 largest retail tenants based upon minimum rents in place as of December 31, 2007. The table includes leases related to our par- tial interest in 25 anchor-only leases with Kroger and Safeway supermarkets. The amounts below include our pro-rata share of GLA and annualized base rent for our partial ownership interest in properties (GLA and rent in thousands): Number of Stores in Portfolio Total GLA Annualized Base Rent (1) Total Portfolio GLA (2) Annualized Base Rent (2) Percentage of Total Represented by Retail Tenant Retail Tenant A&P (Waldbaum’s) Albertson’s (Shaw’s, Acme) T.J. Maxx (T.J. Maxx, Marshalls, Homegoods) Sears (Sears, Kmart) Wal-Mart Ahold (Stop & Shop) Kroger (3) Safeway (4) Home Depot Circuit City Price Chopper Restoration Hardware Sleepy’s Federated (Macy’s) Walgreens CVS Payless Shoesource Limited Brands JC Penney Borders Total Notes: 5 4 8 5 2 2 12 13 2 2 1 1 5 1 2 4 9 1 1 1 216 220 237 440 210 118 156 132 211 60 77 9 36 73 21 31 29 13 50 19 $ 3,769 3,013 1,853 1,633 1,515 1,299 1,046 1,040 1,010 950 804 781 683 651 615 562 552 510 495 482 4.3% 4.4% 4.7% 8.7% 4.1% 2.3% 3.1% 2.6% 4.2% 1.2% 1.5% 0.2% 0.7% 1.4% 0.4% 0.6% 0.6% 0.3% 1.0% 0.4% 6.3% 5.0% 3.1% 2.7% 2.5% 2.2% 1.8% 1.7% 1.7% 1.6% 1.3% 1.3% 1.1% 1.1% 1.0% 0.9% 0.9% 0.9% 0.8% 0.8% 81 2,358 $ 23,263 46.7% 38.7% (1) Base rents do not include percentage rents (except where noted), additional rents for property expense reimbursements, and contrac- tual rent escalations due after December 31, 2007. (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 opera- tions 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 oper- ations at one other location. Safeway is obligated to pay rent through the full term of all these leases which expire in 2009. Acadia Realty Trust 2007 Annual Report 22 Lease Expirations The following table shows scheduled lease expirations for retail tenants in place as of December 31, 2007, assuming that none of the tenants exercise renewal options. (GLA and Annualized Base Rent in thousands): Core Portfolio: Leases maturing in 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Thereafter Total Number of Leases 106 78 65 52 42 20 24 20 12 20 39 478 Opportunity Fund Portfolios: Leases maturing in Number of Leases 2008 2009 2010 2011 2012 2014 2015 2016 2017 Thereafter Total Note: 23 28 4 11 8 6 2 1 3 9 95 Annualized Base Rent (1) GLA Current Annual Rent $8,134 6,176 6,259 7,416 5,534 4,463 4,806 5,558 1,762 4,701 16,377 $71,186 Percentage of Total Square Feet Percentage of Total 11% 9% 9% 10% 8% 6% 7% 8% 2% 7% 23% 100% 476 550 526 330 505 266 288 336 82 212 1,414 4,985 10% 11% 11% 7% 10% 5% 6% 7% 2% 4% 27% 100% Annualized Base Rent (1) GLA Current Annual Rent $ 523 7,480 190 5,037 748 341 47 111 741 4,668 $ 19,886 Percentage of Total Square Feet Percentage of Total 3% 37% 1% 25% 4% 2% 0% 1% 4% 23% 100% 47 1,036 9 290 44 14 3 8 66 242 1,759 2% 60% 1% 16% 2% 1% 0% 0% 4% 14% 100% (1) Base rents do not include percentage rents, additional rents for property expense reimbursements, nor contractual rent escalations due after December 31, 2007. 23 Acadia Realty Trust 2007 Annual Report Geographic Concentrations The following table summarizes our retail properties by region as of December 31, 2007. (GLA and Annualized Base Rent in thousands): Region Core Properties: New York Region (3) New England Midwest Mid-Atlantic Total Core Properties Opportunity Fund Properties: Midwest (4) Mid-Atlantic (5) New York Region (6) Various (Kroger/Safeway Portfolio) (7) Total Operating GLA (1) Occupied % (2) Annualized Base Rent (2) Annualized Base Rent Per Occupied Square Foot Percentage of Total Represented by Region GLA 19% 22% 13% 46% Annualized Base Rent 35% 14% 13% 38% $ 24,654 $24.67 10,167 9,455 26,910 9.60 13.57 12.07 $ 71,186 $14.28 100% 100% $ 1,488 1,768 4,095 $ 8.86 10.69 38.23 16% 12% 7% 10% 12% 28% 50% 1,018 100% 7,363 7.23 65% 1,032 1,197 742 2,549 5,520 247 179 112 97% 97% 94% 94% 95% 68% 93% 95% Opportunity Fund Properties 1,556 94% $ 14,714 $10.09 100% 100% Fund Redevelopment Properties: Midwest (8) New York Region (9) Total Fund Redevelopment Properties Notes: 155 224 379 69% 87% $ 641 4,531 $ 6.02 23.27 40% 60% 12% 88% 80% $ 5,172 $17.16 100% 100% (1) Property GLA includes a total of 255,000 square feet which is not owned by us. This square footage has been excluded for calcu- lating annualized 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 had not yet com- menced as of December 31, 2007. (3) We have a 49% interest in two partnerships, which together, own the Crossroads Shopping Center. (4) We have a 37.78% interest in future earnings and distributions from Fund I, which owns one property, and a 20% interest in Fund II, which owns one property. (5) We have a 37.78% interest in future earnings and distributions from Fund I, which has a 50% interest in a property. (6) We have a 37.78% interest in future earnings and distributions from Fund I, which owns one property, and a 20% interest in Fund II, which has a 98.6% interest in two properties. (7) Fund I portfolio of 25 triple-net, anchor-only leases with Kroger and Safeway supermarkets. (8) We have a 37.78% interest in future earnings and distributions from Fund I, which has a 50% interest in one property. (9) We have a 20% interest in Fund II, which has a 98.6% interest in one property. Acadia Realty Trust 2007 Annual Report 24 Kroger/Safeway Portfolio In January of 2003, Fund I formed a joint venture (the with terms, including renewal options, averaging in excess of 80 years, which are master leased to a non-affiliated “Kroger/Safeway JV”) with an affiliate of real estate devel- entity. The primary lease terms end during 2009 (“Primary oper and investor AmCap Incorporated (“AmCap”) for the purpose of acquiring a portfolio of 25 supermarket leases for $48.9 million inclusive of the closing and other related acquisition costs. The portfolio, which aggregates approxi- mately 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-stand- ing and all are triple-net leases. The Kroger/Safeway JV acquired the portfolio subject to long-term ground leases Term”). Rental options for the supermarket leases at the end of their Primary Term are at an average rent of $5.13 per square foot and for 10-year increments through 2049. Although there is no obligation for the Kroger/Safeway JV to pay ground rent during the Primary Term, to the extent it exercises an option to renew a ground lease for a prop- erty at the end of the Primary Term, it will be obligated to pay an average ground rent of $1.55 per square foot. The following table sets forth more specific information 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 Notes: Tenant Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Kroger Co. Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Safeway Kroger Co. Total Notes (1) (5) (7) (2) (6) (2) (5) (7) (4) (1) (5) (5) (5) (1) (5) (1) (6) (3) (5) (1) (7) (1) (7) (1) (4) (1) (7) (4) (1) (4) (2) (6) (1) (4) (7) (4) (4) (1) (6) (3) (4) 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 $ 3.07 Rent upon initial option commencement $ 2.40 6.90 5.92 5.90 4.99 5.57 4.84 11.09 8.97 9.57 8.92 6.23 8.94 7.36 6.43 10.29 7.01 6.49 9.29 9.33 7.76 7.56 7.32 7.75 5.86 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 (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. (4) The tenant has exercised its option to renew its lease. (5) The tenant has exercised its option to purchase the fee to this property during 2009. (6) The tenant has not exercised its option to renew the lease. (7) Renewal status pending. 25 Acadia Realty Trust 2007 Annual Report 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 any certainty the amounts involved, management is of the opinion that, when such litigation is resolved, our resulting net 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 (b) Dividends We have determined that for 2007, 51% of the total divi- dends distributed to shareholders represented ordinary income, 15% represented unrecaptured Section 1250 gain and 34% represented Section 1231 gain. Our cash flow is affected by a number of factors, including the revenues received from rental properties, our operating expenses, the interest expense on our borrowings, the ability of lessees to meet their obligations to us and unanticipated capital expenditures. Future dividends paid by us will be at the discretion of the Trustees and will No matter was submitted to a vote of security holders depend on our actual cash flows, our financial condition, through the solicitation of proxies or otherwise during the capital requirements, the annual distribution requirements fourth quarter of 2007. PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON x EQUITY, RELATED STOCK MATTERS ANDx ISSUER PURCHASES OF EQUITY SECURITIESx (a) Market Information The following table shows, for the period indicated, the high and low sales price for our Common Shares as reported on the New York Stock Exchange, and cash divi- dends declared during the two years ended December 31, 2007 and 2006: under the REIT provisions of the Code and such other factors as the Trustees deem relevant. (c) Issuer purchases of equity securities We have an existing share repurchase program that authorizes management, at its discretion, to repurchase up to $20.0 million of our outstanding Common Shares. Through February 29, 2008, we had repurchased 2.1 million Common Shares at a total cost of $11.7 million. All of these Common Shares have been subsequently reissued. The program may be discontinued or extended at any time and there is no assurance that we will purchase the full amount authorized. There were no Common Shares repurchased by us during the fiscal year ended December Quarter Ended High Low Dividend Per Share 31, 2007. (d) Securities authorized for issuance under equity compensation plans The following table provides information related to our 1999 Share Incentive Plan (the “1999 Plan”), 2003 Share Incentive Plan (the “2003 Plan”) and the 2006 Share Incen- tive Plan (the “2006 Plan”) as of December 31, 2007: 2007 March 31, 2007 June 30, 2007 September 30, 2007 December 31, 2007 2006 March 31, 2006 June 30, 2006 September 30, 2006 December 31, 2006 $28.14 $24.12 $0.2000 28.75 27.93 29.00 25.43 21.19 24.03 0.2000 0.2000 0.4325 $24.21 $19.79 $0.1850 23.94 26.70 27.13 19.51 22.70 23.81 0.1850 0.1850 0.2000 At February 29, 2008, there were 321 holders of record of our Common Shares. Acadia Realty Trust 2007 Annual Report 26 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)] 531,738 — 531,738 $9.99 — $9.99 618,041 (1) — 618,041 (1) Equity compensation plans approved by security holders Equity compensation plans not approved by security holders Total Notes: (1) The 1999 Plan authorizes the issuance of options equal to up to 8% of the total Common Shares outstanding from time to time on a fully diluted basis. However, not more than 4,000,000 of the Common Shares in the aggregate may be issued pursuant to the exer- cise of options and no participant may receive more than 5,000,000 Common Shares during the term of the 1999 Plan. The 2003 Plan authorizes the issuance of options equal to up to 4% of the total 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. The 2006 Plan authorizes the issuance of a maximum number of 500,000 Common Shares. No participant may receive more than 500,000 Common Shares during the term of the 2006 Plan. Remaining Common Shares available is as follows: Outstanding Common Shares as of December 31, 2007 Outstanding OP Units as of December 31, 2007 Total Outstanding Common Shares and OP Units 12% of Common Shares pursuant to the 1999 and 2003 Plans Common Shares pursuant to the 2006 Plan Total Common Shares available under equity compensations plans Less: Issuance of Restricted Shares Granted Issuance of Options Granted Number of Common Shares remaining available 32,184,462 642,272 32,826,734 3,939,208 500,000 4,439,208 (1,042,005) (2,779,162) 618,041 27 Acadia Realty Trust 2007 Annual Report (e) Share Price Performance Graph (1) The following graph compares the cumulative total shareholder return for our Common Shares for the period commenc- ing December 31, 2002 through December 31, 2007 with the cumulative total return on the Russell 2000 Index (“Russell 2000”), the NAREIT All Equity REIT Index (the “NAREIT”) and the SNL Shopping Center REITs (the “SNL”) over the same period. Total return values for the Russell 2000, the NAREIT, the SNL and the Common Shares were calculated based upon cumulative total return assuming the investment of $100.00 in each of the Russell 2000, the NAREIT, the SNL and our Common Shares on December 31, 2002, and assuming reinvestment of such dividends. The shareholder return as set forth in the table below is not necessarily indicative of future performance. Comparison of Five-Year Cumulative Total Return among Acadia Realty Trust, the Russell 2000, the NAREIT and the SNL: Period Ending Index Acadia Realty Trust Russell 2000 NAREIT All Equity REIT Index SNL REIT Retail Shopping Ctr Index 12/31/02 12/31/03 12/31/04 12/31/05 12/31/06 12/31/07 100.00 100.00 100.00 100.00 178.76 147.25 137.13 141.78 243.71 174.24 180.44 192.62 311.77 182.18 202.38 210.19 401.39 215.64 273.34 282.93 427.32 212.26 230.45 232.94 (1) The information is this section is not “soliciting material,” is not deemed “filed” with the SEC, and is not to be incorporated by reference into any filing of the Trust under the Securities Act or the Exchange Act, whether made before or after the date hereof and irrespective of any general incorporation language contained in such filing. Acadia Realty Trust 2007 Annual Report 28 5010015020025030035040045050012/31/0712/31/0612/31/0512/31/0412/31/0312/31/02SNLShoppingCenterREITSIndexNAREITAllEquityREITIndexRussell2000AcadiaRealtyTrustIndexValueITEM 6. SELECTED FINANCIAL DATAx The following table sets forth, on a historical basis, our selected financial data. This information should be read in conjunc- tion 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. Funds from operations (“FFO”) amounts for the year ended December 31, 2007 have been adjusted as set forth in “Item 7. Management’s Discussion and Analysis of Finan- cial Condition and Results of Operations – Reconciliation of Net Income to Funds from Operations and Adjusted Funds From Operations.” (dollars in thousands, except per share amounts) 2007 2006 2005 2004 2003 Years ended December 31, OPERATING DATA: Revenues Operating expenses Interest expense Depreciation and amortization Equity in earnings of unconsolidated partnerships Minority interest Income tax provision (benefit) Income from continuing operations Income from discontinued operations Income from extraordinary item (1) $101,569 $ 95,800 $ 93,965 $ 80,283 $ 76,072 48,617 22,775 27,506 6,619 9,063 297 18,056 5,537 3,677 42,734 20,377 25,361 2,559 5,227 (508) 15,622 23,391 — 38,453 16,689 24,697 21,280 (13,946) 2,140 19,320 1,306 — 32,884 14,525 21,607 513 (1,462) — 10,318 9,267 — 31,521 13,389 22,537 985 (4,892) — 4,718 3,135 — Net income $ 27,270 $ 39,013 $ 20,626 $ 19,585 $ 7,853 Basic earnings per share: Income from continuing operations Income from discontinued operations Income from extraordinary item Basic earnings per share Diluted earnings per share: Income from continuing operations Income from discontinued operations Income from extraordinary item Diluted earnings per share Weighted average number of Common Shares outstanding – basic – diluted $ $ $ $ 0.55 0.17 0.11 0.83 0.54 0.17 0.11 0.82 $ $ $ 0.48 0.72 — 1.20 0.48 0.70 — $ $ $ 0.61 0.04 — 0.65 0.60 0.04 — $ 1.18 $ 0.64 $ $ $ $ 0.35 0.32 — 0.67 0.34 0.31 — 0.65 $ $ $ 0.18 0.12 — 0.30 0.18 0.11 — $ 0.29 32,907 33,309 32,502 33,153 31,949 32,214 29,341 29,912 26,640 27,232 Cash dividends declared per Common Share $ 1.0325 $ 0.755 $ 0.7025 $ 0.6525 $ 0.595 BALANCE SHEET DATA: Real estate before accumulated depreciation $854,074 $650,051 $670,817 $ 561,370 $ 504,355 Total assets Total mortgage indebtedness Total convertible notes payable Minority interest in Operating Partnership Minority interests in partially-owned affiliates Total equity OTHER: Funds from Operations, adjusted for extraordinary item (1) (2) Cash flows provided by (used in): Operating activities Investing activities Financing activities See Notes on following page. 999,012 402,903 115,000 4,595 166,516 240,736 851,692 319,507 100,000 8,673 105,064 241,119 841,204 382,510 — 9,204 137,086 220,576 599,724 242,527 — 6,893 75,244 216,924 518,914 248,180 — 7,875 37,681 169,734 $ 44,018 $ 39,953 $ 35,842 $ 30,004 $ 27,664 105,165 (208,869) 87,476 39,627 (58,890) 68,359 50,239 (135,470) 159,425 33,885 (72,860) 40,050 31,031 (76,552) 15,454 29 Acadia Realty Trust 2007 Annual Report Notes: (1) The extraordinary item represents the Company’s share of estimated extraordinary gain related to its private-equity invest- ment in Albertson’s. The Albertson’s entity has recorded an extraordinary gain in connection with the allocation of purchase price to assets acquired. The Company considers its private- equity investments to be investments in operating businesses as opposed to real estate. Accordingly, all gains and losses from private-equity investments are included in FFO, which management believes provides a more accurate reflection of the operating performance of the Company. (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 disclo- sure 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 performance, 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 operations as defined by gen- erally 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 Company’s per- formance or to cash flows as a measure of liquidity. Consis- tent 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 depreci- ation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Acadia Realty Trust 2007 Annual Report 30 Management’s Discussion and Analysis ITEM 7. MANAGEMENT’S DISCUSSION ANDx ANALYSIS OF FINANCIAL CONDITIONx AND RESULTS OF OPERATIONS x Overview As of December 31, 2007, we operated 76 properties, which we own or have an ownership interest in, within our Core Portfolio or within our Opportunity Funds I, II and III. These properties consist of 75 commercial properties, primarily neighborhood and community shopping centers and mixed-use developments, which are located primarily in the Northeast, Mid-Atlantic and Midwestern regions of the United States and one multi-family property located in Southeast region of the United States. Our Core Portfolio consists of 34 properties comprising approximately 5.5 million square feet. Fund I has 29 properties comprising approximately 1.5 million square feet. Fund II has 10 prop- erties, the majority of which are undergoing redevelop- ment and will have approximately two million square feet upon completion of redevelopment activities. The newly created Fund III has two properties, which are undergoing redevelopment and will have approximately 0.3 million square feet upon completion of redevelopment activities. and leasing and/or transactions requiring creative capital structuring to facilitate the transactions. n Partner with private equity investors for the purpose of making investments in operating retailers with sig- nificant embedded value in their real estate assets. n Maintain a strong and flexible balance sheet through conservative financial practices while ensuring access to sufficient capital to fund future growth. Results of Operations Comparison of the year ended December 31, 2007 (“2007”) to the year ended December 31, 2006 (“2006”) (dollars in millions) Revenues: Minimum rents Percentage rents Expense reimbursements Other property income Management fee income Interest income Other Change 2007 2006 $72.1 $63.6 1.2 14.5 0.9 5.6 8.3 1.7 0.6 13.3 1.0 4.1 10.3 0.2 $ $8.5 (0.6) (1.2) 0.1 (1.5) 2.0 (1.5) % 13% (50)% (8)% 11% (27)% 24% (88)% The majority of our operating income derives from the Total revenues $101.6 $95.8 $5.8 6% rental revenues from these properties, including recover- ies from tenants, offset by operating and overhead expenses. As our RCP Venture invests in operating com- panies, we consider these investments to be private- equity, as opposed to real estate investments. Since these are not traditional investments in operating rental real estate, the Operating Partnership invests in these through a taxable REIT subsidiary (“TRS”). The increase in minimum rents was primarily attributable to additional rents following our acquisition of 200 West 54th Street, 145 East Service Road, 2914 Third Avenue and Chestnut Hill (“2006/2007 Acquisitions”) as well as Liberty Avenue and 216th Street being placed in service January 1, 2007 and October 1, 2007, respectively. In addition, mini- mum rents increased as a result of re-tenanting activities Our primary business objective is to acquire and manage across our portfolio. 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: n Own and operate a portfolio of community and neigh- borhood shopping centers and mixed-use properties with a retail component located in markets with strong demographics. Percentage rents decreased primarily as a result of the tem- porary closing of an anchor tenant at Fordham Place during the construction period in 2007. Expense reimbursements for common area maintenance (“CAM”) decreased $0.2 million. During 2007, we com- pleted our multi-year review of CAM billings and resolved the majority of all outstanding CAM billing issues with our tenants. As a result, 2007 was adversely impacted by charges n Generate internal growth within the portfolio through related to settlements and related adjustments totaling aggressive redevelopment, re-anchoring and leasing $1.0 million. This was partially offset by higher CAM recov- activities. n Generate external growth through an opportunistic yet disciplined acquisition program. The emphasis is on targeting transactions with high inherent opportunity for the creation of additional value through redevelopment 31 Acadia Realty Trust 2007 Annual Report ery resulting from increased snow removal costs in 2007. Real estate tax reimbursements decreased $1.0 million, primarily as a result of lower real estate tax expense in 2007 and a $0.4 million real estate tax charge to an anchor tenant for previous years billed during 2006. Management fee income decreased $1.5 million primarily Depreciation expense increased $1.3 million in 2007. This as a result of lower fees earned in connection with Klaff was principally a result of increased depreciation expense management contracts following the disposition of certain following the 2006/2007 Acquisitions and Liberty Avenue assets in 2006 and 2007 and lower management fees from and 216th Street being placed in service during 2007. Amor- our investments in unconsolidated affiliates. tization expense increased $0.8 million in 2007. This was The increase in interest income was attributable to interest income on notes and other advances receivable originated in the second half of 2006 and 2007 as well as higher bal- ances in interest earning assets in 2007. The decrease in other income was primarily attributable to a $1.1 million reimbursement of certain fees by the institutional investors of Fund I for the Brandywine Portfolio in 2006 as well as $0.5 million of additional income related to termina- tion of interest rate swap agreements. (dollars in millions) Operating Expenses: Property operating Real estate taxes General and administrative Depreciation and Change 2007 $15.9 9.7 23.0 2006 $12.8 10.1 19.8 $ $3.1 (0.4) 3.2 amortization 27.5 25.4 2.1 Total operating expenses $76.1 $68.1 $8.0 % 24% (4)% 16% 8% 12% The increase in property operating expenses was primarily primarily attributable to increased amortization of loan costs following our convertible debt issuances in December 2006 and January 2007 as well as increased amortization of loan costs from financing activity in late 2006 and 2007. (dollars in millions) Other: Equity in earnings of unconsolidated affiliates Interest expense Minority interest Income taxes Income from discontinued operations Extraordinary item 2007 2006 $ % Change $6.6 (22.8) 9.1 0.3 $2.6 (20.4) 5.2 (0.5) $4.0 (2.4) 3.9 (0.8) 153% (12)% 75% (160)% 23.4 5.5 3.7 — (17.9) 3.7 (76)% 100% Equity in earnings of unconsolidated affiliates increased as a result of our distributions in excess of our invested capital from both our Albertson’s investment of $2.4 million and our investment in Hitchcock Plaza of $2.4 million. These increases were offset by a decrease in our pro rata share of earnings from our Mervyns investment of $1.3 million. the result of the 2006/2007 Acquisitions, Liberty Avenue Interest expense increased $2.4 million in 