UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] 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 in its charter) MARYLAND 23-2715194 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 SOUNDVIEW MARKETPLACE, PORT WASHINGTON, NY 11050 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (516) 767-8830 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of May 14, 1999, there were 25,419,215 common shares of beneficial interest, par value $.001 per share, outstanding. ACADIA REALTY TRUST AND SUBSIDIARIES FORM 10-Q INDEX Part I: Financial Information Page Item 1. Financial Statements (unaudited) Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998 1 Consolidated Statements of Operations for the three months ended March 31, 1999 and 1998 2 Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998 3 Notes to Consolidated Financial Statements 5 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3. Quantitative and Qualitative Disclosure of Market Risk 20 Part II: Other Information Item 2. Changes in Securities and Use of Proceeds 21 Item 6. Exhibits 21 Signatures 22 Part I. Financial Information Item 1. Financial Statements ACADIA REALTY TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except per share amounts) March 31, 1999 December 31, (unaudited) 1998 ----------- ------------ ASSETS Real estate Land $ 78,466 $ 76,136 Buildings and improvements 472,912 452,300 Properties under development 18,319 22,813 -------- -------- 569,697 551,249 Less: accumulated depreciation 91,549 87,202 -------- -------- Net real estate 478,148 464,047 Property held for sale -- 7,073 Cash and cash equivalents 15,741 15,183 Cash in escrow 13,308 12,650 Investments in unconsolidated partnerships 7,699 7,516 Rents receivable, net 6,571 6,006 Prepaid expenses 2,350 2,797 Deferred charges, net 11,657 11,461 Other assets 1,561 1,779 -------- -------- $537,035 $528,512 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Mortgage notes payable $288,497 $277,561 Accounts payable and accrued expenses 7,925 10,673 Due to related parties 56 176 Dividends and distributions payable 4,392 -- Other liabilities 3,131 3,817 -------- -------- Total Liabilities 304,001 292,227 -------- -------- Minority interest in Operating Partnership 78,378 79,344 Minority interests in majority owned partnerships 2,350 2,350 -------- -------- Total Minority Interests 80,728 81,694 -------- -------- Shareholders' Equity: Common shares, $.001 par value, authorized 100,000,000 shares, issued and outstanding 25,419,215 shares 25 25 Additional paid-in capital 168,461 170,746 Deficit (16,180) (16,180) -------- -------- Total Shareholders' Equity 152,306 154,591 -------- -------- $537,035 $528,512 ======== ======== See accompanying notes 1 ACADIA REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (in thousands, except per share amounts) March 31, March 31, 1999 1998 (unaudited) (unaudited) ---------- ----------- Revenues Minimum rents $ 17,353 $ 8,464 Percentage rents 788 565 Expense reimbursements 3,458 1,753 Other 652 169 -------- -------- Total revenues 22,251 10,951 -------- -------- Operating Expenses Property operating 5,882 2,292 Real estate taxes 2,551 1,428 Depreciation and amortization 4,686 3,473 General and administrative 1,466 456 -------- -------- Total operating expenses 14,585 7,649 -------- -------- Operating income 7,666 3,302 Equity in earnings of un- consolidated partnerships 183 -- Loss on sale of properties (1,284) -- Interest expense (5,424) (3,923) -------- -------- Income (loss) before minority interest 1,141 (621) Minority interest in Operating Partnership (376) 88 -------- -------- Net income (loss) $ 765 $ (533) ======== ======== Net income (loss) per Common Share - basic and diluted $ .03 $ (.06) ======== ======== See accompanying notes 2 ACADIA REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (in thousands) March 31, March 31, 1999 1998 (unaudited) (unaudited) ----------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 765 $ (533) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 4,686 3,473 Minority interest in Operating Partnership 376 (88) Equity in income of unconsolidated partnerships (183) -- Provision for bad debts 355 310 Loss on sale of properties 1,284 -- Changes in assets and liabilities: Funding of escrows, net (658) (681) Rents receivable (920) 387 Prepaid expenses 447 119 Due to related parties (120) (29) Other assets 37 20 Accounts payable and accrued expenses (2,748) (164) Other liabilities (686) (281) -------- -------- Net cash provided by operating activities 2,635 2,533 -------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Expenditures for real estate and improvements (10,970) (3,810) Net proceeds from sale of property 6,128 -- Payment of deferred leasing costs (105) (451) -------- -------- Net cash used in investing activities (4,947) (4,261) -------- -------- See accompanying notes 3 ACADIA REALTY TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 (in thousands) March 31, March 31, 1999 1998 (unaudited) (unaudited) ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on mortgages $ (975) $ (702) Proceeds received on mortgage notes 4,250 1,999 Payment of deferred financing and other costs (405) (87) Distributions to minority interests -- (12) ------ ------ Net cash provided by financing activities 2,870 1,198 ------ ------ Increase (decrease) in cash and cash equivalents 558 (530) Cash and cash equivalents, beginning of period 15,183 1,287 ------ ------ Cash and cash equivalents, end of period $15,741 $ 757 ======= ====== Supplemental Disclosures of Cash Flow Information: Cash paid during the