2007. This was being placed in service January 1, 2007 and higher snow the result of a $4.9 million increase attributable to higher removal costs of $1.0 million in 2007. The decrease in real estate taxes was due to tax refunds and adjustments of estimates of $0.6 million recorded in 2007 and $0.6 million related to the capitalization of construction period real estate taxes at a property that average outstanding borrowings in 2007 and $0.4 million of costs associated with a loan payoff in 2007. These increases were offset by a $2.9 million decrease resulting from a lower average interest rate on the portfolio mort- gage debt in 2007. was operating in 2006. These decreases were offset by The variance in minority interest is primarily attributable increased real estate tax expense of $0.8 million following to the minority partners’ share of increased fund level fees the 2006/2007 Acquisitions as well as general increases partially offset by $2.6 million representing the minority across the portfolio. The variance in general and administrative expense was partners’ share of the income reported from the equity in earnings of unconsolidated affiliates. attributable to increased compensation expense, including The variance in income tax expense primarily relates to share based compensation of $4.7 million for additional income tax on our share of income and losses from personnel hired in the second half of 2006 and in 2007 Albertson’s and Mervyns. as well as increases in existing employee salaries. In addition, there was an increase of $0.7 million for other overhead expenses following the expansion of our infra- Income from discontinued operations represents activity related to properties sold in 2007 and 2006. structure related to increased fund investments and asset The extraordinary gain in 2007 relates to our share of the management services. These factors were partially offset extraordinary gain, net of income taxes and minority inter- by an increase in capitalized construction salaries due to est, from our Albertson’s investment. This gain was char- higher redevelopment activities in 2007. acterized as extraordinary consistent with the accounting Acadia Realty Trust 2007 Annual Report 32 Management’s Discussion and Analysis continued treatment by Albertson’s which reflected the excess of fair Subsequent to the recapitalization and conversion of inter- value of net assets acquired over the purchase price as an ests from Fund I to GDC in January 2006, the Brandywine extraordinary gain. Comparison of the year ended December 31, 2006 (“2006”) to the year ended December 31, 2005 (“2005”) Portfolio is accounted for under the equity method of accounting for the year ended December 31, 2006. In the following tables, we have excluded the Brandywine Port- folio operations for the year ended December 31, 2005 for purposes of comparability with the year ended December The Brandywine Portfolio operations were consolidated as 31, 2006. part of Fund I for the year ended December 31, 2005. (dollars in millions) Revenues: Minimum rents Percentage rents Expense reimbursements Other property income Management fee income Interest income Other Total revenues 2005 Brandywine 2005 Change from 2005 Adjusted 2006 $ 63.6 1.2 14.5 0.9 5.6 8.3 1.7 $ 95.8 As Reported $ 69.4 1.3 14.4 2.0 3.6 3.3 — $ 94.0 Portfolio $(14.0) (0.6) (2.2) (0.2) 0.5 — — $(16.5) Adjusted $55.4 0.7 12.2 1.8 4.1 3.3 — $77.5 $ $ 8.2 0.5 2.3 (0.9) 1.5 5.0 1.7 $18.3 % 15% 71% 19% (50)% 37% 152% 100% 24% The increase in minimum rents was attributable to addi- Management fee income increased primarily as a result of tional rents following our acquisition of Chestnut Hill, fees earned in connection with the acquisition of the Klaff Clark Diversey, A&P Shopping Plaza, 2914 Third Avenue management contract rights in February 2005 and addi- and Boonton Shopping Center (60% owned) as well as tional management fees earned from our investments in Fund II acquisitions of Sherman Avenue and 161st Street unconsolidated affiliates. in New York and a leasehold interest in Chicago (“2005/ 2006 Acquisitions”). The increase in interest income was attributable to inter- est income on our advances and notes receivable origi- Expense reimbursements for both CAM and real estate nated in 2005 and 2006, as well as higher balances in taxes increased in 2006. CAM expense reimbursements interest earning assets in 2006. increased $0.5 million as a result of higher tenant reim- bursements following the 2005/2006 Acquisitions, offset by a decrease in tenant reimbursements as a result of lower snow removal costs in 2006. Real estate tax reim- bursements increased $1.8 million, primarily as a result of the 2005/2006 Acquisitions, as well as general increases in real estate taxes across the portfolio. The decrease in other property income was the result of receipt of a bankruptcy claim settlement against a former Other income increased as a result of a $1.1 million reimbursement of the Company’s share of certain fees incurred by the institutional investors of Fund I for the Brandywine Portfolio, as well as $0.5 million related to the termination of an interest rate swap in 2006. tenant in 2005. (dollars in millions) 2005 Brandywine 2005 Change from 2005 Adjusted Operating Expenses: Property operating Real estate taxes General and administrative Depreciation and amortization Total operating expenses 2006 $ 12.8 10.1 19.8 25.4 $ 68.1 As Reported $ 13.3 9.0 16.2 24.7 $ 63.2 Portfolio $ (3.4) (0.8) — (2.6) $ (6.8) Adjusted $ 9.9 8.2 16.2 22.1 $56.4 $ $ 2.9 1.9 3.6 3.3 $11.7 % 29% 23% 22% 15% 21% 33 Acadia Realty Trust 2007 Annual Report The increase in property operating expenses was primarily $0.9 million, and $0.9 million of other overhead expenses the result of the recovery of approximately $0.5 million following the expansion of our infrastructure related to related to the settlement of our insurance claim in con- increased investment in development-intensive projects nection with the flood damage incurred at the Mark Plaza in Fund assets and asset management services. in 2005, increased property operating expenses related to the 2005/2006 Acquisitions and higher bad debt expense in 2006. These increases were offset by lower snow removal costs during 2006. Depreciation expense increased $1.4 million in 2006. This was principally a result of increased depreciation expense related to the 2005/2006 Acquisitions. Amortization expense increased $1.9 million, which was primarily the The increase in real estate taxes was due to general combination of an increase in amortization related to the increases in real estate taxes experienced across the port- 2005/2006 Acquisitions, specifically, amortization of tenant folio, as well as increased real estate tax expense related installation costs of $1.0 million, amortization of leasehold to the 2005/2006 Acquisitions. The increase in general and administrative expense was primarily attributable to increased compensation expense of $2.7 million, including stock-based compensation of interest of $0.5 million and amortization of loan costs of $0.2 million. In addition, amortization expense increased $0.2 million related to the write off of certain Klaff man- agement contracts following the disposition of certain related assets in 2006. 2005 As Reported Brandywine Portfolio 2005 Adjusted Change from 2005 Adjusted $ % (dollars in millions) Other: Equity in earnings of unconsolidated affiliates Interest expense Minority interest Income taxes Income from discontinued operations 2006 $ 2.6 (20.4) 5.2 (0.5) $21.3 (16.7) (13.9) 2.1 23.4 1.3 $ 0.9 3.7 5.1 — — $22.2 (13.0) (8.8) 2.1 $ (19.6) (7.4) 14.0 2.6 (88)% (57)% 159% 124% 1.3 22.1 1,700% Equity in earnings of unconsolidated affiliates decreased The variance in income tax expense relates to taxes at the during 2006 primarily as a result of the gains recognized taxable REIT subsidiary (“TRS”) level on our share of gains from the sale of Mervyns assets in 2005. from the sale of Mervyns locations during 2005. Interest expense increased $7.4 million as a result of Income from discontinued operations represents activity higher average outstanding borrowings in 2006. related to properties sold in 2007, 2006 and 2005. Minority interest variance is attributable to the minority partner’s share of gains from the sale of Mervyns assets in 2005. Acadia Realty Trust 2007 Annual Report 34 Management’s Discussion and Analysis continued Reconciliation of Net Income to Funds from Operations and Adjusted Funds from Operations (dollars in thousands) Net income Depreciation of real estate and amortization of leasing costs: Consolidated affiliates, net of minority interests’ share Unconsolidated affiliates Income attributable to minority interest in operating partnership (1) Gain on sale of properties Extraordinary item (net of minority interests’ share and income taxes) (3) Funds from operations (2) Add back: Extraordinary item, net (3) Funds from operations, adjusted for extraordinary item Notes: For the years ended December 31, 2007 2006 2005 2004 2003 $ 27,270 $39,013 $20,626 $19,585 $ 7,853 19,669 1,736 614 (5,271) (3,677) 40,341 3,677 20,206 1,806 803 (21,875) — 39,953 — 16,676 746 416 (2,622) — 35,842 — 16,026 714 375 (6,696) — 30,004 — 18,421 643 747 — — 27,664 — $ 44,018 $39,953 $35,842 $30,004 $ 27,664 (1) Represents income attributable to Common Operating Partnership Units and does not include distributions paid to Series A and B Preferred OP Unitholders. (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 accept- ance 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 performance, 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 operations as defined by generally accepted accounting principles (“GAAP”) and is not indicative of cash available to fund all cash needs, including distributions. It should not be considered as an alternative to net income for the pur- pose of evaluating the Company’s performance or to cash flows as a measure of liquidity. Consistent with the NAREIT definition, the Company defines FFO as net income (computed in accordance with GAAP), excluding gains (losses) from sales of depreciated prop- erty, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. (3) The extraordinary item represents the Company’s share of estimated extraordinary gain related to its private-equity investment in Albertson’s. The Albertson’s entity has recorded an extraordinary gain in connection with the allocation of purchase price to assets acquired. The Company considers its private-equity investments to be investments in operating businesses as opposed to real estate. Accordingly, all gains and losses from private-equity investments are included in FFO, which management believes provides a more accurate reflection of the operating performance of the Company. Liquidity and Capital Resources Uses of Liquidity Our principal uses of liquidity are expected to be for (i) distributions to our shareholders and OP unit holders, (ii) investments which include the funding of our capital committed to our opportunity funds, property acquisitions and redevelopment/re-tenanting activities within our exist- ing portfolio and (iii) debt service and loan repayments. Distributions In order to qualify as a REIT for Federal income tax pur- poses, we must currently distribute at least 90% of our taxable income to our shareholders. For the first three quarters during 2007, we paid a quarterly dividend of $0.20 per Common Share and Common OP Unit. In December of 2007, our Board of Trustees approved and declared an 5.0% increase in our quarterly dividend to $0.21 per Common Share and Common OP Unit for the fourth quarter of 2007, which was paid January 15, 2008. In addition, in December of 2007, our Board of Trustees approved a special dividend of $0.2225 per Common Share in connection with taxable gains arising from property dispositions that was paid on January 15, 2008 to the shareholders of record as of December 31, 2007. Fund I and Mervyns I In September 2001, the Operating Partnership committed $20.0 million to a newly formed opportunity fund with four of our institutional shareholders, who committed $70.0 million, for the purpose of acquiring a total of approximately $300.0 million of community and neigh- borhood shopping centers on a leveraged basis. On January 4, 2006, we recapitalized a one million square foot retail portfolio located in Wilmington, Delaware 35 Acadia Realty Trust 2007 Annual Report (“Brandywine Portfolio”) through a merger of interests Fund II and Mervyns II with affiliates of GDC Properties (“GDC”). The Brandywine Portfolio was recapitalized through a “cash out” merger of the 77.8% interest, which was previously held by the institutional investors in Fund I (the “Investors”) to affili- ates of GDC at a valuation of $164.0 million. The Operat- ing Partnership, through a subsidiary, retained our existing 22.2% interest and continues to operate the Brandywine Portfolio and earn fees for such services. At the closing, the Investors, excluding the Operating Partnership, received a return of all their capital invested in Fund I and preferred return, thus triggering the Operating Partnership’s Promote distribution in all future Fund I distributions and increasing the Operating Partnership’s interest in cash flow and income from 22.2% to 37.8% as a result of the Promote. In June On June 15, 2004, we closed our second opportunity fund, Fund II, and during August 2004, formed Mervyns II with the investors from Fund I as well as two additional institutional investors. With $300.0 million of committed discretionary capital, Fund II and Mervyns II combined expect to be able to acquire up to $900.0 million of real estate assets on a leveraged basis. The Operating Partner- ship is the managing member with a 20% interest in the joint venture. The terms and structure of Fund II are sub- stantially the same as Fund I with the exceptions that the preferred return is 8%. As of December 31, 2007, $182.0 million had been contributed to Fund II, of which the Oper- ating Partnership’s share is $36.4 million. 2006, the Investors received $36.0 million of additional Fund II has invested in the RCP Venture and the New proceeds from this transaction following the replacement York Urban/Infill Redevelopment initiatives and other of bridge financing provided by them with permanent investments as further discussed in “PROPERTY ACQUI- mortgage financing. SITIONS” in Item 1 of this Form 10-K. As of December 31, 2007, Fund I has a total of 29 proper- ties totaling 1.5 million square feet as further discussed in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. RCP Venture The following table summarizes the RCP Venture investments from inception through December 31, 2007: (dollars in millions) Investor Mervyns I and Mervyns II Mervyns Mervyns I and Mervyns II Mervyns add-on Investment Mervyns II Mervyns II Fund II Fund II Mervyns II Total investments Albertson’s Albertson’s add-on investments Shopko Marsh Rex Year Acquired 2004 2005 2006 2006/2007 2006 2006 2007 Operating Partnership Share Invested Capital $ 26.1 Distributions $ 46.0 Invested Capital $ 4.9 Distributions $ 11.3 1.3 20.7 2.8 1.1 0.7 2.7 1.3 53.2 0.8 1.1 — — 0.3 4.2 0.4 0.2 0.1 0.5 0.3 9.8 0.1 0.2 — — $ 55.4 $ 102.4 $ 10.6 $ 21.7 New York Urban/Infill Redevelopment Initiative In September 2004, we, through Fund II, launched our $2.2 million and Fund II, the managing member, has agreed to invest the balance to acquire assets in which Acadia New York Urban Infill Redevelopment initiative. During P/A agrees to invest. Operating cash flow is generally to 2004, Fund II, together with an unaffiliated partner, P/A, be distributed pro-rata to Fund II and P/A until each has formed Acadia P/A (“Acadia P/A”) for the purpose of received a 10% cumulative return and then 60% to Fund acquiring, constructing, developing, owning, operating, II and 40% to P/A. Distributions of net refinancing and leasing and managing certain retail real estate properties net sales proceeds, as defined, follow the distribution of in the New York City metropolitan area. P/A has agreed operating cash flow except that unpaid original capital is to invest 10% of required capital up to a maximum of returned before the 60%/40% split between Fund II and Acadia Realty Trust 2007 Annual Report 36 Management’s Discussion and Analysis continued P/A, respectively. Upon the liquidation of the last property portion of its previous distributions, as defined, until Fund investment of Acadia P/A, to the extent that Fund II has II has received an 18% IRR. To date, Fund II has invested not received an 18% internal rate of return (“IRR”) on in nine projects, eight of which are in conjunction with all of its capital contributions, P/A is obligated to return a P/A, as follows: Location Queens Manhattan Property Liberty Avenue (1) (2) 216th Street (3) Pelham Manor Shopping Center (1) Westchester 161st Street 400 East Fordham Road Canarsie Plaza 4650 Broadway CityPoint (1) Atlantic Avenue Bronx Bronx Brooklyn Manhattan Brooklyn Brooklyn Total Notes: Year Acquired 2005 2005 2004 2005 2004 2007 2005 2007 2007 Purchase Price $ 14.5 27.5 — 49.0 30.0 21.0 25.0 29.0 5.0 $201.0 Redevelopment (dollars in millions) Anticipated Additional Costs $ — — 45.0 16.0 90.0 49.0 30.0 296.0 18.0 $544.0 Estimated Completion Completed Completed Second half 2008 First half 2009 First half 2009 First half 2009 Second half 2009 (4) Second half 2009 Square Feet Upon Completion 125,000 60,000 320,000 232,000 285,000 323,000 216,000 600,000 110,000 2,271,000 (1) Fund II acquired a leasehold interest at this property. (2) Liberty Avenue redevelopment is complete. The purchase price includes redevelopment costs of $14.5 million. (3) 216th Street redevelopment is complete. The purchase price includes redevelopment costs of $20.5 million. (4) To be determined. Fund III In May 2007, we closed on our third opportunity fund, in Fund III. The terms and structure of Fund III are sub- stantially the same as the previous Funds, including the Fund III with 14 institutional investors, including a majority Promote structure, with the exception that the Preferred of the investors from Fund I and Fund II. With $503.0 Return is 6%. million of committed discretionary capital, Fund III expects to be able to acquire or develop approximately $1.5 billion of assets on a leveraged basis. The Operating Partner- ship’s share of the committed capital is $100.0 million and it is the sole managing member with a 19.9% interest Fund III has invested in the New York Urban/Infill Rede- velopment initiatives and another investment as further discussed in “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K. The projects are as follows: Property Sheepshead Bay Main Street Total Location Brooklyn Westport, CT Year Acquired 2007 2007 Purchase Price $ 20.0 17.0 $ 37.0 Redevelopment (dollars in millions) Anticipated Additional Costs $ 89.0 6.0 $ 95.0 Estimated Completion To be determined To be determined Square Feet Upon Completion 240,000 30,000 270,000 Other Investments During 2005, 2006 and 2007, we made the following (iii) $3.2 million for Boonton Shopping Center (iv) $16.0 million for Chestnut Hill other core portfolio investments as further discussed in (v) $18.5 million for 2914 Third Avenue “PROPERTY ACQUISITIONS” in Item 1 of this Form 10-K: (vi) $36.4 million for West 54th Street (i) $16.8 million in Amboy Road (ii) $9.8 million for Clark/Diversey (vii) $17.0 million for East Service Road 37 Acadia Realty Trust 2007 Annual Report Property Development, Redevelopment and Expansion Our redevelopment program focuses on selecting well- amounted to approximately $10.0 million. We anticipate that cash flow from operating activities will continue to provide adequate capital for all of our debt service payments, recur- located neighborhood and community shopping centers ring capital expenditures and REIT distribution requirements. and creating significant value through re-tenanting and On January 5, 2006, we made a distribution of $42.7 mil- property redevelopment. During 2006, we commenced the redevelopment and re-tenanting of the Bloomfield Town Square, located in Bloomfield Hills, Michigan. A former outparcel building, occupied by Chrysler Dodge, was demolished and replaced with a 17,500 square foot building occupied by Drexel Heritage and Panera Bread. The new tenants opened and commenced paying rent during the third and fourth quarters of 2006, and are paying base rent at a 127% increase over that of Chrysler Dodge. In addition, we have re-tenanted approximately 26,000 square feet to Circuit City, which commenced paying rent in September of 2007 at a 79% increase over that of the former tenants. Total costs for this project was $4.6 million. Additionally, for the year ended December 31, 2007, we currently estimate that capital outlays of approximately $2.5 million to $3.5 million will be required for tenant improve- lion utilizing a $42.7 million distribution we received from an unconsolidated affiliate on December 29, 2005. Issuance of Convertible Notes During December of 2006 and January of 2007, we issued $115.0 million of 3.75% Convertible Notes. These notes were issued at par and are due in 2026. The $112.1 million in proceeds, net of related costs, were used to retire vari- able rate debt, fund capital commitments and general company purposes. Shelf Registration Statements and Issuance of Equity During January 2007, we filed a shelf registration on Form S-3 providing offerings for up to a total of $300.0 million of Common Shares, Preferred Shares and debt securities. To date, we have not issued any securities pursuant to this shelf registration. ments, related renovations and other property improvements. In addition, we have $46.7 million of remaining capacity 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 and Fund III as well as new funds that we may establish in the future, as the primary vehicles for our future acquisitions, including investments in the RCP Venture and New York Urban/Infill Redevelop- ment initiative. Additional sources of capital for funding property acquisitions, development, redevelopment, expan- sion, re-tenanting, tenanting, RCP investments and New York Urban/Infill are expected to be obtained primarily from (i) the issuance of public equity or debt instruments, (ii) cash on hand, (iii) additional debt financings, (iv) unrelated member capital contributions and (v) future sales of exist- ing properties. As of December 31, 2007, we had a total of approximately $202.3 million of additional capacity under existing debt facilities, cash and cash equivalents on hand of $123.3 million, and 10 properties that are unencum- to issue equity under the shelf registration statement we filed in November 2004. Financing and Debt At December 31, 2007, mortgage and convertible notes payable aggregated $517.0 million, net of unamortized premium of $0.9 million, and were collateralized by 49 properties and related tenant leases. Interest rates on our outstanding indebtedness ranged from 3.75% to 8.5% with maturities that ranged from March 2008 to November 2032. Taking into consideration $34.3 million of notional principal under variable to fixed-rate swap agreements currently in effect, as of December 31, 2007 $401.4 million of the portfolio, or 78%, was fixed at a 5.2% weighted average interest rate and $115.6 million, or 22% was floating at a 6.0% weighted average interest rate. There is $92.2 million of debt maturing in 2008 at weighted average interest rates of 5.8%. We intend to refinance the indebtedness or select other alternatives based on market conditions at that time. bered and available as potential collateral for future bor- Reference is made to Note 7 and Note 8 in the Notes to rowings. In addition, during 2007, we, through our RCP Consolidated Financial Statements included in this Form Venture, received cash distributions totaling approximately 10-K for a summary of the financing and refinancing trans- $53.2 million from our ownership position in Albertson’s. actions since December 31, 2006. The Operating Partnership’s share of these distributions Acadia Realty Trust 2007 Annual Report 38 Management’s Discussion and Analysis continued Asset Sales Asset sales are an additional source of liquidity for us. During December of 2007, we sold an apartment complex Contractual Obligations and Other Commitments At December 31, 2007, maturities on our mortgage notes in Columbia Missouri and during November and December ranged from March 2008 to November 2032. In addition, of 2006, we sold the Soundview Marketplace, Bradford we have non-cancelable ground leases at seven of our Towne Center, Greenridge Plaza, Luzerne Street Shopping shopping centers. We lease space for our White Plains Center and Pittston Plaza. During 2005 we sold the Berlin corporate office for a term expiring in 2015. The following Shopping Center. These sales are discussed in “ASSET table summarizes our debt maturities and obligations under SALES AND CAPITAL/ASSET RECYCLING” in Item 1 of non-cancelable operating leases of December 31, 2007: this Form 10-K. (dollars in millions) Contractual obligation Future debt maturities Interest obligations on debt Operating lease obligations Total Payments due by period Less than 1 year 1 to 3 years 3 to 5 years More than 5 years $ 92.2 $ 64.9 $143.1 $ 216.8 23.7 3.9 40.0 10.2 31.4 11.2 51.0 101.4 $119.8 $ 115.1 $185.7 $ 369.2 Total $517.0 146.1 126.7 $789.8 During May of 2007, we closed on our third opportunity n The Operating Partnership has a 4.9% interest in City- fund, Fund III. The Operating Partnership’s share of Fund Point, a Fund II investment, of which the Operating Part- III’s $503.0 million committed capital is $100.0 million. nership’s pro-rata share of mortgage debt (net of Fund II In conjunction with the redevelopment of our core portfolio and opportunity fund properties, we have entered into con- struction commitments aggregating approximately $47.8 minority interest share), was $1.7 million as of December 31, 2007. This loan bears interest at LIBOR plus 120 basis points and matures on June 13, 2008. million with general contractors as of December 31, 2007. n The Operating Partnership has an 18.9% interest in Off Balance Sheet Arrangements We have investments in the following joint ventures for the purpose of investing in operating properties. We account for these investments using the equity method of accounting as we have a non-controlling interest. As such, our financial statements reflect our share of income from two Fund I investments of which the Operating Partner- ship’s pro-rata share of mortgage debt (net of the Fund I minority interest share), was $3.2 million as of Decem- ber 31, 2007. These loans carry a weighted average interest rate of 6.21% and both loans mature during August 2010. but not the assets and liabilities of these joint ventures. In addition, we have arranged for the provision of five n The Operating Partnership owns a 49% interest in two partnerships which own the Crossroads Shopping Center (“Crossroads”). The Operating Partnership’s pro rata share of Crossroads mortgage debt was $31.4 million as of December 31, 2007. This fixed-rate debt bears interest at 5.4% and matures in December 2014. n The Operating Partnership owns a 22.2% investment in various entities which own the Brandywine Portfolio. The Operating Partnership’s pro-rata share of Brandy- wine debt was $36.9 million as of December 31, 2007 with a fixed interest rate of 5.99%. These loans mature on July 1, 2016. separate letters of credit in connection with certain leases and investments. As of December 31, 2007, there were no outstanding balances under any of the letters of credit. If the letters of credit were fully drawn, the combined maximum amount of exposure would be $12.2 million. Historical Cash Flow The following table compares the historical cash flow for the year ended December 31, 2007 (“2007”) with the cash flow for the year ended December 31, 2006 (“2006”). 39 Acadia Realty Trust 2007 Annual Report Years Ended December 31, 2007 2006 Variance Critical Accounting Policies Management’s discussion and analysis of financial condi- (dollars in millions) Net cash provided by operating activities Net cash used in $ 105.2 $ 39.6 $ 65.6 investing activities (208.9) (58.9) (150.0) Net cash provided by financing activities 87.5 68.4 19.1 Total $ (16.2) $ 49.1 $ (65.3) A discussion of the significant changes in cash flow for 2007 versus 2006 is as follows: The variance in net cash provided by operating activities resulted from an increase of $23.5 million in operating income before non-cash expenses in 2007, which was primarily due to the increase of $33.4 million in distribu- tions of operating income from unconsolidated affiliates tion and results of operations is based upon our consoli- dated financial statements, which have been prepared in accordance with U.S, GAAP. The preparation of these con- solidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, 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 fol- lowing critical accounting policies affect the significant judgments and estimates used by us in the preparation of our consolidated financial statements. as a result of the distributions from Albertson’s in 2007 as well as those factors discussed in this Item 7. In addition, Valuation of Property Held for Use and Sale On a quarterly basis, we review the carrying value of both a net increase in cash of $42.1 million resulted from properties held for use and for sale. We perform the changes in operating assets and liabilities, primarily other impairment analysis by calculating and reviewing net oper- assets, that was the result of the repayment of notes ating income on a property-by-property basis, we evaluate relating to certain transactions in 2007 as well as an leasing projections and perform other analyses to conclude increase in accrued expenses and other liabilities. whether an asset is impaired. We record impairment losses The increase in net cash used in investing activities resulted from $118.0 million of additional expenditures for real estate acquisitions, development and tenant installations in 2007, $12.1 million of additional invest- ments in unconsolidated affiliates, primarily CityPoint, in 2007, $9.9 million of additional collections of notes receiv- able in 2006 as well as an additional $18.8 million of pro- ceeds from sales in 2006 and the repayment of $19.0 million of our preferred equity investment in 2006. These net increases were offset by $29.6 million of additional notes receivable originated in 2006. 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. For properties held for sale, we reduce our carrying value to the fair value less costs to sell. For the years ended December 31, 2007 and 2006, no impairment losses were recognized. 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. Management does not believe that the The increase in net cash provided by financing activities value of any properties in its portfolio was impaired as of resulted from an increase of $65.8 million of contributions December 31, 2007 or 2006. from partners and members and minority interests in par- tially-owned affiliates in 2007, as well as additional cash of $62.6 million from borrowings in 2007. These increases were offset by an additional $85.0 million in cash received from the issuance of convertible debt in 2006 and an addi- tional $27.3 million of distributions to partners and mem- bers in 2007. Bad Debts We maintain an allowance for doubtful accounts for esti- mated losses resulting from the inability of tenants to make payments on arrearages in billed rents, as well as the likeli- hood 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, 2007, we had Acadia Realty Trust 2007 Annual Report 40 Management’s Discussion and Analysis continued recorded an allowance for doubtful accounts of $3.1 million. The Company makes estimates of the uncollectability If the financial condition of our tenants were to deteriorate, of its accounts receivable related to tenant revenues. An resulting in an impairment of their ability to make payments, allowance for doubtful accounts has been provided against additional allowances may be required. certain tenant accounts receivable that are estimated to Real Estate Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Construction in progress includes costs for significant property expansion and redevelopment. Depreciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for buildings, the shorter of the useful life or lease term for tenant improvements and five years for furniture, fixtures and equipment. Expendi- tures for maintenance and repairs are charged to opera- tions as incurred. be uncollectible. Once the amount is ultimately deemed to be uncollectible, it is written off. Interest income from notes receivable is recognized on an accrual basis based on the contractual terms of the notes. The Company reviews notes receivable on a quar- terly basis to determine collectability. Inflation Our long-term leases contain provisions designed to miti- gate the adverse impact of inflation on our net income. Such provisions 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 Upon acquisitions of real estate, we assess the fair value are often related to increases in the consumer price index of acquired assets (including land, buildings and improve- or similar inflation indexes. In addition, many of our leases ments, and identified intangibles such as above and below are for terms of less than 10 years, which permits us to market leases and acquired in-place leases and customer seek to increase rents upon re-rental at market rates if relationships) and acquired liabilities in accordance with current rents are below the then existing market rates. Statement of Financial Accounting Standards (“SFAS”) Most of our leases require the tenants to pay their share No. 141, “Business Combinations” and SFAS No. 142, of operating expenses, including common area mainte- “Goodwill and Other Intangible Assets,” and allocate pur- nance, real estate taxes, insurance and utilities, thereby chase price based on these assessments. We assess fair reducing our exposure to increases in costs and operating value based on estimated cash flow projections that utilize expenses resulting from inflation. appropriate discount and capitalization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical oper- ating results, known trends, and market/economic condi- tions that may affect the property. Revenue Recognition and Accounts and Notes 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, beginning when the tenant takes possession of the space. Certain of these leases also provide for percentage rents based upon the level of sales achieved by the tenant. Percentage rent is recognized in the period when the tenants’ sales break- point is met. In addition, leases typically provide for the reimbursement to the Company of real estate taxes, insur- ance and other property operating expenses. These reim- bursements are recognized as revenue in the period the expenses are incurred. Recently Issued Accounting Pronouncements Reference is made to the Notes to Consolidated Financial Statements which begins on page 60 of this Form 10-K. ITEM 7A. QUANTITATIVE AND QUALITATIVEx DISCLOSURES ABOUT MARKET RISKx 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 interest rates primarily through the use of fixed-rate debt and interest rate swap agreements. As of December 31, 2007, we had total mortgage debt of $517.0 million of which $401.4 million, or 78%, was fixed-rate, inclusive of interest rate swaps, and $115.6 million, or 22%, was 41 Acadia Realty Trust 2007 Annual Report variable-rate based upon LIBOR plus certain spreads. As The following table sets forth information as of December of December 31, 2007, we were a party to four interest 31, 2007 concerning our long-term debt obligations, rate swap transactions and one interest rate cap transac- including principal cash flows by scheduled maturity and tion to hedge our exposure to changes in interest rates weighted average interest rates of maturing amounts with respect to $34.3 million and $30.0 million of LIBOR- (dollars in millions): based variable-rate debt, respectively. Consolidated mortgage debt: Year 2008 2009 2010 2011 2012 Thereafter Scheduled Amortization $ 6.0 6.1 1.7 2.1 2.2 16.4 $ 34.5 Maturities $ 86.2 47.3 9.8 129.8 9.0 200.4 $ 482.5 Mortgage debt in unconsolidated partnerships (at our pro-rata share): Year 2008 2009 2010 2011 2012 Thereafter Scheduled Amortization $ 0.4 0.5 0.5 0.5 0.5 1.6 $ 4.0 Maturities $ 1.7 — 3.1 — — 64.3 $69.1 Total $ 92.2 53.4 11.5 131.9 11.2 216.8 $ 517.0 Total $ 2.1 0.5 3.6 0.5 0.5 65.9 $73.1 Weighted Average Interest Rate 5.8% 6.3% 6.1% 4.0% 5.9% 5.6% Weighted Average Interest Rate 5.8% 5.4% 6.1% 5.4% 5.4% 5.7% Of our total consolidated and our pro-rata share of uncon- As of December 31, 2007 and 2006, we had notes receiv- solidated outstanding debt, $94.3 million and $53.9 million able of $57.7 million and $36.0 million, respectively. Given will become due in 2008 and 2009, respectively. As we the short term nature of the notes and the fact that several intend on refinancing some or all of such debt at the then- of the notes are demand notes, we have determined that existing market interest rates which may be greater than the carrying value of the notes receivable approximates the current interest rate, our interest expense would fair value. increase by approximately $1.4 million annually if the inter- est rate on the refinanced debt increased by 100 basis points. Interest expense on our variable debt of $115.6 ITEM 8. FINANCIAL STATEMENTS ANDx SUPPLEMENTARY DATAx million as of December 31, 2007 would increase $1.2 mil- The financial statements beginning on page 52 are incor- lion if LIBOR increased by 100 basis points. We may seek porated herein by reference. 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 additional variable-rate debt through inter- est rate swaps and protection agreements, or other means. ITEM 9. CHANGES IN AND DISAGREEMENTSx WITH ACCOUNTANTS ON ACCOUNTINGx AND FINANCIAL DISCLOSUREx None. Based on our outstanding debt balances as of December ITEM 9A. CONTROLS AND PROCEDURESx 31, 2007, the fair value of our total outstanding debt would decrease by approximately $19.0 million if interest rates increase by 1%. Conversely, if interest rates decrease by 1%, the fair value of our total outstanding debt would increase by approximately $20.4 million. (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 effec- tiveness of our disclosure controls and procedures. Based Acadia Realty Trust 2007 Annual Report 42 on that evaluation, the Chief Executive Officer and Chief assessment, we used the criteria set forth in the frame- Financial Officer concluded that our disclosure controls work in Internal Control–Integrated Framework issued and procedures were effective as of December 31, 2007 by the Committee of Sponsoring Organizations of the to provide reasonable assurance that information required Treadway Commission. Based on our evaluation under to be disclosed by us in reports that we file or submit the framework in Internal Control–Integrated Framework, under the Exchange Act is recorded, processed, summa- our management concluded that our internal control over rized, and reported within the time periods specified in financial reporting was effective as of December 31, 2007 SEC rules and forms, and is accumulated and communi- to provide reasonable assurance regarding the reliability cated to management, including our Chief Executive of financial reporting and the preparation of financial state- Officer and Chief Financial Officer, as appropriate to allow ments for external reporting purposes in accordance with timely decisions regarding required disclosure. U.S. generally accepted accounting principles. (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 manage- ment, including our principal executive officer and principal financial officer, we conducted an evaluation of the effec- tiveness of our internal control over financial reporting as of December 31, 2007 as required by the Securities Exchange Act of 1934 Rule 13a-15(c). In making this 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 internal control over financial reporting as of December 31, 2007 which appears in paragraph (b) of this item 9A. Acadia Realty Trust White Plains, New York February 29, 2008 43 Acadia Realty Trust 2007 Annual Report (b) Attestation report of the independent registered public accounting firm The Shareholders and Trustees of Acadia Realty Trust We have audited Acadia Realty Trust and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organiza- tions 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 included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on 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 effec- tive internal control over financial reporting was maintained in all material respects. Our audit included obtaining an under- standing of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control, based on the assessed risk. Our audit also included 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 gener- ally accepted accounting principles. A company’s internal control over financial reporting includes those policies and proce- dures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as neces- sary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding 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, Acadia Realty Trust and subsidiaries maintained in all material respects effective internal control over finan- cial reporting as of December 31, 2007, 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, 2007 and 2006 and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007 and our report dated February 29, 2008 expressed an unqualified opinion thereon. /s/ BDO Seidman, LLP New York, New York February 29, 2008 (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, 2007 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. ITEM 9B. OTHER INFORMATIONx None Acadia Realty Trust 2007 Annual Report 44 PART III In accordance with the rules of the SEC, certain information required by Part III is omitted and is incorporated by refer- ence into this Form 10-K from our definitive proxy statement relating to our 2008 annual meeting of stockholders (our “2008 Proxy Statement”) that we intend to file with the SEC no later than April 29, 2008. ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEx The information under the following headings in the 2008 Proxy Statement is incorporated herein by reference: n “PROPOSAL 1 — ELECTION OF TRUSTEES” n “MANAGEMENT” n “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” ITEM 11. EXECUTIVE COMPENSATIONx The information under the following headings in the 2008 Proxy Statement is incorporated herein by reference: n “ACADIA REALTY TRUST COMPENSATION COMMITTEE REPORT” n “COMPENSATION DISCUSSION AND ANALYSIS” n “EXECUTIVE AND TRUSTEE COMPENSATION” n “COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION” ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENTx The information under the heading “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in the 2008 Proxy Statement is incorporated herein by reference. The information under Item 5 under the heading “(d) Securities authorized for issuance under equity compensation plans” is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCEx The information under the following headings in the 2008 Proxy Statement is incorporated herein by reference: n “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” n “PROPOSAL 1 — ELECTION OF TRUSTEES — Trustee Independence” ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESx The information under the heading “AUDIT COMMITTEE INFORMATION” in the 2008 Proxy Statement is incorporated herein by reference. 45 Acadia Realty Trust 2007 Annual Report PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULESx 1. Financial Statements: See “Index to Financial Statements” at page 52 below. 2. Financial Statement Schedule: See “Schedule III — Real Estate and Accumulated Depreciation” at page 89 below. 3. Exhibits: 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 10.33 10.34 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) (21) 2003 Share Option Plan (16) (21) 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 Partnership, 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 dated October 1998 (6) (21) Amendment to employment agreement between the Company and Kenneth F. Bernstein dated January 19, 2007 (26) (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 September 21, 1999 (7) First Amendment to Severance Agreements between the Company and Joel Braun, Executive Vice President and Chief Investment Officer, Michael Nelsen, Senior Vice President and Chief Financial Officer, Robert Masters, Senior Vice Presi- dent, General Counsel, Chief Compliance Officer and Secretary and Joseph Hogan, Senior Vice President and Director of Construction dated January 19, 2007 (21) (26) 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) Acadia Realty Trust 2007 Annual Report 46 Exhibit No. Description 10.44 10.45 10.46 10.47 10.51 10.52 10.53 10.54 10.55 10.56 10.57 10.58 10.59 10.60 10.61 10.62 10.63 10.64 10.65 10.66 10.67 10.68 10.69 10.70 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) 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 Green- wich 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 Mort- gage, Inc. dated December 9, 2005 (22) Agreement and Plan Of Merger Dated as of December 22, 2005 by and among Acadia Realty Acquisition I, LLC, Ara Btc LLC, ARA MS LLC, ARA BS LLC, ARA BC LLC and ARA BH LLC, Acadia Investors, Inc., AII BTC LLC, AII MS LLC, AII BS LLC, AII BC LLC And AII BH LLC, Samuel Ginsburg 2000 Trust Agreement #1, Martin Ginsburg 2000 Trust Agreement #1, Martin Ginsburg, Samuel Ginsburg and Adam Ginsburg, and GDC SMG, LLC, GDC Beechwood, LLC, Aspen Cove Apart- ments, LLC and SMG Celebration, LLC (23) Amended and Restated Loan Agreement between Acadia Realty Limited Partnership, as lender, and Levitz SL Woodbridge, L.L.C., Levitz SL St. Paul, L.L.C., Levitz SL La Puente, L.L.C., Levitz SL Oxnard, L.L.C., Levitz SL Willowbrook, L.L.C., Levitz SL Northridge, L.L.C., Levitz SL San Leandro, L.L.C., Levitz SL Sacramento, L.L.C., HL Brea, L.L.C., HL Deptford, L.L.C., HL Hayward, L.L.C., HL San Jose, L.L.C., HL Scottsdale, L.L.C., HL Torrance, L.L.C., HL Irvine 1, L.L.C., HL West Covina, L.L.C., HL Glendale, L.L.C. and HL Northridge, L.L.C., each a Delaware limited liability company, Levitz SL Lang- horne, L.P. and HL Fairless Hills, L.P., each a Delaware limited partnership (each, together with its permitted successors and assigns, a “Borrower,” and collectively, together with their respective permitted successors and assigns,“ Borrow- ers”), dated June 1, 2006 (24) Consent and Assumption Agreement between Thor Chestnut Hill, LP, Thor Chestnut Hill II, LP, Acadia Chestnut, LLC, Aca- dia Realty Limited Partnership and Wells Fargo Bank, N.A. dated June 9, 2006, original Mortgage and Security Agreement between Thor Chestnut Hill, LP and Thor Chestnut Hill II, LP and Column Financial, Inc. dated June 5, 2003 and original Assignment of Leases and Rents from Thor Chestnut Hill, LP and Thor Chestnut Hill II, LP to Column Financial, Inc. dated June 2003 (24) Loan Agreement and Promissory Note between RD Woonsocket Associates, L.P. and Merrill Lynch Mortgage Lending, Inc. dated September 8, 2006 (25) Amended and Restated Revolving Loan Agreement dated as of December 19, 2006 by and among RD Abington Associ- ates LP, Acadia Town Line, LLC, RD Methuen Associates LP, RD Absecon Associates, LP, RD Bloomfield Associates, LP, RD Hobson Associates, LP, and RD Village Associates LP, and Bank of America, N.A. and the First Amendment to Amended and Restated Revolving Loan Agreement dated February, 2007 (26) Loan Agreement between Bank of America, N.A. and RD Branch Associates, LP dated December 19, 2006 (26) Loan Agreement between 239 Greenwich Associates Limited Partnership and Wachovia Bank, National Association dated January 25, 2007 (28) Revolving Credit Agreement between Acadia Realty Limited Partnership and Washington Mutual Bank dated March 29, 2007 (28) Loan Agreement between Acadia Merrillville Realty, L.P. and Bear Stearns Commercial Mortgage, Inc dated July 2, 2007 (29) Promissory Note between Acadia Merrillville Realty, L.P. and Bear Stearns Commercial Mortgage, Inc dated July 2, 2007 (29) Loan Agreement Note between APA 216th Street and Bank of America, N.A. dated September 11, 2007 (29) Promissory Note between APA 216th Street and Bank of America, N.A. dated September 11, 2007 (29) Acquisition and Project Loan agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 (30) Building Loan Agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 (30) Revolving credit agreement between Acadia Strategic Opportunity Fund III, LLC. and Bank of America, N.A. dated October 10, 2007 (30) Mortgage Consolidation and Modification Agreement between Acadia Tarrytown LLC and Anglo Irish Bank Corporation, PLC dated October 30, 2007 (30) 47 Acadia Realty Trust 2007 Annual Report 10.71 10.72 10.73 10.74 10.75 21 23.1 31.1 31.2 32.1 32.2 99.1 99.2 99.3 99.4 99.5 99.6 Notes: (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) Project Loan Agreement between P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 (30) Building Loan Agreement P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 (30) Project Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated Decem- ber 26, 2007 (30) Building Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 26, 2007 (30) Certain information regarding the compensation arrangements with certain officers of registrant (Incorporated by reference to Item 5.02 of the registrant’s Form 8-K filed with the SEC on February 4, 2008) List of Subsidiaries of Acadia Realty Trust (30) Consent of Registered Public Accounting Firm to incorporation by reference its reports into Forms S-3 and Forms S-8 (30) 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 (30) 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 (30) 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 (30) 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 (30) 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) 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 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) 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 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Form 8-K filed on April 20, 1998 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 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 Acadia Realty Trust 2007 Annual Report 48 Notes continued (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (27) (28) (29) Incorporated by reference to the copy thereof filed as an Exhibit to Yale University’s Schedule 13D filed on September 25, 2002 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 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 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 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 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 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 Management contract or compensatory plan or arrangement. 