period for interest, net of amounts capitalized of $372 and $168, respectively $6,095 $3,509 ====== ====== Supplemental Disclosure of Non-Cash Investing and Financing Activities: Acquisition of real estate by assumption of debt $7,661 ====== See accompanying notes 4 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 1. THE COMPANY Acadia Realty Trust (the "Company"), formerly known as Mark Centers Trust, is a fully integrated and self-managed real estate investment trust ("REIT") focused primarily on the ownership, acquisition, redevelopment and management of neighborhood and community shopping centers, and multi-family properties. All of the Company's assets are held by, and all of its operations are conducted through, Acadia Realty Limited Partnership (the "Operating Partnership"), formerly known as Mark Centers Limited Partnership, and its majority owned partnerships. As of March 31, 1999, the Company controlled 69% of the Operating Partnership as the sole general partner. The Company currently operates fifty-seven properties, which it owns or has an ownership interest in, consisting of forty-seven neighborhood and community shopping centers, three enclosed malls, one mixed use (retail/office) property, five multi-family properties and one redevelopment property located in the Eastern and Midwestern regions of the United States. 2. BASIS OF PRESENTATION The consolidated financial statements include the consolidated accounts of the Company and its majority owned partnerships, including the Operating Partnership, and have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Non-controlling investments in partnerships are accounted for under the equity method of accounting as the Company exercises significant influence. The information furnished in the accompanying consolidated financial statements reflects all adjustments which are, in the opinion of management, necessary for a fair presentation of the aforementioned consolidated financial statements for the interim periods. The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. 5 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 2. BASIS OF PRESENTATION, CONTINUED Actual results could differ from these estimates. Operating results for the three month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 1999. For further information refer to the consolidated financial statements and accompanying footnotes included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. 3. ACQUISITION OF PROPERTY On February 24, 1999, the Company acquired the Mad River Station, a 154,000 square foot shopping center located in Dayton, Ohio for $11,500. The Company assumed $7,661 in mortgage debt and funded the remaining purchase price from working capital. 4. DISPOSITION OF PROPERTIES Pursuant to its continuing plan to dispose of certain under-performing properties, the Company sold two properties during the three month period ended March 31, 1999. The Company sold the Searstown Mall on February 1, 1999 for a sale price of $3,300 and the Auburn Plaza on March 29, 1999 for $3,500. 5. SHAREHOLDERS' EQUITY AND MINORITY INTERESTS The following table summarizes the change in the shareholders' equity and minority interests since December 31, 1998: Shareholders' Minority Equity Interests Balance at December 31, 1998 $154,591 $ 81,694 Dividends and distributions declared of $0.12 per Common Share and Operating Partnership ("OP") Unit (3,050) (1,342) Net income for the period January 1 through March 31, 1999 765 376 -------- -------- Balance at March 31, 1999 $152,306 $ 80,728 ======== ======== Minority interests represent the limited partners' interest of 11,184,143 and 1,623,000 units in the Operating Partnership at March 31, 1999 and 1998, respectively. In addition, at March 31, 1999, minority interests also include an aggregate amount of $2,350 representing interests held by third parties in four partnerships in which the Company has a majority ownership position. 6 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 6. INVESTMENT IN PARTNERSHIPS The Company owns a 49% interest in the Crossroads Joint Venture and Crossroads II Joint Venture (collectively "Crossroads") and accounts for this investment using the equity method. Summary financial information of the Crossroads and the Company's investment in and share of income from Crossroads follows: March 31, 1999 --- Balance Sheet Assets: Rental property, net $ 9,051 Other assets 5,095 ------- Total assets $14,146 ======= Liabilities and partners' equity Mortgage note payable $35,424 Other liabilities 717 Partners' equity (21,995) ------- Total liabilities and partners' equity $14,146 ======= Company's investment in partnerships $ 7,699 ======= Statement of Operations Total revenue $ 1,803 Operating and other expenses 463 Interest expense 634 Depreciation and amortization 132 ------- Net income $ 574 ======= Company's share of net income $ 281 Amortization of excess investment (See below) 98 ------- Income from partnerships $ 183 ======= The unamortized excess of the Company's investment over its share of the net equity in Crossroads at the date of acquisition was $19,580. The portion of this excess attributable to buildings and improvements is being amortized over the life of the related property. 