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, 2005 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on January 4, 2006 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, 2006 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, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Current Report on Form 8-K filed on January 19, 2007 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, 2006 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed for the quarter ended March 31, 2007 Incorporated by reference to the copy thereof filed as an Exhibit to the Company’s Quarterly Report on Form 10-Q filed for the quarter ended September 30, 2007 (30) Filed herewith 49 Acadia Realty Trust 2007 Annual Report 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 Senior Vice President and Chief Financial Officer /s/ Jonathan W. Grisham Jonathan W. Grisham Senior Vice President and Chief Accounting Officer Dated: February 29, 2008 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/ William T. Spitz (William T. Spitz) /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) Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) Trustee Trustee Trustee Trustee Trustee Trustee Trustee Date February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 February 29, 2008 Acadia Realty Trust 2007 Annual Report 50 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 10.67 10.68 10.69 10.70 10.71 10.72 10.73 10.74 21 23.1 31.1 31.2 32.1 32.2 Acquisition and Project Loan agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 Building Loan Agreement between Acadia – PA East Fordham Acquisitions, LLC and Eurohypo AG, New York Branch dated October 5, 2007 Revolving credit agreement between Acadia Strategic Opportunity Fund III, LLC. and Bank of America, N.A. dated October 10, 2007 Mortgage Consolidation and Modification Agreement between Acadia Tarrytown LLC and Anglo Irish Bank Corporation, PLC dated October 30, 2007 Project Loan Agreement between P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 Building Loan Agreement P/A – Acadia Pelham Manor, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 10, 2007 Project Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 26, 2007 Building Loan Agreement between Acadia Atlantic Avenue, LLC and Bear Stearns Commercial Mortgage, Inc. dated December 26, 2007 List of Subsidiaries of Acadia Realty Trust Consent of Registered Public Accounting Firm to incorporation by reference its reports into Forms S-3 and Forms 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 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 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 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 51 Acadia Realty Trust 2007 Annual Report ACADIA REALTY TRUST AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Consolidated Balance Sheets as of December 31, 2007 and 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54 Consolidated Statements of Income for the years ended December 31, 2007, 2006 and 2005. . . . . . . . . . . . . . . . . . . 55 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . 56 Consolidated Statements of Cash Flows for the years ended December 31, 2007, 2006 and 2005 . . . . . . . . . . . . . . . 57 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60 Schedule III – Real Estate and Accumulated Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 89 Acadia Realty Trust 2007 Annual Report 52 Report of Independent Registered Public Accounting Firm The Shareholders and Trustees of Acadia Realty Trust We have audited the accompanying consolidated balance sheets of Acadia Realty Trust and subsidiaries (the “Company”) as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2007. In connection with our audits of the financial statements we have also audited the accompanying financial statement schedule listed on page 52. These financial state- ments 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 also includes examining, on a test basis, evidence sup- porting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedules. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Acadia Realty Trust and subsidiaries at December 31, 2007, and 2006 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2007, in conformity with generally accepted accounting principles in the United States of America. Also, in our opinion, the financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents 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), Acadia Realty Trust and subsidiaries’ internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) and our report dated February 29, 2008 expressed an unqualified opinion thereon. As explained in Note 1 to the financial statements, effective January 1, 2006, Acadia Realty Trust and subsidiaries adopted the provisions of Staff Accounting Bulletin 108, Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements. BDO Seidman, LLP New York, New York February 29, 2008 53 Acadia Realty Trust 2007 Annual Report Consolidated Balance Sheets (dollars in thousands) Assets Real estate Land Buildings and improvements Construction in progress Less: accumulated depreciation Net real estate Cash and cash equivalents Cash in escrow Investments in and advances to unconsolidated affiliates Rents receivable, net Notes receivable Deferred charges, net Acquired lease intangibles Prepaid expenses and other assets, net Assets of discontinued operations December 31, 2007 2006 $ 235,550 540,760 77,764 $ 145,916 465,050 39,085 854,074 155,480 698,594 123,343 6,637 44,654 13,449 57,662 21,825 16,103 16,745 — 650,051 135,085 514,966 139,571 5,321 33,333 11,869 36,038 20,749 11,653 41,959 36,233 Total assets $ 999,012 $ 851,692 Liabilities and Shareholders’ Equity Mortgage notes payable Convertible notes payable Acquired lease intangibles Accounts payable and accrued expenses Dividends and distributions payable Share of distributions in excess of share of income and investment in unconsolidated affiliates Other liabilities Liabilities of discontinued operations Total liabilities Minority interest in operating partnership Minority interests in partially-owned affiliates Total minority interests Shareholders’ equity: Common shares, $.001 par value, authorized 100,000,000 shares, issued and outstanding 32,184,462 and 31,772,952 shares, respectively Additional paid-in capital Accumulated other comprehensive loss Retained earnings Total shareholders’ equity Total liabilities and shareholders’ equity The accompanying notes are an integral part of these consolidated financial statements. $ 402,903 115,000 5,651 15,289 14,420 20,007 13,895 — 587,165 4,595 166,516 171,111 $ 319,507 100,000 4,919 9,882 6,661 21,728 5,379 28,760 496,836 8,673 105,064 113,737 32 227,890 (953) 13,767 240,736 31 227,555 (234) 13,767 241,119 $ 999,012 $ 851,692 Acadia Realty Trust 2007 Annual Report 54 Consolidated Statements of Income (dollars in thousands, except per share amounts) Revenues Minimum rents Percentage rents Expense reimbursements Other property income Management fee income from related parties, net Interest income Other income Total revenues Operating Expenses Property operating Real estate taxes General and administrative Depreciation and amortization Total operating expenses Operating Income Equity in earnings of unconsolidated affiliates Interest expense Minority interest Income from continuing operations before income taxes Income tax provision (benefit) Income from continuing operations Discontinued operations Operating income from discontinued operations Impairment of real estate Gain (loss) on sale of properties, net Minority interest Income from discontinued operations Extraordinary item Share of extraordinary gain from investment in unconsolidated affiliate Minority interest Income tax provision Income from extraordinary item Net income Basic earnings per share Income from continuing operations Income from discontinued operations Income from extraordinary item Basic earnings per share Diluted earnings per share Income from continuing operations Income from discontinued operations Income from extraordinary item Diluted earnings per share Years Ended December 31, 2007 2006 2005 $ 72,051 625 13,318 1,031 4,064 10,315 165 101,569 15,881 9,678 23,058 27,506 76,123 25,446 6,619 (22,775) 9,063 18,353 297 18,056 377 — 5,271 (111) 5,537 30,200 (24,167) (2,356) 3,677 $ 63,629 1,192 14,538 857 5,625 8,311 1,648 $ 69,401 1,272 14,440 1,972 3,564 3,316 — 95,800 93,965 12,857 10,095 19,782 25,361 68,095 27,705 2,559 (20,377) 5,227 15,114 (508) 15,622 2,879 — 20,974 (462) 23,391 — — — — 13,348 8,952 16,153 24,697 63,150 30,815 21,280 (16,689) (13,946) 21,460 2,140 19,320 2,152 (770) (50) (26) 1,306 — — — — $ 27,270 $ 39,013 $ 20,626 $ 0.55 0.17 0.11 $ 0.83 $ 0.54 0.17 0.11 $ 0.82 $0.48 0.72 — $1.20 $0.48 0.70 — $1.18 $ 0.61 0.04 — $ 0.65 $ 0.60 0.04 — $ 0.64 The accompanying notes are an integral part of these consolidated financial statements. 55 Acadia Realty Trust 2007 Annual Report Consolidated Statements of Shareholders’ Equity Common Shares Shares Amount Additional Paid-in Capital Accumulated Other Comprehensive Loss Retained Earnings (Deficit) Total Shareholders’ Equity (dollars in thousands, except per share amounts) Balance at December 31, 2004 31,341 $ 31 $222,715 $ (3,180) $ (2,642) $216,924 Conversion of 796 Series A Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee Restricted Share awards Dividends declared ($0.7025 per Common Share) Employee and Trustee exercise of 51,200 options Common Shares issued under Employee Share Purchase Plan Unrealized gain on valuation of swap agreements Amortization of derivative instrument Net income Total comprehensive income 92 52 — 51 7 — — — Balance at December 31, 2005 31,543 Cumulative effect of straight-line rent adjustment Conversion of 696 Series A Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee restricted share awards Dividends declared ($0.755 per Common Share) Employee exercise of 7,500 options to purchase Common Shares Common Shares issued under Employee Share Purchase Plan Redemption of 11,105 restricted Common OP Units Issuance of Common Stock to Trustees Unrealized loss on valuation of swap agreements Amortization of derivative instrument Net income Total comprehensive income — 93 122 — 8 4 — 3 — — — Balance at December 31, 2006 31,773 Conversion of 4,000 Series B Preferred OP Units to Common Shares by limited partners of the Operating Partnership Employee Restricted Share awards Dividends declared ($1.0325 per Common Share) Employee exercise of 17,474 options to purchase Common Shares Common Shares issued under Employee Share Purchase Plan Issuance of Common Shares to Trustees Employee Restricted Shares cancelled Unrealized loss on valuation of swap agreements Amortization of derivative instrument Net income Total comprehensive income 312 103 — 17 7 13 (41) — — — — — — — — — — — — 31 — — — — — — — — — — — 31 — 1 — — — — — — — — — 696 1,030 (1,691) 345 104 — — — — — — — — 2,708 460 — — — — 696 1,030 (20,626) (22,317) — — — 20,626 — 345 104 2,708 460 20,626 23,794 223,199 (12) (2,642) 220,576 — 696 3,530 — 43 112 (101) 76 — — — — — — — — — — — (662) 440 — — 1,796 1,796 — — 696 3,530 (24,400) (24,400) — — — — — 43 112 (101) 76 (662) 440 39,013 — 39,013 38,791 227,555 (234) 13,767 241,119 4,000 3,151 (6,425) 174 183 346 (1,094) — — — — — — — — — — — (921) 202 — — — — 4,000 3,152 (27,270) (33,695) — — — — — — 27,270 — 174 183 346 (1,094) (921) 202 27,270 26,551 Balance at December 31, 2007 32,184 $ 32 $227,890 $ (953) $ 13,767 $240,736 The accompanying notes are an integral part of these consolidated financial statements. Acadia Realty Trust 2007 Annual Report 56 Consolidated Statements of Cash Flows (dollars in thousands) Cash Flows from Operating Activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization (Gain) loss on sale of property Impairment of real estate Minority interests Amortization of lease intangibles Amortization of mortgage note premium Share compensation expense Equity in earnings of unconsolidated affiliates Distributions of operating income from unconsolidated affiliates Amortization of derivative settlement included in interest expense Changes in assets and liabilities: Funding of escrows, net Rents receivable Prepaid expenses and other assets, net Accounts payable and accrued expenses Other liabilities Years Ended December 31, 2007 2006 2005 $ 27,270 $ 39,013 $ 20,626 28,428 (5,271) — 15,215 722 (111) 3,285 (36,819) 36,666 202 667 (1,180) 23,926 4,962 7,203 27,178 (20,974) — (4,765) 1,080 (144) 3,531 (2,559) 3,277 440 (1,389) 260 967 (5,200) (1,088) 27,747 50 770 13,972 980 (530) 1,029 (21,280) 21,498 460 (1,827) (3,004) (8,867) (3,855) 2,470 Net cash provided by operating activities 105,165 39,627 50,239 Cash Flows from Investing Activities Investment in real estate and improvements Deferred acquisition and leasing costs Investments in and advances to unconsolidated affiliates Return of capital from unconsolidated affiliates Collections of notes receivable Advances of notes receivable Preferred equity investment Proceeds from sale of property Net cash used in investing activities (210,227) (1,746) (39,712) 26,625 11,071 (14,548) — 19,668 (208,869) (87,009) (6,941) (27,626) 28,423 20,948 (44,162) 19,000 38,477 (131,077) (5,670) (455) 22,847 1,868 (7,914) (19,000) 3,931 (58,890) (135,470) The accompanying notes are an integral part of these consolidated financial statements. 57 Acadia Realty Trust 2007 Annual Report Consolidated Statements of Cash Flows continued Years Ended December 31, 2007 2006 2005 (dollars in thousands) Cash Flows from Financing Activities Principal payments on mortgage notes Proceeds received on mortgage notes Proceeds received on convertible notes Payment of deferred financing and other costs Capital contributions from partners and members Distributions to partners and members Dividends paid to Common Shareholders Distributions to minority interests in Operating Partnership Distributions on preferred Operating Partnership Units to minority interests Distributions to minority interests in partially-owned affiliates Repurchase and cancellation of shares Contributions from minority interests in partially-owned affiliates Redemption of Operating Partnership Units Common Shares issued under Employee Share Purchase Plan Exercise of options to purchase Common Shares (165,451) 222,218 15,000 (4,128) 105,520 (61,050) (26,039) (527) (86) (2,612) (1,094) 5,022 — 529 174 (168,082) 159,617 100,000 (7,026) 44,481 (36,120) (23,823) (487) (254) (232) — 300 (246) 188 43 (44,784) 184,466 — (2,801) 44,122 — (21,869) (380) (342) (436) — 1,000 — 104 345 Net cash provided by financing activities 87,476 68,359 159,425 (Decrease) increase in cash and cash equivalents Cash and cash equivalents, beginning of period Cash and cash equivalents, end of period (16,228) 139,571 $ 123,343 49,096 90,475 $ 139,571 74,194 16,281 $ 90,475 Supplemental disclosure of cash flow information: Cash paid during the period for interest, including capitalized interest of $34, $79, and $260, respectively $ 23,709 $ 22,843 $ 18,799 Cash paid for income taxes $ 348 $ 1,039 $ 1,512 Supplemental disclosure of non-cash investing and financing activities: Acquisition of management contract rights through issuance of Common and Preferred Operating Partnership Units Acquisition of real estate through assumption of debt $ $ — — $ — $ 22,583 Issuance of notes receivable in connection with sale of real estate $ (18,000) Acquisition of property through issuance of Preferred Operating Partnership Units Conversion of common equity interest into preferred equity interest in investments $ $ — — $ $ $ The accompanying notes are an integral part of these consolidated financial statements. $ $ $ $ 4,000 — — 200 — — — $ 3,255 Acadia Realty Trust 2007 Annual Report 5858 Consolidated Statements of Cash Flows continued (dollars in thousands) Recapitalization and deconsolidation of investment: Real estate, net Other assets and liabilities Mortgage debt Minority interests Investment in unconsolidated affiliates Cash included in investments and advances to unconsolidated affiliates Acquisition of interest in investment from unaffiliated investor: Real estate, net Other assets and liabilities Investment in unconsolidated affiliates Cash included in expenditures for real estate and improvements The accompanying notes are an integral part of these consolidated financial statements. Years Ended December 31, 2007 2006 2005 $ — — — — — $ — $ — — — $ — $124,962 (11,413) (66,984) (36,504) (10,428) $ (367) $ (9,260) 5,901 3,469 $ 110 $ — — — — — $ — $ — — — $ — 59 59 Acadia Realty Trust 2007 Annual Report Notes to Consolidated Financial Statements Note 1i Organization, Basis of Presentation and Summary of Significant Accounting Policies Acadia Realty Trust (the “Trust”) and subsidiaries (collec- interest in both Fund I and Mervyns I and is also entitled to a profit participation in excess of its invested capital based on certain investment return thresholds (“Promote”). Cash flow is distributed pro-rata to the partners and members (including the Operating Partnership) until they receive a 9% cumulative return (“Preferred Return”), tively, the “Company”) is a fully integrated, self-managed and the return of all capital contributions. Thereafter, and self-administered equity real estate investment trust remaining cash flow (which is net of distributions and (“REIT”) focused primarily on the ownership, acquisition, fees to the Operating Partnership for management, asset redevelopment and management of retail properties, management, leasing, construction and legal services) is including neighborhood and community shopping centers distributed 80% to the partners (including the Operating and mixed-use properties with retail components. Partnership) and 20% to the Operating Partnership as a As of December 31, 2007, the Company operated 76 properties, which it owns or has an ownership interest in, principally located in the Northeast, Mid-Atlantic and Midwest regions of the United States. All of the Company’s assets are held by, and all of its oper- ations are conducted through, Acadia Realty Limited Part- nership (the “Operating Partnership”) and entities in which the Operating Partnership owns a controlling interest. As of December 31, 2007, the Trust controlled 98% of the Operating Partnership as the sole general partner. As the general partner, the Trust is entitled to share, in proportion to its percentage interest, in the cash distributions and profits and losses of the Operating Partnership. The lim- ited partners represent entities or individuals who con- tributed their interests in certain properties or entities to the Operating Partnership in exchange for common or pre- ferred units of limited partnership interest (“Common or Preferred OP Units”). Limited partners holding Common OP Units are generally entitled to exchange their units on a one-for-one basis for common shares of beneficial inter- est of the Trust (“Common Shares”). This structure is Promote. As all contributed capital and accumulated pre- ferred return has been distributed to investors, the Oper- ating Partnership is currently entitled to a Promote on all earnings and distributions. During June of 2004, the Company formed Acadia Strate- gic Opportunity Fund II, LLC (“Fund II”), and during August 2004 formed Acadia Mervyn Investors II, LLC (“Mervyns II”), with the investors from Fund I as well as two additional institutional investors. With $300.0 million of committed discretionary capital, Fund II and Mervyns II combined expect to be able to acquire or develop up to $900.0 million of investments on a leveraged basis. The Operating Part- nership’s share of committed capital is $60.0 million. The Operating Partnership is the managing member with a 20% interest in both Fund II and Mervyns II. The terms and structure of Fund II and Mervyns II are substantially the same as Fund I and Mervyns I, including the Promote structure, with the exception that the Preferred Return is 8%. As of December 31, 2007, the Operating Partnership had contributed $28.8 million to Fund II and $7.6 million to Mervyns II. referred to as an umbrella partnership REIT or “UPREIT.” During May of 2007, the Company formed Acadia Strategic During September of 2001, the Company formed a part- nership, Acadia Strategic Opportunity Fund I, LP (“Fund I”), and during August of 2004 formed a limited liability com- pany, Acadia Mervyn Investors I, LLC (“Mervyns I”), with four institutional investors. The Operating Partnership committed a total of $20.0 million to Fund I and Mervyns I, and the four institutional shareholders committed a total of $70.0 million, for the purpose of acquiring approximately $300.0 million in investments. As of December 31, 2007, the Operating Partnership had contributed $16.5 million to Fund I and $2.7 million to Mervyns I. Opportunity Fund III LLC (“Fund III”) with 14 institutional investors, including a majority of the investors from Fund I and Fund II. With $503.0 million of committed discretionary capital, Fund III expects to be able to acquire or develop approximately $1.5 billion of assets on a leveraged basis. The Operating Partnership’s share of the invested capital is $100.0 million and it is the managing member with a 19.9% interest in Fund III. The terms and structure of Fund III is substantially the same as the previous Funds I and II, including the Promote structure, with the exception that the Preferred Return is 6%. As of December 31, 2007, the Operating Partnership had contributed $10.5 The Operating Partnership is the general partner of Fund I million to Fund III. and sole managing member of Mervyns I, with a 22.2% Acadia Realty Trust 2007 Annual Report 60 Notes to Consolidated Financial Statements continued Principles of Consolidation The consolidated financial statements include the consoli- as buying, selling or financing nor is it the primary benefi- ciary under FIN 46R, as discussed above. Under the equity dated accounts of the Company and its controlling invest- method, the Company increases its investment for its ments in partnerships and limited liability companies in proportionate share of net income and contributions to which the Company is presumed to have control in accor- the joint venture and decreases its investment balance dance with Emerging Issues Task Force (“EITF”) Issue No. by recording its proportionate share of net loss and distri- 04-5. The ownership interests of other investors in these butions. The Company recognizes income for distributions entities are recorded as minority interests. All significant in excess of its investment where there is no recourse to intercompany balances and transactions have been elimi- the Company. For investments in which there is recourse nated in consolidation. Investments in entities for which to the Company, distributions in excess of the investment the Company has the ability to exercise significant influence are recorded as a liability. Although the Company accounts over, but does not have financial or operating control, are for its investment in Albertson’s (Note 4), using the equity accounted for using the equity method of accounting. method of accounting, the Company adopted the policy Accordingly, the Company’s share of the earnings (or loss) of not recording its equity in earnings or losses of this of these entities are included in consolidated net income. unconsolidated affiliate until the Company receives the Variable interest entities within the scope of Financial Accounting Statements Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46-R”) are required to be consolidated by their primary beneficiary. The audited financial statements of Albertson’s to support the equity earnings or losses in accordance with paragraph 19 of Accounting Principles Board (“APB”) 18 “Equity Method of Accounting for Investments in Common Stock.” primary beneficiary of a variable interest entity is determined The Company periodically reviews its investment in to be the party that bears a majority of the entity’s expected unconsolidated joint ventures for other than temporary losses, receives a majority of its expected returns, or both. declines in market value. Any decline that is not expected Management has evaluated the applicability of FIN 46-R to to be recovered in the next 12 months is considered other its investments in certain joint ventures and determined that than temporary and an impairment charge is recorded as these joint ventures do not meet the requirements of a a reduction in the carrying value of the investment. No variable interest entity or the Company is not the primary impairment charges were recognized for the years ended beneficiary and, therefore, consolidation of these ventures is December 31, 2007, 2006 and 2005. not required. Accordingly, these investments are accounted for using the equity method On January 4, 2006, Fund I recapitalized its investment in a one million square foot shopping center portfolio located in Wilmington, Delaware (“Brandywine Portfolio”). The recapitalization was effected through the conversion of the Use of Estimates Accounting principles generally accepted in the United States of America (“GAAP”) require the Company’s man- agement to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant assumptions 77.8% interest which was previously held by the institutional and estimates relate to the valuation of real estate, depre- investors in Fund I to affiliates of GDC Properties (“GDC”) through a merger of interests in exchange for cash. The Operating Partnership has retained its existing 22.2% inter- est in the Brandywine Portfolio in partnership with GDC and ciable lives, revenue recognition and the collectability of trade accounts receivable. Application of these assump- tions requires the exercise of judgment as to future uncer- tainties and, as a result, actual results could differ from continues to operate the portfolio and earn fees for such these estimates. services. Following the January 2006 recapitalization of the Brandywine Portfolio, the Company no longer has a control- ling interest in this investment and, accordingly, accounts for this investment under the equity method of accounting. Investments in and Advances to Unconsolidated Joint Ventures The Company accounts for its investments in unconsoli- dated joint ventures using the equity method as it does not exercise control over significant asset decisions such 61 Acadia Realty Trust 2007 Annual Report Real Estate Real estate assets are stated at cost less accumulated depreciation. Expenditures for acquisition, development, construction and improvement of properties, as well as significant renovations are capitalized. Interest costs are capitalized until construction is substantially complete. Construction in progress includes costs for significant property expansion and redevelopment. Depreciation is computed on the straight-line basis over estimated useful lives of 30 to 40 years for buildings, the shorter of the use- Real Estate Held-for-Sale The Company evaluates the held-for-sale classification of ful life or lease term for tenant improvements and five years its real estate each quarter. Assets that are classified as for furniture, fixtures and equipment. Expenditures for main- held-for-sale are recorded at the lower of their carrying tenance and repairs are charged to operations as incurred. amount or fair value less cost to sell. Assets are generally 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 customer relationships) and acquired liabilities classified as held-for-sale once management has initiated an active program to market them for sale and has received a firm purchase commitment. The results of operations of these real estate properties are reflected as discontinued operations in all periods reported. in accordance with Statement of Financial Accounting On occasion, the Company will receive unsolicited offers Standards (“SFAS”) No. 141, “Business Combinations,” from third parties to buy individual Company properties. and SFAS No. 142, “Goodwill and Other Intangible Assets,” Under these circumstances, the Company will classify and allocates purchase price based on these assessments. the properties as held-for-sale when a sales contract is The Company assesses fair value based on estimated cash executed with no contingencies and the prospective buyer flow projections that utilize appropriate discount and capi- has funds at risk to ensure performance. talization rates and available market information. Estimates of future cash flows are based on a number of factors including the historical operating results, known trends, and market/economic conditions that may affect the property. The Company reviews its long-lived assets used in opera- tions for impairment when there is an event, or change in circumstances that indicates impairment in value. The Company records impairment losses and reduces the car- 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. rying value of properties when indicators of impairment are present and the expected undiscounted cash flows Management Contracts Income from management contracts is recognized on an related to those properties are less than their carrying accrual basis as such fees are earned. The initial acquisition amounts. In cases where the Company does not expect cost of the management contracts is being amortized over to recover its carrying costs on properties held for use, the estimated lives of the contracts acquired. Income from the Company reduces its carrying cost to fair value, and management contracts for the year ended December 31, for properties held for sale, the Company reduces its car- 2005 is net of sub-management fees of $0.3 million. rying value to the fair value less costs to sell. During the years ended December 31, 2007 and 2006, no impairment losses were recognized. During the year ended December 31, 2005, an impairment loss of $0.8 million was recog- nized related to a property that was sold during July of 2005. Management does not believe that the values of its properties within the portfolio are impaired as of Decem- ber 31, 2007. Sale of Real Estate The Company recognizes property sales in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” The Company generally records the sales of operating proper- ties and outparcels using the full accrual method at closing when the earnings process is deemed to be complete. Sales not qualifying for full recognition at the time of sale are accounted for under other appropriate deferral methods. Revenue Recognition and Accounts and Notes 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, beginning when the tenant takes possession of the space. As of December 31, 2007 and 2006, included in rents receivable, net on the accompanying consolidated balance sheet, unbilled rents receivable relating to straight-lining of rents were $8.4 million and $5.6 million, respectively. Certain of these leases also provide for percentage rents based upon the level of sales achieved by the tenant. Percentage rent is recognized in the period when the tenants’ sales breakpoint is met. In addition, leases typically provide for the reimbursement to the Company of real estate taxes, insurance and other property operating expenses. These Acadia Realty Trust 2007 Annual Report 62 Notes to Consolidated Financial Statements continued reimbursements are recognized as revenue in the period TRS income taxes are accounted for under the asset and the expenses are incurred. The Company makes estimates of the uncollectability of its accounts receivable related to tenant revenues. An allowance for doubtful accounts has been provided against certain tenant accounts receivable that are estimated to liability method as required by SFAS No. 109, “Accounting for Income Taxes.” Under the asset and liability method, deferred income taxes are recognized for the temporary differences between the financial reporting basis and the tax basis of the TRS assets and liabilities. be uncollectible. Once the amount is ultimately deemed The Company adopted the provisions of the FASB Financial to be uncollectible, it is written off. Rents receivable Interpretation No. 48, “Accounting for Uncertainty in Income at December 31, 2007 and 2006 are shown net of an Taxes — an interpretation of SFAS No. 109,” as of January 1, allowance for doubtful accounts of $3.1 million and $3.2 2007. The Company believes that it has appropriate support million, respectively. Interest income from notes receivable is recognized on an accrual basis based on the contractual terms of the notes. The Company reviews notes receivable on a quarterly basis and determined that all notes receivable are deemed to be collectible as of December 31, 2007. Cash and Cash Equivalents The Company considers all highly liquid investments with an original maturity of three months or less when pur- chased to be cash equivalents. Restricted Cash and Cash in Escrow Restricted cash and cash in escrow consist principally of cash held for real estate taxes, property maintenance, insurance, minimum occupancy and property operating income requirements at specific properties as required by certain loan agreements. 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 distrib- ute at least 90% of its REIT taxable income to its stock- holders 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 prop- erties 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. for the income tax positions taken and, as such, does not have any uncertain tax positions that result in a material impact on the Company’s financial position or results of operation. The prior three years income tax returns are sub- ject to review by the Internal Revenue Service. The Com- pany’s policy relating to interest and penalties is to recognize them as a component of the provision for income taxes. Stock-based Compensation The Company accounts for stock options pursuant to SFAS No. 123R, “Accounting for Stock-Based Compensation.” As such, all stock options are reflected as compensation expense in the Company’s consolidated financial state- ments over their vesting period based on the fair value at the date the stock option was granted. Recent Accounting Pronouncements In September 2006, the SEC issued Staff Accounting Bulletin (SAB) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.” This Bulletin provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. The guidance in this Bulletin must be applied to financial reports cover- ing the first fiscal year ending after November 15, 2006. As a result of the adoption of SAB No. 108, the Company recorded a $1.8 million cumulative effect of straight-line rent adjustment for prior years effective January 1, 2006. This adjustment was the result of changing the calculation of tenants straight-line rent from rent commencement date to the date the tenant took possession of the space. This adjustment is reflected in the Company’s balance sheet as an increase to both rents receivable, net and retained earnings. During September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements.” This SFAS defines fair value, establishes a framework for measuring fair value in GAAP, 63 Acadia Realty Trust 2007 Annual Report and expands disclosures about fair value measurements. intangibles), the liabilities assumed and any noncontrolling This statement applies to accounting pronouncements interest in the acquired entity. The Company is currently that require or permit fair value measurements, except for evaluating the impact of adopting the Statement, which is share-based payment transactions under SFAS No. 123. effective for fiscal years beginning on or after December SFAS 157 is effective for financial statements issued for 15, 2008. fiscal years beginning after November 15, 2007. As SFAS No. 157 does not require any new fair value measurements or remeasurements of previously computed fair values, the Company does not believe adoption of SFAS No. 157 will have a material effect on its financial statements. On February 15, 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities.” This statement permits companies and not- for-profit organizations to make a one-time election to carry eligible types of financial assets and liabilities at fair Comprehensive income The following table sets forth comprehensive income for the years ended December 31, 2007, 2006 and 2005: Years Ended December 31, 2007 2006 2005 (dollars in thousands) Net income $27,270 $39,013 $20,626 Other comprehensive (loss) income (719) (222) 3,168 value, even if fair value measurement is not required Comprehensive income $26,551 $38,791 $23,794 under GAAP. SFAS 159 is effective for fiscal years begin- ning after November 15, 2007. The Company is currently evaluating the effect of the adoption of SFAS No. 159. Other comprehensive income relates to the changes in the fair value of derivative instruments accounted for as cash flow hedges and amortization, which is included in interest On August 31, 2007, the FASB issued a proposed FASB expense, of derivative instruments. Staff Position (the “Proposed FSP”) that affects the accounting for the Company’s convertible notes payable. The Proposed FSP requires the initial debt proceeds from the sale of the Company’s convertible notes to be allocated between a liability component and an equity component. The resulting debt discount must be amortized over the period the debt is expected to remain outstanding as additional interest expense. The Proposed FSP, if adopted, would be effective for fiscal years beginning after Decem- ber 15, 2007 and would require retroactive application. The Company is currently evaluating the impact that this Proposed FSP would have on its financial statements if adopted. In December 2007, the FASB issued SFAS No. 160, “Non- controlling Interests in Consolidated Financial Statements,” which, among other things, provides guidance and estab- lishes amended accounting and reporting standards for a parent company’s noncontrolling or minority interest in a subsidiary. The Company is currently evaluating the impact of adopting the Statement, which is effective for fiscal years beginning on or after December 15, 2008. In December 2007, the FASB issued SFAS No. 141R, The following table sets forth the change in accumulated other comprehensive loss for the years ended December 31, 2007 and 2006: Accumulated other comprehensive loss (dollars in thousands) Beginning balance Years Ended December 31, 2007 2006 $(234) $ (12) Unrealized (loss) gain on valuation of derivative instruments (719) (222) Ending balance $(953) $ (234) Note 2i Acquisition and Disposition of Properties and Discontinued Operations A. Acquisition and Disposition of Properties “Business Combinations,” which replaces SFAS No. 141 Currently the primary vehicles for the Company’s acquisi- Business Combinations. SFAS No. 141R, among other tions are Funds I, II and III (Note 1). things, establishes principles and requirements for how an acquirer entity recognizes and measures in its financial statements the identifiable assets acquired (including Acquisitions On March 20, 2007, the Company purchased a retail com- mercial condominium at 200 West 54th Street located in Acadia Realty Trust 2007 Annual Report 64 Notes to Consolidated Financial Statements continued Manhattan, New York. The 10,000 square foot property located in Boonton, New Jersey. The property is a 63,000 was acquired for $36.4 million. square foot shopping center anchored by a 49,000 square Additionally, on March 20, 2007, the Company purchased a single-tenant building located at 1545 East Service Road in Staten Island, New York for $17.0 million. On May 31, 2007, the Company purchased a property located on Atlantic Avenue in Brooklyn, New York for $5.0 million. Redevelopment plans for the property call for the demolition of the existing structure and the con- struction of a 110,000 square foot self-storage facility. On June 13, 2007, the Company (approximately 25%), along with an unaffiliated partner (approximately 75%), acquired a leasehold interest in The Gallery at Fulton Street and adjacent parking garage located in downtown Brooklyn, New York for $115.0 million. The redevelopment plans include the demolition of the existing improvements and the construction of a mixed-use project to be called CityPoint. On October 31, 2007, the Company, in conjunction with an unaffiliated partner, P/A Associates, LLC (“Acadia P/A”), acquired a 530,000 square foot warehouse building in Canarsie, Brooklyn for approximately $21.0 million. The development plan for this property includes the demolition of a portion of the warehouse and the construction of a 320,000 square foot mixed-use project consisting of retail, office, cold-storage and self-storage. foot A&P Supermarket. A portion of the remaining 40% interest is owned by a principal of P/A Associates, LLC. The interest was acquired for $3.2 million. On June 16, 2006, the Company purchased 8400 and 8625 Germantown Road, totaling 40,570 square feet, in Philadelphia, Pennsylvania for $16.0 million. The Company assumed a $10.1 million first mortgage loan which has a maturity date of June 11, 2013. On September 21, 2006, the Company purchased 2914 Third Avenue, a 41,305 square foot building located in the Bronx, New York for $18.5 million. Dispositions On November 15, 2007, the Company sold the Amherst Marketplace and Sheffield Crossing, shopping centers located in Ohio, for $26.0 million, which resulted in a $7.5 million gain on sale. On December 13, 2007, the Company sold a residential complex in Columbia, Missouri for $15.5 million, which resulted in a $2.0 million loss on sale. On November 3, 2006, the Company sold the Bradford Towne Centre, a 257,123 square foot shopping center located in Towanda, Pennsylvania, for $16.0 million, which resulted in a $5.6 million gain on sale. On November 1, 2007, the Company, and an unaffiliated partner acquired a property in Westport, Connecticut for On November 28, 2006, the Company sold three proper- ties located in northeastern Pennsylvania as follows: approximately $17.0 million. The plan is to redevelop the (dollars in thousands) existing building into 30,000 square feet of retail and resi- Property Sales Price Gain GLA dential use. On November 5, 2007, the Company, through Acadia P/A, acquired a property in Sheepshead Bay, Brooklyn for Greenridge Plaza $10,600 $4,753 191,767 Luzerne Street Center Pittston Plaza 3,600 6,000 2,521 487 58,035 79,498 approximately $20.0 million. The redevelopment plan Total $20,200 $7,761 329,300 includes the demolition of the existing structures and the construction of a 240,000 square foot shopping center. On December 14, 2006, the Company sold the Soundview Marketplace, a 183,815 square foot shopping center in Port On January 12, 2006, the Company closed on a 19,265 Washington, New York, for $24.0 million which resulted in square foot retail building in the Lincoln Park district in a $7.9 million gain on the sale. Chicago. The property was acquired from an affiliate of Klaff for a purchase price of $9.9 million, including the assumption of existing mortgage debt in the principal amount of $3.8 million. On July 7, 2005, the Company sold the Berlin Shopping Center for $4.0 million. An impairment loss of $0.8 million was recognized for the year ended December 31, 2005 to reduce the carrying value of this asset to fair value less On January 24, 2006, the Company acquired a 60% inter- costs to sell. est in the entity which owns the A&P Shopping Plaza 65 Acadia Realty Trust 2007 Annual Report B. Discontinued Operations SFAS No. 144 requires discontinued operations presenta- Years Ended December 31, 2007 2006 2005 tion for disposals of a “component” of an entity. In accor- (dollars in thousands) dance with SFAS No. 144, for all periods presented, the Company has reclassified its consolidated statements of income to reflect income and expenses for sold properties (Note 2A), as discontinued operations and reclassified its consolidated balance sheets to reflect assets and liabilities Revenues $ 6,471 $15,359 $16,278 Operating expenses Interest expense 4,460 1,634 9,590 2,890 11,338 2,788 Operating income 377 2,879 2,152 related to such properties as assets and liabilities related Impairment of real estate — — (770) to discontinued operations. Interest expense specific to a discontinued operation property is reflected in discontin- Gain (loss) on sale of properties 5,271 20,974 ued operations. Minority interest (111) (462) (50) (26) The combined results of operations of sold properties are Income from discontinued reported separately as discontinued operations for the years ended December 31, 2007, 2006 and 2005. The combined assets and liabilities and results of opera- tions of the properties classified as discontinued opera- tions are summarized as follows: (dollars in thousands) Assets Net real estate Rents receivable, net Other assets Total assets of discontinued operations Liabilities December 31, 2006 $32,616 1,080 2,537 $36,233 operations $ 5,537 $23,391 $ 1,306 Note 3i Segment Reporting The Company has three reportable segments: core portfo- lio, opportunity funds and other which, primarily consists of management fee and interest income. 