7 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 7. MORTGAGE LOANS On March 23, 1999, the Company closed on a $7,000 facility with Fleet Bank, NA which is secured by the Town Line Plaza. As of March 31, 1999, the Company had $4,000 outstanding under this facility which matures March 15, 2002, bears interest at LIBOR plus 175 basis and requires the payment of principal amortized over a 25 year period. In connection with this facility, the Company also obtained two irrevocable letters of credit totaling $3,000. The first letter of credit for $2,000 is required pursuant to the bankruptcy reorganization plan of the owner of the Mall 189 (Note 12). The letter of credit is expected to be reduced in $500 increments as redevelopment of the property progresses. The second letter of credit for $1,000 was obtained related to the settlement of certain litigation in 1998 with the former President of the Company. On February 24, 1999, the Company assumed $7,661 in mortgage debt in connection with the acquisition of the Mad River Station shopping center. The debt, which matures May 23, 2005, bears interest at a fixed-rate of 9.6% and requires the payment of principal amortized over 25 years. The debt can be prepaid commencing May 23, 2000 with certain prepayment fees and May 23, 2002 without any such fees. 8. RELATED PARTY TRANSACTIONS The Company manages three properties in which certain current shareholders of the Company or their affiliates have ownership interests. Management fees earned by the Company under these contracts are at rates of 3.25% and 3.5% of collections, or in one case, a fixed annual fee of $110. Such fees aggregated $143 during the three month period ended March 31, 1999. 9. DIVIDENDS AND DISTRIBUTIONS PAYABLE On February 4, 1999, the Board of Trustees of the Company approved and declared a quarterly dividend for the quarter ended March 31, 1999 of $0.12 per Common Share. The dividend was paid on April 15, 1999 to the shareholders of record as of March 31, 1999. 8 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 10. PER SHARE DATA Basic earnings per share was determined by dividing the net income applicable to common shareholders by the weighted average number of Common Shares outstanding during each period consistent with the guidelines of the Financial Accounting Standards Board Statement No. 128. The weighted average number of Common Shares for the three month period ended March 31, 1999 and 1998 totaled 25,419,215 and 8,554,177, respectively. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue Common Shares were exercised or converted into Common Shares or resulted in the issuance of Common Shares that then shared in the earnings of the Company. Options to purchase 300,000 Common Shares at $9 per share were outstanding during the three month period ended March 31, 1999 but were not included in the computation of diluted earnings per share because the options' exercise price was greater than the average market price of the Common Shares and, therefore, the effect would be antidilutive. For the three months ended March 31, 1998, no additional Common Shares were reflected as the impact would be anti-dilutive due to the net loss for the period. 11. SEGMENT REPORTING The Company has two reportable segments: retail properties and multi-family properties. The Company evaluates property performance primarily based on net operating income before depreciation, amortization and certain non-recurring items. The reportable segments are managed separately due to the differing nature of the leases and property operations associated with the retail versus residential tenants. March 31, 1999 -------------- Retail Multi-Family All Properties Properties Other Total ---------- ------------ ----- ----- Revenues $ 18,260 $ 3,694 $ 297 $ 22,251 Property operating expenses and real estate taxes 7,043 1,390 - 8,433 Net property income before depreciation, amortization and certain nonrecurring items 11,217 2,304 297 13,818 Depreciation and amortization 4,253 433 4,686 Interest expense 4,406 1,018 - 5,424 Real estate at cost 488,478 81,219 - 569,697 Total assets 446,953 82,383 7,699 537,035 Gross leasable area (multi-family - 2,273 units) 8,561 2,039 - 10,600 Expenditures for real estate and improvements 10,717 253 - 10,970 Reconciliation to income (loss) before minority interest Net property income before depreciation, amortization and certain nonrecurring items $ 13,818 Depreciation and amortization (4,686) General and administrative (1,466) Equity in earnings of unconsolidated partnerships 183 Loss on sale of property (1,284) Interest expense (5,424) ------- Income (loss) before minority interest $ 1,141 ======= March 31, 1998 -------------- Retail Multi-Family All Properties Properties Other Total ---------- ------------ ----- ----- Revenues $ 10,932 $ - $ 19 $ 10,951 Property operating expenses and real estate taxes 3,720 - - 3,720 Net property income before depreciation, amortization and certain nonrecurring items 7,212 - 19 7,231 Depreciation and amortization 3,473 - - 3,473 Interest expense 3,921 - 2 3,923 Real estate at cost 311,541 - - 311,541 Total assets 255,787 - - 255,787 Gross leasable area (multi-family - 2,273 units) 7,265 - - 7,265 Expenditures for real estate and improvements 3,810 - - 3,810 Reconciliation to income (loss) before minority interest Net property income before depreciation, amortization and certain nonrecurring items $ 7,231 Depreciation and amortization (3,473) General and administrative (456) Equity in earnings of uncomsolidated partnerships - Loss on sale of property - Interest expense (3,923) ------ Income (loss) before minority interest $ (621) ====== 9 ACADIA REALTY TRUST AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (in thousands, except per share amounts) 12. SUBSEQUENT EVENTS On May 5, 1999, the Company acquired the general partner's interest in the entity owning the Mall 189, a 122,000 square foot shopping center located in South Burlington, Vermont for approximately $6,547. The interest was acquired out of bankruptcy by restructuring and assuming the mortgage debt of $6,222. The center, which is currently a partially enclosed mall, will be converted into a conventional strip center format. On April 9, 1999, Marvin Slomowitz, a current trustee of the Company, converted 100,000 OP Units to 100,000 Common Shares. 