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. Investments in the core portfolio are typically held long-term. Given the finite life of the opportunity funds, these investments are typically held for shorter terms. Fees earned by the Company as general partner/member of the opportunity funds are eliminated in the Company’s consolidated financial state- Mortgage notes payable $26,955 ments. The Company previously reported two reportable Accounts payable and accrued expenses Other liabilities Total liabilities of discontinued operations 665 1,140 $28,760 segments, retail properties and multi-family properties. During December of 2007, the Company sold the majority of its multi-family properties and realigned the segments to reflect the way the Company now manages the business. The following table sets forth certain segment information for the Company, reclassified for discontinued operations, as of and for the years ended December 31, 2007, 2006, and 2005 (does not include unconsolidated affiliates): Acadia Realty Trust 2007 Annual Report 66 Notes to Consolidated Financial Statements continued (dollars in thousands) Revenues Property operating expenses and real estate taxes Other expenses Net income before depreciation and amortization Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Income tax provision Minority interest Income from discontinued operations Extraordinary item Net income 2007 Core Portfolio Opportunity Funds Other Elimination Total $ 62,970 $ 20,672 $38,294 $(20,367) $ 101,569 18,770 25,239 $ 18,961 $ 17,510 $ 17,439 $ $ $ 5,069 13,032 2,000 (280) — (15,213) 25,559 23,058 2,571 $36,294 $ (4,874) $ 52,952 9,381 5,852 $ $ 615 $ — $ 27,506 — $ (516) $ 22,775 $ 460,591 $ 377,461 $20,380 $ (4,358) $ 854,074 $ 569,538 $ 419,045 $14,787 $ (4,358) $ 999,012 $ 58,124 $ 151,652 $ 451 $ — $ 210,227 $ 52,952 (27,506) 6,619 (22,775) 297 9,063 5,537 3,677 $ 27,270 67 Acadia Realty Trust 2007 Annual Report 2006 Core Portfolio Opportunity Funds Other Elimination Total (dollars in thousands) Revenues Property operating expenses and real estate taxes Other expenses $ 58,450 $ 19,291 $26,654 $ (8,595) $ 95,800 16,655 21,610 4,710 4,410 1,916 — (329) (6,238) 22,952 19,782 Net income before depreciation and amortization $ 20,185 $ 10,171 $24,738 $ (2,028) $ 53,066 Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Income tax (benefit) Minority interest Income from discontinued operations Net income $ 15,212 $ 14,160 $ $ 9,517 6,298 $ $ 632 243 $ — $ 25,361 $ (324) $ 20,377 $ 407,858 $ 223,748 $20,149 $ (1,704) $ 650,051 $ 584,544 $ 254,586 $14,266 $ (1,704) $ 851,692 $ 62,725 $ 24,092 $ 192 $ — $ 87,009 $ 53,066 (25,361) 2,559 (20,377) (508) 5,227 23,391 $ 39,013 Acadia Realty Trust 2007 Annual Report 68 Notes to Consolidated Financial Statements continued 2005 Core Portfolio Opportunity Funds Other Elimination Total (dollars in thousands) Revenues Property operating expenses and real estate taxes Other expenses $ 52,996 $ 32,045 $18,555 $(9,631) $ 93,965 14,713 15,382 5,754 8,888 1,833 — — (8,117) 22,300 16,153 Net income before depreciation and amortization $ 22,901 $ 17,403 $16,722 $(1,514) $ 55,512 Depreciation and amortization Interest expense Real estate at cost Total assets Expenditures for real estate and improvements Reconciliation to net income Net property income before depreciation and amortization Depreciation and amortization Equity in earnings of unconsolidated partnerships Interest expense Income tax provision Minority interest Income from discontinued operations Net income Note 4i Investments A. Investments in and Advances to Unconsolidated Affiliates Retailer Controlled Property Venture ("RCP Venture”) During January of 2004, the Company entered into the $ 13,546 $ 10,540 $ 9,394 $ 7,503 $ $ 611 134 $ — $ 24,697 $ (342) $ 16,689 $ 337,344 $ 314,773 $19,872 $(1,172) $ 670,817 $ 436,136 $ 389,456 $16,784 $(1,172) $ 841,204 $ 25,355 $ 105,448 $ 274 $ — $ 131,077 $ 55,512 (24,697) 21,280 (16,689) 2,140 (13,946) 1,306 $ 20,626 Mervyns Department Stores During September of 2004, the RCP Venture invested in a consortium to acquire the Mervyns Department Store chain from Target Corporation. The gross acquisition price of $1.2 billion was financed with $800 million of debt and $400 million of equity. The Company’s share of this invest- ment was $23.9 million. For the year ended December 31, 2007, the Company made an additional investment of $2.2 million in Mervyns through the RCP Venture. RCP Venture with Klaff Realty, L.P. (“Klaff”) and Lubert- For the year ended December 31, 2005, the Company Adler Management, Inc. for the purpose of making invest- made add-on investments in Mervyns totaling $1.3 million. ments in surplus or underutilized properties owned by The Company accounts for these add-on investments retailers. Through December 31, 2007, the Company has using the cost method due to the minor ownership interest invested $55.4 million through the RCP Venture on a non- and the inability to exert influence over the partnership’s recourse basis. Cash flow is to be distributed to the RCP operating and financial policies. Venture partners in accordance with their ownership inter- ests 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 Klaff and 80% to the part- ners (including Klaff). Albertson’s During June of 2006, the RCP Venture made its second investment as part of an investment consortium, acquiring Albertson’s and Cub Foods, of which the Company’s share was $20.7 million. During February of 2007, the Company received a cash distribution of $44.4 million from this 69 Acadia Realty Trust 2007 Annual Report investment which was sourced from the disposition of Other Investments certain operating stores and a refinancing of the remaining During 2006, the Company made additional investments assets held by Albertson’s. The distribution in excess of of $1.1 million in Shopko and $0.7 million in Marsh through the Company’s invested capital was reflected as an extra- the RCP Venture. For the year ended December 31, 2007, ordinary gain of $30.2 million. This gain was characterized the Company received a $1.1 million cash distribution as extraordinary consistent with the accounting treatment from the Shopko investment representing 100% of its by Albertson’s which reflected the excess of fair value of invested capital. net assets acquired over the purchase price as an extraor- dinary gain. The Company received additional distributions from this investment totaling $8.8 million for the year ended December 31, 2007. For the years ended December 31, 2007 and 2006, the Company made add-on investments in Albertson’s totaling $2.8 million and received distributions totaling $0.8 million. The Company accounts for these add-on investments During July of 2007, the RCP Venture acquired a portfolio of 87 retail properties from Rex Stores Corporation. The Company’s share of this investment was $2.7 million. The Company accounts for the two above investments using the cost method due to its minor ownership interest and the inability to exert influence over the partnership’s operating and financial policies. using the cost method due to the minor ownership interest The following table summarizes the RCP Venture invest- and the inability to exert influence over the partnership’s ments from inception through December 31, 2007: operating and financial policies. (dollars in thousands) Investor Investment Mervyns I and Mervyns II Mervyns Mervyns I and Mervyns II Mervyns add-on investments Year Acquired 2004 2005 2006 Albertson’s Albertson’s add-on investments 2006/2007 Shopko Marsh Rex 2006 2006 2007 Mervyns II Mervyns II Fund II Fund II Mervyns II Total Operating Partnership Share Invested Capital $26,072 1,342 20,717 2,765 1,100 667 2,701 Distributions $ 45,966 Invested Capital $ 4,901 1,342 53,206 833 1,100 — — 283 4,239 386 220 133 535 Distributions $ 11,251 283 9,847 93 220 — — $55,364 $102,447 $10,697 $ 21,694 Brandywine Portfolio center located in White Plains, New York which is The Company owns a 22.2% interest in a one million accounted for using the equity method. square foot retail portfolio located in Wilmington, Delaware (the “Brandywine Portfolio”) which is accounted for using the equity method. Crossroads The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II (collectively, “Crossroads”), which collectively own a 311,000 square foot shopping Other Investments Fund I Investments Fund I has joint ventures with unaffiliated third-party investors in the ownership and operation of the following shopping centers, which are accounted for using the equity method of accounting. Shopping Center Location Year Acquired Haygood Shopping Center Virginia Beach, VA Sterling Heights Shopping Center Detroit, MI 2004 2004 Total GLA 178,533 154,835 333,368 Acadia Realty Trust 2007 Annual Report 70 Notes to Consolidated Financial Statements continued In November 2006, Fund I completed the purchase of the Fund II’s approximately 25% investment in CityPoint (Note remaining 50% interest in the Tarrytown Centre, a 35,000 2) is accounted for using the equity method. This invest- square foot center located in Westchester, New York, ment is a variable interest entity of which the Company from its unaffiliated partner. This investment, which had is not the primary beneficiary. The Company’s maximum previously been accounted for using the equity method, is exposure is its current investment balance of $28.9 million. now consolidated. Fund II Investments In addition to these investments, the Company made advances to unconsolidated affiliates. At December 31, Fund II has invested $1.2 million as a 50% owner in an 2007 and 2006, advances to unconsolidated affiliates entity which has a leasehold interest in a former Levitz totaled $4.0 million and $2.3 million, respectively. Furniture store located in Rockville, Maryland, which is accounted for using the equity method. The following tables summarize the Company’s invest- ment in unconsolidated subsidiaries as of December 31, 2007, December 31, 2006 and December 31, 2005. December 31, 2007 RCP Venture CityPoint Brandywine Portfolio Crossroads Investments Total Other (dollars in thousands) Balance Sheets Assets Rental property, net Investment in unconsolidated affiliates Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity (deficit) $ — $145,775 $136,942 $ 5,552 $ 38,137 $ 326,406 195,672 — — 3,046 — 10,631 — 4,372 — 6,650 195,672 24,699 $195,672 $148,821 $147,573 $ 9,924 $ 44,787 $ 546,777 $ — — $ 34,000 $166,200 $ 64,000 $ 33,084 $ 297,284 2,213 9,629 1,112 195,672 112,608 (28,256) (55,188) 2,307 9,396 15,261 234,232 Total liabilities and partners’ equity $195,672 $148,821 $147,573 $ 9,924 $ 44,787 $ 546,777 Company’s investment in and advances to unconsolidated affiliates $ 9,813 $ 28,890 $ — $ — $ 5,951 $ 44,654 Share of distributions in excess of share of income and investment in unconsolidated affiliates $ — $ — $ (7,822) $ (12,185) $ — $ (20,007) (dollars in thousands) Balance Sheets Assets Rental property, net Investment in unconsolidated affiliates Other assets Total assets Liabilities and partners’ equity Mortgage note payable Other liabilities Partners’ equity (deficit) Total liabilities and partners’ equity Company’s investment in and advances to RCP Venture Brandywine Portfolio Crossroads Other Investments Total December 31, 2006 $ — 385,444 — $127,146 $ 6,017 $ 43,660 $176,823 — 6,747 — 4,511 — 6,632 385,444 17,890 $385,444 $133,893 $ 10,528 $ 50,292 $580,157 $ — — 385,444 $385,444 $166,200 $ 64,000 $ 28,558 $258,758 12,709 (45,016) 1,858 (55,330) 8,862 12,872 23,429 297,970 $133,893 $ 10,528 $ 50,292 $580,157 unconsolidated affiliates $ 24,894 $ — $ — $ 8,439 $ 33,333 Share of distributions in excess of share of income and investment in unconsolidated affiliates $ — $ (10,541) $(11,187) $ — $ (21,728) 71 Acadia Realty Trust 2007 Annual Report Year Ended December 31, 2007 RCP Venture Brandywine Portfolio Crossroads Other Investments Total (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense $ — — — Equity in earnings of unconsolidated affiliates 46,416 Equity in earning of unconsolidated affiliates extraordinary gain Depreciation and amortization Net income (loss) Company’s share of net income Amortization of excess investment Company’s share of net income before extraordinary gain Company’s share of extraordinary gain 151,000 — $197,416 $ 3,312 — $ 3,312 $ 30,200 $ 20,252 $ 8,518 $ 5,862 $ 34,632 5,620 10,102 — — 3,269 $ 1,261 $ $ $ 232 — 232 — 3,095 3,485 — — 475 $ 1,463 $ 717 392 $ 325 $ — 1,396 2,333 — — 4,439 $(2,306) $ 2,750 — $ 2,750 $ — 10,111 15,920 46,416 151,000 8,183 $197,834 $ 7,011 392 $ 6,619 $ 30,200 Year Ended December 31, 2006 RCP Venture Brandywine Portfolio Crossroads Other Investments Total (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense Equity in (losses) of unconsolidated affiliates Depreciation and amortization Net (loss) income Company’s share of net income Amortization of excess investment Company’s share of net income (loss) (dollars in thousands) Statement of Operations Total revenue Operating and other expenses Interest expense Equity in earnings of unconsolidated affiliates Depreciation and amortization Net income (loss) Company’s share of net income Amortization of excess investment Company’s share of net income (loss) $ 18,324 $ 9,208 $ 3,707 $ 31,239 $ — — — (4,554) — 4,800 12,066 — 2,947 $ (4,554) $ (1,489) $ $ 2,212 — 2,212 $ $ (31) — (31) 3,121 3,485 — 580 $ 2,022 $ 991 392 $ 599 2,295 1,448 — 1,416 $(1,452) $ (221) — 10,216 16,999 (4,554) 4,943 $ (5,473) $ 2,951 392 $ (221) $ 2,559 Year Ended December 31, 2005 RCP Venture Crossroads Other Investments Total $ — — — 181,543 — $ 181,543 $ 20,902 — $ 20,902 $ 8,772 2,581 3,632 — 654 $ 1,905 $ 988 392 $ 596 $ 3,778 2,206 906 — 927 $ (261) $ (218) — $ 12,550 4,787 4,538 181,543 1,581 $183,187 $ 21,672 392 $ (218) $ 21,280 Acadia Realty Trust 2007 Annual Report 72 Notes to Consolidated Financial Statements continued B. Notes Receivable and Preferred Equity above and below market leases, acquired in-place leases Investment and customer relationships) and acquired liabilities in During March of 2005, the Company made a $20.0 million accordance with SFAS No. 141. The intangibles are amor- preferred equity investment (“Preferred Equity Invest- tized over the remaining non-cancelable terms of the ment”) in Levitz SL, L.L.C. (“Levitz SL”), the owner of respective leases. fee and leasehold interests in 30 current or former Levitz Furniture Store locations (the “Levitz Properties”), totaling 2.5 million square feet. During June 2006, the Company converted the Preferred Equity Investment to a first mortgage loan and made an additional advance bringing the total outstanding amount to $31.3 million. The loan matures on May 31, 2008 and bears interest at a rate of 10.5%. During 2006, Levitz SL sold one of the Levitz Properties located in Northridge, California and used $20.4 million of the proceeds to pay down the loan. During 2007, Levitz SL sold an additional Levitz Property located in St. Paul Minnesota and used $4.8 million of the proceeds to pay down the first mort- gage loan. As of December 31, 2007 and 2006, the loan balance amounted to $6.1 million and $10.9 million, respectively, and was secured by fee and leasehold mort- gages as well as a pledge of the entities owning 13 of the remaining Levitz Properties totaling 1.3 million square feet. Although Levitz Furniture filed for Chapter 7 bankruptcy protection during November 2007, the Company believes the underlying value of the real estate is sufficient to recover the principal and interest due under the mortgage. Note 5i Deferred Charges Deferred charges consist of the following as of December 31, 2007 and 2006: December 31, 2007 2006 (dollars in thousands) Deferred financing costs $ 18,756 $ 15,684 The scheduled amortization of acquired lease intangible assets as of December 31, 2007 is as follows: (dollars in thousands) 2008 2009 2010 2011 2012 Thereafter $ 2,744 2,222 1,782 1,258 777 7,320 $16,103 The scheduled amortization of acquired lease intangible liabilities as of December 31, 2007 is as follows: (dollars in thousands) 2008 2009 2010 2011 2012 Thereafter Note 7i $ (827) (694) (631) (634) (588) (2,277) $(5,651) Mortgage Loans At December 31, 2007 and 2006, mortgage notes payable, excluding the net valuation premium on the assumption of debt, aggregated $402.0 million and $318.3 million, respectively, and were collateralized by 49 and 52 proper- ties and related tenant leases, respectively. Interest rates on the Company’s outstanding mortgage indebtedness Deferred leasing and other costs 20,399 19,342 ranged from 4.75% to 8.5% with maturities that ranged Accumulated amortization (17,330) (14,277) 39,155 35,026 from March 2008 to November 2032. Certain loans are cross-collateralized and cross-defaulted. The loan agree- ments contain customary representations, covenants and $ 21,825 $ 20,749 events of default. Certain loan agreements require the Note 6i Acquired Lease Intangibles Upon acquisitions of real estate, the Company assesses Company to comply with certain affirmative and negative covenants, including the maintenance of certain debt service coverage and leverage ratios. The following reflects mortgage loan activity for the year the fair value of acquired assets (including land, buildings ended December 31, 2007: and improvements, and identified intangibles such as 73 Acadia Realty Trust 2007 Annual Report During 2007, the Company drew an additional $17.4 million During October 2007, the Company closed on a $75.0 on two existing construction loans. During September 2007, million revolving facility, which bears interest at the com- the Company paid off the remaining $19.2 million balance mercial paper rate plus 50 basis points and matures on of one of these loans. As of December 31, 2007, the out- October 10, 2011. As of December 31, 2007, this facility standing balance on the remaining construction loan was was fully available. $10.0 million. On October 30, 2007, the Company closed on a $9.8 During January 2007, the Company paid off a $21.5 million loan secured by a property, which bears interest million loan. at LIBOR plus 165 basis points and matures on October During January 2007, the Company closed on a $26.0 30, 2010. million loan secured by a property, which bears interest During October 2007, the Company closed on a construc- at a fixed rate of 5.4% and matures on February 11, 2017. tion loan for a property for $95.3 million. This loan bears A portion of the proceeds was used to pay off an existing interest at LIBOR plus 175 basis points and matures on $15.7 million loan. During March 2007, the Company closed on a $30.0 mil- lion revolving facility which bears interest at LIBOR plus 125 basis points and matures on March 29, 2010. As of October 4, 2009. A portion of the proceeds were used to pay down an existing $18.0 million loan. As of December 31, 2007, the amount outstanding on this loan was $37.3 million. December 31, 2007, this line of credit was fully available. During November and December 2007, in conjunction During 2007, the Company borrowed $34.5 million on an existing credit facility. During July 2007, the Company closed on a new $26.3 mil- lion mortgage loan secured by a property. The loan bears interest at a fixed rate of 5.9% and matures on August 1, 2017. A portion of the proceeds were used to pay down an existing $12.5 million loan. with the sale of four properties, the Company paid off $26.5 million of debt. During December 2007, the Company closed on a con- struction loan for a property for $35.7 million. This loan bears interest at a fixed rate of 7.2%. Based upon meet- ing certain conditions, this loan will become permanent after a two-year period and the interest rate will be adjusted. This loan matures on January 1, 2020. As of During September 2007, the Company extended a $19.0 December 31, 2007, there was no outstanding balance million loan that bears fixed interest at 5.8% to a new on this loan. maturity date of March 1, 2008 and also extended a $2.9 million loan that bears interest at LIBOR plus 200 basis points to a new maturity date of October 5, 2008. During December 2007, the Company closed on a con- struction loan for a property for $16.2 million. This loan bears interest at a fixed rate of 7.1%. Based upon meet- On September 12, 2007, the Company closed on a $25.5 ing certain conditions, this loan will become permanent million loan secured by a property, which bears interest after a two-year period and the interest rate will be at a fixed rate of 5.8% and matures on October 1, 2017. adjusted. This loan matures on January 1, 2020. As of A portion of the proceeds were used to pay down an December 31, 2007, there was no outstanding balance existing $19.2 million construction loan. on this loan. Acadia Realty Trust 2007 Annual Report 74 Notes to Consolidated Financial Statements continued The following table summarizes our mortgage indebtedness as of December 31, 2007 and December 31, 2006: December 31, Interest Rate at Properties 2007 2006 December 31, 2007 Maturity Encumbered Payment Terms (dollars in thousands) Mortgage notes payable — variable-rate Washington Mutual Bank, FA $ — $ 21,524 6.10% (LIBOR + 1.50%) 4/1/2011 Bank of America, N.A. RBS Greenwich Capital Bank of America, N.A. PNC Bank, National Association Bank One, N.A. 9,781 30,000 9,925 6.00% (LIBOR + 1.40%) 6/29/2012 30,000 6.00% (LIBOR + 1.40%) 4/1/2008 — 6,424 5.85% (LIBOR + 1.25%) 12/31/2008 9,990 2,818 5,363 6.25% (LIBOR + 1.65%) 5/18/2009 2,939 6.60% (LIBOR + 2.00%) 10/5/2008 Bank of China, New York Branch — 18,000 6.35% (LIBOR + 1.75%) 11/1/2007 Bank of America, N.A. Bank of America, N.A. Anglo Irish Bank Corporation Eurohypo AG Bank of America, N.A./Bank of New York Bank of America, N.A. 15,773 16,000 5.90% (LIBOR + 1.30%) 12/1/2011 — 9,800 37,263 34,500 — — 5.85% (LIBOR + 1.25%) 12/1/2010 — 6.25% (LIBOR + 1.65%) 10/30/2010 — 6.35% (LIBOR + 1.75%) 10/4/2009 — 5.35% (LIBOR + 0.75%) 3/1/2008 — 4.75% (Commercial Paper + 0.50%) 10/9/2011 Interest rate swaps (41) (34,284) (16,002) Total variable-rate debt 115,641 94,173 6.46% 5.19% 5.64% 4.98% 5.12% 5.53% 5.44% 8.50% 6.40% 5.45% 6.06% 5.83% 6.62% 6.51% 5.80% 5.88% 5.42% 7.18% 7.14% 6.18% 7/1/2007 6/1/2013 9/6/2014 9/6/2015 11/6/2015 1/1/2016 3/1/2016 4/11/2028 11/1/2032 6/11/2013 8/29/2016 3/1/2008 2/1/2009 1/15/2009 10/1/2017 8/1/2017 2/11/2017 1/1/2020 1/1/2020 (39) Mortgage notes payable – fixed-rate Sun America Life Insurance Company RBS Greenwich Capital RBS Greenwich Capital RBS Greenwich Capital RBS Greenwich Capital Bear Stearns Commercial Bear Stearns Commercial LaSalle Bank, N.A. GMAC Commercial Column Financial, Inc. Merrill Lynch Mortgage Lending, Inc. Bank of China Cortlandt Deposit Corp Cortlandt Deposit Corp Bank of America, N.A. Bear Stearns Commercial Wachovia Bear Stearns Commercial Bear Stearns Commercial Interest rate swaps (41) Total fixed-rate debt Total fixed and variable debt Valuation premium on assumption of debt net of amortization (40) Total See notes on following page. — — 14,752 17,600 12,500 34,600 20,500 3,727 8,451 9,834 23,500 19,000 4,950 4,893 25,500 26,250 26,000 — — 12,665 15,672 14,940 17,600 12,500 34,600 20,500 3,782 8,565 9,997 23,500 19,000 7,425 7,339 — — — — — 34,284 16,002 286,341 224,087 401,982 318,260 921 1,247 $402,903 $ 319,507 (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (7) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) (21) (22) (23) (24) (25) (26) (4) (13) (14) (27) (28) (29) (29) (30) (30) (36) (35) (30) (29) (31) (30) (36) (30) (30) (29) (29) (29) (32) (33) (34) (30) (29) (29) (29) (37) (30) (35) (35) (30) (38) (30) (36) (36) 75 Acadia Realty Trust 2007 Annual Report Notes: (1) Ledgewood Mall (15) New Loudon Center (16) Crescent Plaza (2) Village Commons Shopping Center (17) Pacesetter Park Shopping Center (3) 161st Street (4) 216th Street (5) Liberty Avenue (6) Granville Center (7) Fordham Place (8) Branch Shopping Center (9) Marketplace of Absecon Bloomfield Town Square Hobson West Plaza Village Apartments Town Line Plaza Methuen Shopping Center Abington Towne Center (10) Tarrytown Centre (11) Acadia Strategic Opportunity Fund II LLC (12) Acadia Strategic Opportunity Fund III LLC (13) Merrillville Plaza (14) 239 Greenwich Avenue Note 8i (18) Elmwood Park Shopping Center (19) Gateway Shopping Center (20) Clark-Diversey (21) Boonton Shopping Center (22) Chestnut Hill (23) Walnut Hill (24) Sherman Avenue (25) Kroger Portfolio (26) Safeway Portfolio (27) Pelham Manor (28) Atlantic Avenue Self-Storage (29) Monthly principal and interest (30) Interest only monthly (31) Annual principal and monthly interest (32) Interest only monthly until 9/10; monthly principal and interest thereafter (33) Interest only monthly until 12/08; monthly principal and interest thereafter (34) Interest only monthly until 1/10; monthly principal and interest thereafter (35) Annual principal and semi-annual interest payments (36) Interest only upon draw down on con- struction loan (37) Interest only until 10/11, monthly principal and interest thereafter (38) Interest only until 7/12, monthly principal and interest thereafter (39) Maturing between 1/1/10 and 3/1/12 (40) In connection with the assumption of debt in accordance with the requirements of SFAS No. 141, the Company has recorded a valuation premium which is being amortized to interest expense over the remaining terms of the underlying mortgage loans (41) Represents the amount of the company’s variable-rate debt that has been fixed through certain cash flow hedge transactions (Note 18) Convertible Notes Payable In December 2006, the Company issued $100.0 million of convertible notes with a fixed interest rate of 3.75% due 2026 (the “Convertible Notes”). The Convertible Notes were issued at par and require interest payments semi- annually in arrears on June 15th and December 15th of each year. The Convertible Notes are unsecured unsubor- dinated obligations and rank equally with all other unse- cured and unsubordinated indebtedness. On January 8, 2007, the option to increase the issuance of the Convert- ible Notes by an additional $15.0 million, was exercised, resulting in additional proceeds of $14.7 million. The Con- vertible Notes had an initial conversion price of $30.86 per share. Upon conversion of the Convertible Notes, the Company will deliver cash and, in some circumstances, Common Shares, as specified in the indenture relating to the Convertible Notes. The Convertible Notes may only be Company’s Common Shares multiplied by the applicable conversion rate; or (iii) if those notes have been called for redemption, at any time prior to the close of business on the second business day prior to the redemption date; or (iv) if the Company’s Common Shares are not listed on a United States national or regional securities exchange for 30 consecutive trading days. Prior to December 20, 2011, the Company will not have the right to redeem Convertible Notes, except to preserve its status as a REIT. After December 20, 2011, the Company will have the right to redeem the notes, in whole or in part, at any time and from time to time, for cash equal to 100% of the principal amount of the notes plus any accrued and unpaid interest to, but not including, the redemption date. The Holders of notes may require the Company to repurchase their notes, in whole or in part, on December 20, 2011, December 15, 2016, and December 15, 2021 for cash equal to 100% of the principal amount of the notes to be repurchased plus any accrued and unpaid interest to, but not including, the converted prior to maturity: (i) during any calendar quarter repurchase date. beginning after December 31, 2006 (and only during such calendar quarter), if, and only if, the closing sale price of the Company’s Common Shares for at least 20 trading days (whether consecutive or not) in the period of 30 con- secutive trading days ending on the last trading day of the preceding calendar quarter is greater than 130% of the conversion price per common share in effect on the appli- cable trading day; or (ii) during the five consecutive trad- ing-day period following any five consecutive trading-day period in which the trading price of the notes was less than 98% of the product of the closing sale price of the If certain change of control transactions occur prior to December 20, 2011 and a holder elects to convert the Convertible Notes in connection with any such transaction, the Company will increase the conversion rate in connec- tion with such conversion by a number of additional com- mon shares based on the date such transaction becomes effective and the price paid per common share in such transaction. The conversion rate may also be adjusted under certain other circumstances, including the payment of cash dividends in excess of our current regular quarterly Acadia Realty Trust 2007 Annual Report 76 Notes to Consolidated Financial Statements continued cash dividend of $0.21 per Common Share, but will be not Note 9i adjusted for accrued and unpaid interest on the notes. Upon a conversion of notes, the Company will deliver cash and, at the Company’s election, its Common Shares, with an aggregate value, which the Company refers to as the “conversion value,” equal to the conversion rate multiplied by the average price of the Company’s Common Shares as follows: (i) an amount in cash which the Company refers to as the “principal return,” equal to the lesser of (a) the principal amount of the converted notes and (b) the conversion value; and (ii) if the conversion value is greater than the principal return, an amount with a value equal to Shareholders’ Equity and Minority Interests Common Shares Through December 31, 2007, the Company had repurchased 2,051,605 Common Shares at a total cost of $11.7 million (all of these Common Shares have been subsequently reis- sued) under its share repurchase program that allows for the repurchase of up to $20.0 million of its outstanding Common Shares. The repurchased shares are reflected as a reduction of Common Shares at par value and additional the difference between the conversion value and the prin- paid-in capital. During the first quarter of 2007, 43,865 employee Restric- ted Shares were cancelled to pay the employees’ income taxes due on the value of the portion of the Restricted Shares which vested. During the year ended December 31, 2007, the Company recognized accrued Common Share and Common OP Unit-based compensation totaling $3.3 million in connection with the vesting of Restricted Shares and Units. (Note 13). cipal return, which the Company refers to as the “new amount.” The net amount may be paid, at the Company’s option, in cash, its Common Shares or a combination of cash and its Common Shares. The scheduled principal repayments of all indebtedness as of December 31, 2007 are as follows: (dollars in thousands) 2008 2009 2010 2011 2012 Thereafter $ 92,199 53,356 11,515 131,870 11,239 216,803 $516,982(1) Note: (1) Does not include $921 net valuation premium on assumption of debt. Minority Interests The following table summarizes the change in the minority interests since December 31, 2006: Minority Interest in Operating Partnership Minority Interest in Partially-Owned Affiliates (dollars in thousands) Balance at December 31, 2006 Distributions declared of $1.033 per Common OP Unit Net income for the period January 1 through December 31, 2007 Distributions paid Conversion of Series B Preferred OP Units Other comprehensive income – unrealized loss on valuation of swap agreements Minority Interest contributions Employee Long-term Incentive Plan Unit Awards Balance at December 31, 2007 77 Acadia Realty Trust 2007 Annual Report $ 8,673 (690) 615 — (4,000) (136) — 133 $ 4,595 $ 105,064 — 14,601 (63,691) — — 110,542 — $ 166,516 Minority interest in the Operating Partnership represents The following table summarizes the minority interest con- (i) the limited partners’ 642,272 Common OP Units at both tributions and distributions in 2007: December 31, 2007 and 2006, (ii) 188 Series A Preferred Contributions Distributions OP Units at both December 31, 2007 and 2006, with a (dollars in thousands) stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $22.50 (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) 0 and 4,000 Series B Preferred OP Units at December 31, 2007 and December 31, 2006, respectively, with a stated value of $1,000 per unit, which are entitled to a preferred quarterly distribution of the greater of (a) $13.00 (5.2% annually) per unit or (b) the quarterly distri- Partially-owned affiliates $ — $ (2,641) Fund I Fund II Mervyns II Fund III — (3,658) 66,050 (17,628) 2,139 (39,764) 42,353 — $110,542 $ (63,691) bution attributable to a Series B Preferred OP Unit if such In February 2005, the Company issued $4.0 million (250,000 unit were converted into a Common OP Unit. During February 2007, Klaff (Note 10) converted 3,800 Series B Preferred Units into 296,412 Common OP Units and ultimately into the same number of Common Shares. During June 2007 Klaff converted its remaining 200 Series B Preferred Units into 15,601 Common OP Units and ultimately into the same number of Common Shares. Restricted Common OP Units valued at $16.00 each) of Restricted Common OP Units to Klaff in consideration for the remaining 25% interest in certain management contract rights previously acquired from Klaff as well as the rights to certain potential future revenue streams. This followed the acquisition of 75% of the management contract rights from Klaff in January 2004 as reflected below. The Restricted Common OP Units are convertible into the Company’s Com- Minority interests in partially-owned affiliates include third- mon Shares on a one-for-one basis after a five-year lock-up party interests in Fund I, II and III, and Mervyns I and II period. $1.1 million of the purchase price was allocated to and three other entities. During July 2005, the Company issued to a third party 11,105 Restricted Common OP Units valued at $18.01 investment in management contracts in the consolidated balance sheet and is being amortized over the estimated remaining life of the contracts. per unit in connection with the purchase of 4343 Amboy The Series A Preferred OP Units were issued on November Road. The holder of the Common OP Units was restricted 16, 1999 in connection with the acquisition of all the part- from selling these for six months from the date of the nership interests of the limited partnership which owns the transaction. During June 2006, the Company redeemed Pacesetter Park Shopping Center. Through December 31, for cash the 11,105 Restricted Common OP Units. 2007, 696 Series A Preferred OP Units were converted into During January 2006, the Company acquired a 60% inter- est in the A&P Shopping Plaza located in Boonton, New Jersey (Note 2). The remaining 40% interest is owned by a third party and is reflected as minority interest in the accompanying Consolidated Balance Sheets at December 31, 2007 and December 31, 2006. 92,800 Common OP Units and then into Common Shares. The Series A Preferred OP Units are currently convertible into Common OP Units based on the stated value divided by $7.50. Either the Company or the holders can currently call for the conversion of the Series A Preferred OP Units at the lesser of $7.50 or the market price of the Common Shares as of the conversion date. 4,000 Series B Preferred OP Units were issued to Klaff during January of 2004 in consideration for the acquisition of 75% of certain management contract rights. 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, Klaff may currently redeem them at par for either cash or Common OP Units. After the fifth anniversary of the issuance, the Company may redeem the Acadia Realty Trust 2007 Annual Report 78 Notes to Consolidated Financial Statements continued Preferred OP Units and convert them into Common OP Minimum future rentals to be received under non-cancelable Units at market value as of the redemption date. The $4.0 leases for shopping centers and other retail properties as million purchase price is reflected in the investment in man- of December 31, 2007 are summarized as follows: agement contracts in the consolidated balance sheet and is (dollars in thousands) being amortized over the estimated life of the contracts. For the years ended December 31, 2006 and 2005, $0.5 million of these Klaff management contracts were written off fol- lowing the disposition of these assets. During 2007, Klaff converted all 4,000 Series B Preferred Units into 312,013 Common OP Units and ultimately into Common Shares. 2008 2009 2010 2011 2012 Thereafter $ 84,482 81,036 71,734 58,538 49,778 326,286 $ 671,854 Note 10i Related Party Transactions During January 2004, the Operating Partnership issued Minimum future rentals above include a total of $7.5 mil- lion for three tenants, totaling three leases, which have filed for bankruptcy protection. Two tenant’s leases have 4,000 Restricted Preferred OP Units to Klaff for certain not been rejected nor affirmed. One tenant has filed a management contract rights and the rights to certain notice of rejection dated January 18, 2008. During the potential future revenue streams. During 2007, Klaff con- years ended December 31, 2007, 2006 and 2005, no sin- verted all of these units into 312,013 Common Shares gle tenant collectively accounted for more than 10% of (Note 9). the Company’s total revenues. During February 2005, the Operating Partnership issued $4.0 million of Restricted Common OP Units to Klaff for the balance of certain management contract rights as well as the rights to certain potential future revenue streams (Note 9). During March 2005, the Company completed $20.0 million Preferred Equity Investment with Levitz SL, of which Klaff is the managing member. In June 2006, the Company converted its Preferred Equity Investment with Levitz SL, into a mortgage loan (Note 4). The Company earns asset management, leasing, dispo- sition, development and construction fees for providing services to an existing portfolio of retail properties and/or leasehold interests in which Klaff has an interest. Fees earned by the Company in connection with this portfolio were $2.1 million, $3.5 million and $3.6 million for the years ended December 31, 2007, 2006 and 2005 respectively. Lee Wielansky, the Lead Trustee of the Company, was paid a consulting fee of $0.1 million for each of the years ended December 31, 2007, 2006, and 2005. Note 11i Tenant Leases Space in the shopping centers and other retail properties is leased to various tenants under operating leases that usually grant tenants renewal options and generally provide for additional rents based on certain operating expenses as well as tenants’ sales volume. 79 Acadia Realty Trust 2007 Annual Report Note 12i Lease Obligations The Company leases land at seven of its shopping cen- ters, which are accounted for as operating leases and gen- erally provide the Company with renewal options. Ground rent expense was $4.1 million, $4.5 million, and $3.5 mil- lion (including capitalized ground rent at properties under development of $2.7 million, $3.4 million and $2.7 million) for the years ended December 31, 2007, 2006 and 2005, respectively. The leases terminate at various dates between 2008 and 2066. These leases provide the Company with options to renew for additional terms aggregating from 20 to 60 years. The Company leases space for its White Plains corporate office for a term expiring in 2015. Office rent expense under this lease was $0.8 million, $0.6 million and $0.4 million for the years ended December 31, 2007, 2006 and 2005, respectively. Future minimum rental pay- ments required for leases having remaining non-cancelable lease terms are as follows: (dollars in thousands) 2008 2009 2010 2011 2012 Thereafter $ 3,904 4,656 5,538 5,575 5,642 101,360 $126,675 Note 13i Share Incentive Plan During 2003, the Company adopted the 2003 Share Incen- tive Plan (the “2003 Plan. The 2003 Plan authorizes the issuance of options, share appreciation rights, restricted shares (“Restricted Shares”), restricted OP units (“LTIP Units”) and performance units (collectively, “Awards”) to officers, employees and trustees of the Company and consultants to the Company equal to up to four percent of the total Common Shares of the Company outstanding from time to time on a fully diluted basis. However, no participant may receive more than the equivalent of 1,000,000 Common Shares during the term of the 2003 Plan with respect to Awards. Options are granted by the Compensation Committee (the “Committee”), which currently consists of two non-employee Trustees, and will not have an exercise price less than 100% of the fair market value of the Common Shares and a term of greater than ten years at the grant date. Vesting of options is at the discretion of the Committee. 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 Committee deter- mines the restrictions placed on Awards, including the dividends or distributions thereon and the term of such restrictions. The Committee also determines the award and vesting of performance units and performance shares based on the attainment of specified performance objec- tives of the Company within a specified performance period. Through December 31, 2007, no share appreciation rights or performance units/shares had been awarded. During 2006, the Company adopted the 2006 Share Incen- tive Plan (the “2006 Plan”). The 2006 Plan is substantially similar to the 2003 Plan, except that the maximum num- ber of Common Shares equivalents that the Company may issue pursuant to the 2006 Plan is 500,000. On January 15, 2007 (the “Grant Date”), the Company issued 108,823 Restricted Common Shares (“Restricted Shares”) to officers and 20,735 Restricted Shares to employees of the Company. The Restricted Shares do not carry the rights of Common Shares, including voting rights, until vesting and may not be transferred, assigned or pledged until the recipients have a vested non-forfeitable right to such shares. All Restricted Shares are subject to the recipients’ continued employment with the Company through the applicable vesting dates. Vesting with respect to 61,940 of the Restricted Shares issued to officers is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on 50% of the Restricted Shares issued to officers is also subject to certain Company performance targets. Vesting with respect to 46,883 of the Restricted Shares issued to officers is over three years with 30% vesting on the first anniversary and 35% vesting on the following two anniver- saries of the Grant Date. Vesting with respect to the 20,735 Restricted Shares issued to employees is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on 25% of the Restricted Shares issued to employees is also subject to certain total shareholder returns on the Company’s Common Shares. On the Grant Date, the Company also issued 50,000 Restric- ted Shares to an officer in connection with his promotion to Executive Vice President. Vesting with respect to these Restricted Shares, is over five years with 20% vesting on each of the next five anniversaries of the Grant Date. Dividends on 46,883 of the Restricted Shares, issued to officers are paid currently on both unvested and vested shares. Dividends on 132,675 of these Restricted Shares will not be paid until such Restricted Shares vest. There will be a cumulative dividend payment upon vesting from the Grant Date to the applicable vesting date. The total value of the above Restricted Share awards on the date of grant was $4.5 million. Compensation expense of $1.1 million has been recognized in the accompanying consolidated financial statements related to these Restric- ted Shares for the year ended December 31, 2007. The weighted average fair value for shares granted for the years ended December 31, 2007, 2006 and 2005 were $24.91, $20.46 and $16.30, respectively, On the Grant Date, the Company also issued 20,322 LTIP Units to officers and 1,214 LTIP Units to employees of the Company. LTIP Units are similar to Restricted Shares but provide for a quarterly partnership distribution in a like amount as paid to Common OP Units. This distribution is paid on both unvested and vested LTIP Units. The LTIP Units are convertible into Common OP Units and Common Shares upon vesting and a revaluation of the book capital accounts. Vesting with respect to the LTIP Units is over four years with 25% vesting on each of the next four anniversaries of the Grant Date. In addition, vesting on Acadia Realty Trust 2007 Annual Report 80 Notes to Consolidated Financial Statements continued 50% of the officers’ LTIP Units and 25% of the employees’ options have been issued, of which all are vested, to non- LTIP Units are also subject to certain Company perform- employee Trustees as of December 31, 2007. ance targets. For the years ended December 31, 2007, 2006 and 2005, The total value of these LTIP Units on the Grant Date was $3.3 million, $2.7 million, and $1.0 million, respectively, $0.5 million. Compensation expense of $0.1 million has were recognized in compensation expense related to been recognized in the accompanying financial statements Restricted Share and LTIP Unit grants. related to these LTIP Units for the year ended December 31, 2007. The Company has used the Binomial method for purposes of estimating the fair value in determining compensation On May 15, 2007, the Company issued 10,831 Common expense for options granted for the years ended Decem- Shares and the equivalent of 5,096 Common Shares through ber 31, 2006 and 2005. No options were issued during a deferred compensation plan to Trustees of the Company. 2007. The fair value for the options issued by the Com- In addition, on August 23, 2007, the Company issued an pany was estimated at the date of the grant using the fol- additional 1,918 unrestricted Common Shares to a newly lowing weighted-average assumptions resulting in: elected Trustee. Trustee fee expense of $0.5 million for the year ended December 31, 2007 has been recognized in the accompanying consolidated financial statements related to these issuances. Years Ended December 31, 2006 2005 Weighted-average volatility 18.0% 18.0% As of December 31, 2007, the Company had 473,738 options outstanding to officers and employees of which 454,106 are vested. These options are for 10-year terms from the grant date and vest in three equal annual install- Expected dividends Expected life (in years) Risk-free interest rate 3.6% 4.2% 7.5 7.5 4.4% 4.0% ments, which began on the Grant Date. In addition, 58,000 Fair value at date of grant (per option) $3.03 $2.57 A summary of option activity under all option arrangements as of December 31, 2007, and changes during the year then ended is presented below: Options Outstanding at January 1, 2007 Granted Exercised Forfeited or Expired Outstanding at December 31, 2007 Exercisable at December 31, 2007 Shares 550,372 — (17,474) (1,160) 531,738 512,106 Weighted Average Exercise Price Weighted Average Remaining Contractual Term Aggregate Intrinsic Value (dollars in thousands) $10.01 — 9.94 20.65 $ 9.99 $ 9.58 4.0 3.9 $ 8,305 $ 8,207 The weighted average Grant Date fair value of options A summary of the status of the Company’s unvested granted during the years 2006 and 2005 was $3.03 and Restricted Shares and LTIP Units as of December 31, $2.57, respectively. The total intrinsic value of options 2007 and changes during the year ended December 31, exercised during the years ended December 31, 2007, 2007, is presented on the following page: 2006 and 2005 was $0.3 million, $0.1 million and $0.6 million, respectively. 81 Acadia Realty Trust 2007 Annual Report Unvested Shares and LTIP Units Unvested at January 1, 2007 Granted Vested Forfeited Unvested at December 31, 2007 Restricted Shares (in thousands) 550 180 (105) (30) 595 Weighted Grant-Date Fair Value $ 17.27 24.91 14.89 19.41 $ 20.51 LTIP Units (in thousands) — 22 — — 22 Weighted Grant-Date Fair Value $ — 24.91 — — $ 24.91 As of December 31, 2007, there was $8.5 million of total ing Common Shares that the participants owned for at unrecognized compensation cost related to unvested least six months prior to the option exercise date. The share-based compensation arrangements granted under Share Units are equivalent to a Common Share on a one- share incentive plans. That cost is expected to be recog- for-one basis and carry a dividend equivalent right equal nized over a weighted-average period of 2.3 years. The to the dividend rate for the Company’s Common shares. total fair value of Restricted Shares that vested during the The deferral period is determined by each of the participants years ended December 31, 2007, 2006 and 2005, was and generally terminates after the cessation of the partici- $1.6 million, $2.5 million and $1.0 million, respectively. pants continuous service with the Company, as defined in Note 14i Employee Share Purchase and Deferred Share Plan The Acadia Realty Trust Employee Share Purchase Plan (the “Purchase Plan”), allows eligible employees of the Company to purchase Common Shares through payroll deductions. The Purchase Plan provides for employees to purchase Common Shares on a quarterly basis at a 15% discount to the closing price of the Company’s Com- mon 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 partici- pant’s annual compensation that the Committee estab- 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 2007, 2006 and 2005 there were no additional Share Units contributed to the plan. Note 15i Employee 401(k) Plan The Company maintains a 401(k) plan for employees under which the Company currently matches 50% of a plan participant’s contribution up to 6% of the employee’s annual salary. A plan participant may contribute up to a lishes from time to time, and a participant may not purchase maximum of 15% of their compensation but not in excess more than 1,000 Common Shares per quarter. Compen- sation expense will be recognized by the Company to the extent of the above discount to the average closing price of $15,500 for the year ended December 31, 2007. The Company contributed $0.2 million, $0.2 million and $0.1 million for the years ended December 31, 2007, 2006 and of the Common Shares with respect to the applicable 2005, respectively. quarter. During 2007, 2006 and 2005, 7,123, 5,307 and 6,412 Common Shares, respectively, were purchased by Note 16i Employees under the Purchase Plan. Associated compen- sation expense of $0.03 million was recorded in 2007 and $0.02 million was recorded in 2006 and 2005. Dividends and Distributions Payable On December 6, 2007, the Company declared a cash During August of 2004, the Company adopted a Deferral dividend for the quarter ended December 31, 2007 of and Distribution Election pursuant to the 1999 Share $0.21 per Common Share. The dividend was paid on Jan- Incentive Plan and 2003 Share Incentive Plan, whereby uary 15, 2008 to shareholders of record as of December the participants elected to defer receipt of 190,487 Com- 31, 2007. In addition, on December 21, 2007, the Company mon Shares (“Share Units”) that otherwise would have announced the successful completion of its 2007 disposi- been issued upon the exercise of certain options. The tion initiatives. In connection with the taxable gains arising payment of the option exercise price was made by tender- from these and earlier property dispositions, the Company’s Acadia Realty Trust 2007 Annual Report 82 Notes to Consolidated Financial Statements continued Board of Trustees approved a special dividend totaling December 31, 2007, 2006 and 2005, no U.S. Federal $7.4 million, or $0.2225 per Common Share, which was income or excise taxes were incurred. If the Company paid on January 15, 2008 to the shareholders of record fails to qualify as a REIT in any taxable year, it will be sub- as of December 31, 2007. Note 17i Federal Income Taxes The Company has elected to qualify as a REIT in accor- dance with the Internal Revenue Code (the “Code”) and intends at all times to qualify as a REIT under Sections 856 through 860 of the Code of 1986, as amended. To qualify as a REIT, the Company must meet a number of organizational and operational requirements, including a ject to Federal income taxes at the regular corporate 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 qualifies for taxa- tion 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 are subject to Federal, state and local income taxes. requirement that it currently distribute at least 90% of its The primary difference between the GAAP and tax annual REIT taxable income to its shareholders. As a REIT, reported amounts of the Company’s assets and liabilities the Company generally will not be subject to corporate are a higher GAAP basis in its real estate properties. Federal income tax, provided that distributions to its This is primarily the result of assets acquired as a result shareholders equal at least the amount of its REIT taxable of property contributions in exchange for OP Units and the income as defined under the Code. As the Company dis- utilization of Code Section 1031 deferred exchanges. tributed sufficient taxable income for the years ended Reconciliation between GAAP net income and Federal taxable income The following unaudited table reconciles GAAP net income to taxable income for the years ended December 31, 2007, 2006 and 2005: (dollars in thousands) Net Income Net income attributable to TRS Net income attributable to REIT Book/tax difference in depreciation and amortization Book/tax difference on exercise of stock options and vesting of restricted shares Book/tax difference on capital transactions (1) Other book/tax differences, net 2007 (Estimated) $27,270 2,514 24,756 4,155 (689) 8,300 494 REIT taxable income before dividends paid deduction $37,016 2006 (Actual) $39,013 405 38,608 4,906 (397) (16,709) 2,963 $29,371 2005 (Actual) $20,626 1,349 19,277 2,817 (405) (465) (2,065) $19,159 Note: (1) Principally the result of the deferral of the gain from the sale of properties for income tax purposes. Characterization of Distributions The Company has determined that the cash distributed to the shareholders is characterized as follows for Federal Ordinary income income tax purposes: Capital gain Return of capital Years Ended December 31, 2007 2006 2005 51% 49% — 100% 95% — — 3% 2% 100% 100% 100% 83 Acadia Realty Trust 2007 Annual Report Taxable REIT Subsidiaries (“TRS”) Income taxes have been provided for using the asset and Assets, Accounts Payable and Accrued Expenses, Divi- dends and Distributions Payable, Due to Related Parties liability method as required by SFAS No. 109. The Com- and Other Liabilities. The carrying amount of these assets pany’s combined TRS income (loss) and provision (benefit) and liabilities approximates fair value due to the short-term for income taxes for the years ended December 31, 2007, nature of such accounts. 2006 and 2005 are summarized as follows: 2007 2006 2005 (Estimated) (Actual) (Actual) (dollars in thousands) TRS income (loss) before income taxes $ 5,077 $(296) $ 3,458 Provision (benefit) for income taxes: Federal State and local 2,097 466 (590) (111) 1,601 508 TRS net income $ 2,514 $ 405 $ 1,349 The income tax provision (benefit) differs from the amount computed by applying the statutory federal income tax rate to taxable income (loss) before income taxes as follows: 2007 2006 2005 (dollars in thousands) Federal provision (benefit) at statutory tax rate $1,726 $(100) $1,210 State and local taxes, net of federal benefit 255 (15) 330 Tax effect of: Valuation allowance against deferred tax liability asset Utilization of loss and — deduction carry forwards — — — Change in estimate 605 (586) 208 (115) — REIT state, local and franchise taxes Total provision (benefit) 67 193 507 for income taxes $2,653 $(508) $2,140 Note 18i Financial Instruments Fair Value of Financial Instruments: SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires disclosure on the fair value of finan- Notes Receivable — As of December 31, 2007 and 2006, the Company had notes receivable of $57.7 million and $36.0 million, respectively. Given the short-term nature of the notes and the fact that several of the notes are demand notes, the Company has determined that the car- rying value of the notes receivable approximates fair value. Derivative Instruments — The fair value of these instru- ments is based upon the estimated amounts the Com- pany would receive or pay to terminate the contracts as of December 31, 2007 and 2006 and is determined using interest rate market pricing models. Mortgage Notes Payable and Notes Payable — As of December 31, 2007 and 2006, the Company has deter- mined the estimated fair value of its mortgage notes payable, including those relating to discontinued opera- tions, were $519.4 million and $439.1 million, respectively, by discounting future cash payments utilizing a discount rate equivalent to the rate at which similar mortgage notes payable would be originated under conditions then existing. Derivative Financial Instruments: SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, establishes accounting and reporting standards for deriva- tive instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. As required by SFAS 133, the Company records all deriva- tives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the resulting designa- tion. 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 con- sidered cash flow hedges. cial instruments. Certain of the Company’s assets and lia- For derivatives designated as fair value hedges, changes bilities are considered financial instruments. Fair value in the fair value of the derivative and the hedged item estimates, methods and assumptions are set forth below. related to the hedged risk are recognized in earnings. For Cash and Cash Equivalents, Restricted Cash, Cash in Escrow, Rents Receivable, Prepaid Expenses, Other derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is ini- Acadia Realty Trust 2007 Annual Report 84 Notes to Consolidated Financial Statements continued tially reported in other comprehensive income (outside of As of December 31, 2007 and 2006, no derivatives were earnings) and subsequently reclassified to earnings when designated as fair value hedges or hedges of net invest- the hedged transaction affects earnings, and the ineffec- ments in foreign operations. Additionally, the Company tive portion of changes in the fair value of the derivative is does not use derivatives for trading or speculative pur- recognized directly in earnings. The Company assesses poses and currently does not have any derivatives that are the effectiveness of each hedging relationship by compar- not designated as hedges. ing the changes in fair value or cash flows of the deriva- tive 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. The following table summarizes the notional values and fair values of the Company’s derivative financial instruments as of December 31, 2007. The notional value does not repre- sent exposure to credit, interest rate or market risks: Hedge Type Notional Value Rate Maturity Fair Value (dollars in thousands) Interest Rate Swaps LIBOR Swap LIBOR Swap LIBOR Swap LIBOR Swap Interest rate swaps Interest Rate LIBOR Cap Net Derivative instrument liability $ 4,640 11,410 8,434 9,800 $34,284 $30,000 The above derivative instruments have been designated as cash flow hedges and hedge the future cash outflows on mortgage debt. Such instruments are reported at the fair values reflected above. As of December 31, 2007 and 2006, unrealized losses totaling $1.1 and $0.2 million, respectively were reflected in accumulated other compre- hensive loss. 4.71% 4.90% 5.14% 4.47% 01/01/10 10/01/11 03/01/12 10/29/10 6.00% 04/01/08 $ (93) (395) (383) (195) (1,066) (28) $ (1,094) Note 19i Earnings Per Common Share Basic earnings per share was determined by dividing the applicable net income to common shareholders for the year by the weighted average number of Common Shares outstanding during each year consistent with SFAS No. 128. Diluted earnings per share reflects the potential dilu- tion 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: 85 Acadia Realty Trust 2007 Annual Report Years Ended December 31, 2007 2006 2005 (dollars in thousands, except per share amounts) Numerator: Income from continuing operations – basic earnings per share $18,056 $15,622 $19,320 Effect of dilutive securities: Preferred OP Unit distributions 23 254 — Numerator for diluted earnings per share $18,079 $15,876 $19,320 Denominator: Weighted average shares – basic earnings per share 32,907 32,502 31,949 Effect of dilutive securities: Employee share options Convertible Preferred OP Units Dilutive potential Common Shares 335 67 402 314 337 651 265 — 265 Denominator for diluted earnings per share 33,309 33,153 32,214 Basic earnings per share from continuing operations Diluted earnings per share from continuing operations $ $ 0.55 0.54 $ $ 0.48 0.48 $ $ 0.61 0.60 The weighted average shares used in the computation of Shares on a one-for-one basis. The income allocable to basic earnings per share include unvested restricted such units is allocated on this same basis and reflected as shares (Note 13) and Share Units (Note 14) that are enti- minority interest in the accompanying consolidated finan- tled to receive dividend equivalent payments. The effect cial statements. As such, the assumed conversion of these of the conversion of Common OP Units is not reflected in units would have no net impact on the determination of the above table as they are exchangeable for Common diluted earnings per share. The conversion of the convert- ible notes payable (Note 8) is not reflected in the table above as such conversion would be anti-dilutive. Acadia Realty Trust 2007 Annual Report 86 Notes to Consolidated Financial Statements continued Note 20i Summary of Quarterly Financial Information (unaudited) The quarterly results of operations of the Company for the years ended December 31, 2007 and 2006 are as follows: (dollars in thousands, except per share amounts) Revenue Income from continuing operations Income (loss) from discontinued operations Income from extraordinary item Net income Net income per Common Share — basic: March 31 June 30 September 30 December 31 2007 $24,989 $ 3,670 $ 166 $ 2,883 $ 6,719 $ 23,481 $ 3,028 $ $ 6 — $ 3,034 $26,282 $ 8,117 $ (421) $ 794 $ 8,490 $26,817 $ 3,241 $ 5,786 $ — $ 9,027 Income from continuing operations $ 0.11 $ 0.09 $ 0.25 $ 0.10 Income (loss) from discontinued operations Income from extraordinary item 0.01 0.09 — — (0.01) 0.02 0.17 — Net income $ 0.21 $ 0.09 $ 0.26 $ 0.27 Net income per Common Share — diluted: Income from continuing operations $ 0.11 $ 0.09 Income (loss) from discontinued operations Income from extraordinary item Net income Cash dividends declared per Common Share Weighted average Common Shares outstanding: 0.01 0.08 0.20 0.20 $ $ — — $ $ 0.09 0.20 $ 0.24 (0.01) 0.02 0.25 0.20 $ $ $ 0.10 0.17 — $ 0.27 $0.4325 Basic Diluted 32,753,337 33,274,066 32,934,843 33,290,845 32,965,619 33,315,524 32,972,503 33,327,965 (dollars in thousands, except per share amounts) Revenue Income from continuing operations Income from discontinued operations Net income Net income per Common Share — basic: Income from continuing operations Income from discontinued operations Net income Net income per Common Share — diluted: Income from continuing operations Income from discontinued operations Net income Cash dividends declared per Common Share Weighted average Common Shares outstanding: March 31 June 30 September 30 December 31 2006 $23,906 $ 3,667 $ 686 $ 4,353 $ 0.11 0.02 $ 0.13 $ 0.11 0.02 $ 0.13 $ 0.185 $ 22,303 $ 4,366 $ 482 $ 4,848 $ 0.13 0.02 $ 0.15 $ 0.13 0.01 $ 0.14 $ 0.185 $24,260 $ 3,722 $ 400 $ 4,122 $ 0.12 0.01 $ 0.13 $ 0.12 0.01 $ 0.13 $ 0.185 $25,331 $ 3,867 $21,823 $25,690 $ 0.12 0.67 $ 0.79 $ 0.12 0.66 0.78 0.20 $ $ Basic Diluted 32,468,204 32,766,119 32,509,360 32,810,794 32,513,398 32,836,473 32,514,803 33,186,718 87 Acadia Realty Trust 2007 Annual Report Note 21i Commitments and Contingencies Under various federal, state and local laws, ordinances and regulations relating to the protection of the environ- ment, a current or previous owner or operator of real estate may be liable for the cost of removal or remediation of certain hazardous or toxic substances disposed, stored, generated, released, manufactured or discharged from, The Company is involved in various matters of litigation arising in the normal course of business. While the Com- pany is unable to predict with certainty the amounts involved, the Company’s management and counsel are of the opinion that, when such litigation is resolved, the Company’s resulting liability, if any, will not have a signifi- cant effect on the Company’s consolidated financial posi- tion or results of operations. on, at, under, or in a property. As such, the Company may Note 22i be potentially liable for costs associated with any potential environmental remediation at any of its formerly or cur- rently owned properties. Subsequent Events On February 11, 2008, the Company entered into contract to sell the Ledgewood Mall for $55 million. Ledgewood The Company conducts Phase I environmental reviews Mall is a 517,000 square foot enclosed mall in Ledgewood, with respect to properties it acquires. These reviews New Jersey. The Company expects to close on this trans- include an investigation for the presence of asbestos, action in the second quarter of 2008. underground storage tanks and polychlorinated biphenyls (PCBs). Although such reviews are intended to evaluate the environmental condition of the subject property as well as surrounding properties, there can be no assurance that the review conducted by the Company will be ade- quate to identify environmental or other problems that During the fiscal year ending December 31, 2008, the investment consortium which owns Mervyns (Note 4), sold 41 Mervyns Store locations. The Operating Partner- ship’s share of the gain amounted to approximately $1.9 million, net of taxes. may exist. Where a Phase II assessment is so recom- During December 2007, the Company, through Fund III, mended, a Phase II assessment is conducted to further and in conjunction with its current self-storage partner, determine the extent of possible environmental contami- Storage Post, entered into an agreement to acquire a nation. In all instances where a Phase I or II assessment portfolio of 10 self-storage properties from Storage has resulted in specific recommendations for remedial Post’s existing institutional investors for approximately actions, the Company has either taken or scheduled the $160 million. During January 2008, the Company, through recommended remedial action. To mitigate unknown Fund III, entered into an agreement to acquire an addi- risks, the Company has obtained environmental insurance tional Storage Post self-storage project currently under for most of its properties, which covers only unknown construction for approximately $11 million. These transac- environmental risks. tions are expected to close in the first quarter of 2008. The Company believes that it is in compliance in all mate- rial respects with all federal, state and local ordinances and regulations regarding hazardous or toxic substances. Management is not aware of any environmental liability that it believes would have a material adverse impact on the Company’s financial position or results of operations. Management is unaware of any instances in which the Company 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. Acadia Realty Trust 2007 Annual Report 88 Schedule III: Real Estate and Accumulated Depreciation December 31, 2007 Encum- brances Land Buildings and Improvements Costs Capitalized Subsequent to Acquisition Land Buildings and Improvements Accumulated Acquisition (a) Depreciation Construction (c) Total Date of $17,600 $ 1,147 $ 7,425 $ 1,099 $ 1,147 $ 8,524 $ 9,671 $ 4,898 1984 (a) Description Shopping Centers Crescent Plaza Brockton, MA 505 619 4,161 10,839 505 15,000 15,505 9,170 1982 (a) 5,434 33,200 619 38,634 39,253 28,450 1983 (a) — 4,268 4,690 — 8,958 8,958 6,177 1968 (c) 120 190 — — 1,599 3,004 730 120 190 1,599 1,719 687 1968 (c) 3,734 3,924 2,938 1972 (c) — 12,695 1,664 11,031 12,695 4,964 1995 (c) 1,691 5,803 481 1,691 6,284 7,975 637 2002 (c) — 11,909 1,496 — 13,405 13,405 830 2005 (a) 799 3,197 1,994 799 5,191 5,990 1,646 1998 (a) 3,443 13,774 8,960 3,443 22,734 26,177 5,173 1998 (a) — — — — — — — — — New Loudon Center 14,752 Latham, NY Ledgewood Mall Ledgewood, NJ Mark Plaza Edwardsville, PA Blackman Plaza Wilkes-Barre, PA Plaza 422 Lebanon, PA Route 6 Mall Honesdale, PA Bartow Avenue Bronx, NY Amboy Road Shopping Center Staten Island, NY Abington Towne Center Abington, PA Bloomfield Town Square Bloomfield Hills, MI Walnut Hill Plaza Woonsocket, RI 23,500 3,122 12,488 1,523 3,122 14,011 17,133 3,718 1998 (a) Elmwood Park Plaza 34,600 Elmwood Park, NJ 3,248 12,992 14,764 3,798 27,206 31,004 7,549 1998 (a) Merrillville Plaza Hobart, IN Marketplace of Absecon Absecon, NJ Clark Diversey Boonton Chestnut Hill Third Avenue Liberty Avenue Tarrytown Centre Acadia Realty L.P. Pelham Manor Hobson West Plaza Naperville, IL Village Commons/ Smithtown Shopping Center Smithtown, NY Town Line Plaza Rocky Hill, CT 26,250 4,288 17,152 1,516 4,288 18,668 22,956 4,838 1998 (a) — 2,573 10,294 2,479 2,577 12,769 15,346 3,220 1998 (a) 3,727 8,451 9,834 11,303 3,297 8,978 — 11,108 2,903 7,611 5,568 8,038 9,990 9,800 — — — — 12,627 2,323 — 905 1,793 7,396 1,455 — 7,172 (1,372) (2,392) (515) 894 — 224 153 — 718 10,061 1,328 8,289 11,855 2,773 7,188 5,742 8,185 — 12,627 2,323 — 905 1,793 7,620 1,608 — 7,890 12,834 8,516 14,031 20,040 12,627 9,943 1,608 905 9,683 139 344 214 256 316 651 1,348 2,136 2006 (a) 2006 (a) 2006 (a) 2006 (a) 2005 (a) 2004 (a) 2004 (a) 1998 (a) 9,781 3,229 12,917 1,866 3,229 14,783 18,012 4,143 1998 (a) — 878 3,510 7,257 907 10,738 11,645 6,849 1998 (a) 89 Acadia Realty Trust 2007 Annual Report December 31, 2007 Description Encum- brances Land Buildings and Improvements Costs Capitalized Subsequent to Acquisition Land Buildings and Improvements Accumulated Acquisition (a) Depreciation Construction (c) Total Date of Shopping Centers, cont’d Branch Shopping Center Village of the Branch, NY 15,773 3,156 12,545 777 3,156 13,322 16,478 3,273 1998 (a) 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 Property Winston-Salem, NC Granville Center Kroger/Safeway Various 400 E. Fordham Road Bronx, NY 4650 Broadway/ Sherman Avenue New York, NY 216th Street New York, NY 161st Street Bronx, NY Oakbrook Oakbrook, IL West Shore Expressway West 54th Street Atlantic Avenue Canarsie Plaza 125 Main Street Assoc. Sheepshead Bay — 956 3,826 594 961 4,415 5,376 972 1998 (a) 20,500 1,273 5,091 11,536 1,273 16,627 17,900 3,101 1999 (a) — 2,350 9,404 591 2,350 9,995 12,345 2,329 1999 (a) 12,500 1,475 5,899 1,108 1,475 7,007 8,482 1,791 1999 (a) 26,000 1,817 15,846 502 1,817 16,348 18,165 3,590 1999 (c) — 2,818 9,843 3,429 2,186 — 13,716 8,744 48,988 3,237 59 (48) 3,429 2,186 — 16,953 8,803 48,940 20,382 10,989 48,940 4,989 1,206 28,127 1998 (a) 2002 (a) 2003 (a) 37,263 11,144 18,010 2,240 13,351 18,043 31,394 1,018 2004 (a) 19,000 25,267 25,500 7,313 — — — 25,267 — 25,267 — 2005 (a) 19,286 7,261 19,338 26,599 146 2005 (a) 30,000 16,679 28,410 261 16,679 28,671 45,350 1,731 2005 (a) — — — — — — — — 6,906 17 — 6,923 6,923 1,268 2005 (a) 3,380 16,699 5,322 32,656 12,994 20,391 — 250 — 13,554 18,704 — — 4,316 — 1,899 — — — — — — — — — — 3,380 16,699 5,322 32,656 12,994 20,391 — 250 13,554 18,704 — — 4,316 — 1,899 — 16,934 35,403 5,322 32,656 17,310 20,391 1,899 250 77,764 — 77,764 77,764 265 340 — — 19 — 24 — — 2007 (a) 2007 (a) 2007 (a) 2007 (a) 2007 (a) 2007 (a) ASOF II, LLC 34,500 Underdeveloped land Properties under development — — $ 401,982 $234,296 $ 396,956 $222,822 $235,550 $ 618,524 $854,074 $155,480 See notes on following page. Acadia Realty Trust 2007 Annual Report 90 Schedule III: Real Estate and Accumulated Depreciation continued Notes: 1. Depreciation and investments in buildings and improvements reflected in the statements of income are calculated over the estimated useful life of the assets as follows: Buildings: 30 to 40 years Improvements: shorter of lease term or useful life. 2. The aggregate gross cost of property included above for Federal income tax purposes was $407.4 million as of December 31, 2007. 3. (a) Reconciliation of Real Estate Properties: The following table reconciles the real estate properties from January 1, 2005 to December 31, 2007: Years Ended December 31, 2007 2006 2005 (dollars in thousands) Balance at beginning of year Transfers (1) Other improvements $ 650,051 — 76,007 Reclassification of tenant improvement activities — Property acquired Balance at end of year 128,016 $ 854,074 $ 670,817 (131,341) 40,800 — 69,775 $ 650,051 $ 561,370 — 11,599 — 97,848 $ 670,817 (1) Reflects the change in accounting for the Brandywine Portfolio following the recapitalization of the investment in January 2006 (Note 1). 3. (b) Reconciliation of Accumulated Depreciation: The following table reconciles accumulated depreciation from January 1, 2005 to December 31, 2007: Years Ended December 31, 2007 2006 2005 (dollars in thousands) Balance at beginning of year $ 135,085 $122,077 Reclassification of tenant improvement activities — Depreciation related to real estate Balance at end of year 20,395 $ 155,480 — 13,008 $135,085 $102,315 — 19,762 $122,077 91 Acadia Realty Trust 2007 Annual Report Trustees and Officers Shareholder Information Trustees Kenneth F. Bernstein President and Chief Executive Officer Lee S. Wielansky (Lead Trustee) Chairman of the Board and Chief Executive Officer Midland Development Group Inc. 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, Retail Development Continental Properties Wendy Luscombe President and CEO WKL Associates, Inc. William T. Spitz Former Vice Chancellor for Investments and Treasurer Vanderbilt University Senior Officers Kenneth F. Bernstein President and Chief Executive Officer Joel Braun Executive Vice President, Chief Investment Officer Christopher Conlon Sr. Vice President, Acquisitions Jon Grisham Sr. Vice President, Chief Accounting Officer Joseph Hogan Sr. Vice President, Director of Construction Numa Jerome Sr. Vice President, Director of Leasing Robert Masters, Esq. Sr. Vice President, General Counsel and Corporate Secretary Joseph M. Napolitano Sr. Vice President, Chief Administrative Officer Michael Nelsen Sr. Vice President, Chief Financial Officer Robert Scholem Sr. Vice President, Director of Property Management Investor Relations Debra Miley Director of Marketing and Communiations Tel: 914.288.8100 email: dmiley@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 reinvest- ment 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. Internet Address Visit us online at www.acadiarealty.com for more information. The 2007 Annual Report, current news and quarterly financial and operational supplementary information can be found on the Company’s website. Corporate Headquarters Acadia Realty Trust 1311 Mamaroneck Avenue, Suite 260 White Plains, NY 10605 Tel: 914.288.8100 Legal Counsel Paul, Hastings, Janofsky & Walker, LLP Park Avenue Tower 75 East 55th Street New York, NY 10022 Annual Meeting Acadia’s Board of Trustees has sched- uled the Annual Shareholder Meeting for Wednesday, May 14, 2008, at 10 a.m., 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 determina- tion of shareholders entitled to vote is March 31, 2008. 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 1311 Mamaroneck Avenue Suite 260 White Plains, NY 10605 Tel: 914.288.8100 E Printed on recycled paper. 

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