13. PRO FORMA INFORMATION The following unaudited pro forma condensed consolidated information for the three months ended March 31, 1998 is presented as if the RDC Transaction as described in the Company's Annual Report on Form 10-K for the year ended December 31, 1998, had occurred on January 1, 1997. March 31, 1998 --------- Revenue $20,702 ======= Net income $ 1,276 ======= Net income per share- basic and diluted $ 0.05 ======= Weighted average number of Common Shares outstanding 24,676,558 ========== Weighted average number of Common Shares outstanding-assuming dilution 24,680,358 ========== 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion is based on the consolidated financial statements of Acadia Realty Trust (the "Company") as of March 31, 1999 and 1998 and for the three months then ended. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. Certain statements contained in this report constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to be materially different from any future results performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: general economic and business conditions, which will, among other things, affect demand for rental space, the availability and creditworthiness of prospective tenants, lease rents and the availability of financing; adverse changes in the Company's real estate markets, including, among other things, competition with other companies; risks of real estate development and acquisition; governmental actions and initiatives; and environmental/safety requirements. RESULTS OF OPERATIONS The following comparison for the three month period ended March 31, 1999 as compared to the same period for 1998 reference the effect of the properties acquired on August 12, 1998 (the "RDC Properties") as a result of the RDC Transaction as discussed in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. Comparison of the three month period ended March 31, 1999 ("1999") to the three month period ended March 31, 1998 ("1998") Total revenues increased $11.3 million, or 103%, to $22.3 million for 1999 compared to $11.0 million for 1998. Minimum rents increased $8.9 million, or 105%, to $17.4 million for 1999 compared to $8.5 million for 1998. $8.6 million, or 97%, of the increase was attributable to the RDC Properties. Percentage rents increased $223,000, or 39%, to $788,000 for 1999 compared to $565,000 for 1998. This increase was primarily attributable to the impact from the Company's adopting the Emerging Issue Task Force ("EITF") Issue No. 98-9 "Accounting for Contingent Rent in Interim Financial Periods" in 1998. 11 RESULTS OF OPERATIONS, continued Expense reimbursements increased $1.7 million, or 97%, from $1.8 million for 1998 to $3.5 million for 1999, which was primarily attributable to the RDC Properties which had expense reimbursements of $1.6 million for 1999. Other income increased $483,000 for 1999 which was primarily a result of $156,000 in management fees earned in 1999 under four contracts acquired in the RDC Transaction and an increase in interest earning assets in 1999. Total operating expenses increased $6.9 million, or 91%, to $14.5 million for 1999, from $7.6 million for 1998. Property operating expenses increased $3.6 million, or 157%, to $5.9 million for 1999 compared to $2.3 million for 1998. Of this increase, $3.2 million, or 89%, was attributable to the RDC Properties. The remaining increase was primarily due to an increase in snow removal costs for 1999. Real estate taxes increased $1.1 million, or 79%, from $1.4 million for 1998 to $2.5 million for 1999 primarily attributable to the RDC Properties which had real estate tax expense in 1999 of $1.1 million. Depreciation and amortization increased $1.2 million, or 35%, for 1999 primarily attributable to the RDC Properties, which had depreciation expense of $1.4 million. General and administrative expense increased $1.0 million, or 221%, from $456,000 for 1998 to $1.5 million for 1999, which was primarily attributable to additional staffing and administration costs following the RDC Transaction. Interest expense of $5.4 million for 1999 increased $1.5 million, or 38%, from $3.9 million for 1998 primarily attributable to the mortgage debt associated with the RDC Properties partially offset by the paydown of certain existing debt with the proceeds from the RDC Transaction. Funds from Operations The Company, along with most industry analysts, consider funds from operations("FFO") as defined by the National Association of Real Estate Investment Trusts ("NAREIT")as an appropriate supplemental measure of operating performance. However, FFO does not represent cash generated from operations as defined by generally accepted accounting principles and is not indicative of cash available to fund cash needs. 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. 12 RESULTS OF OPERATIONS, continued Generally, NAREIT defines FFO as net income (loss) before gains (losses) on sales of property, non-recurring charges and extraordinary items, adjusted for certain non-cash charges, primarily depreciation and amortization of capitalized leasing costs. Commencing in 1999, the Company is including the effect of the straight-lining of rents in computing FFO in accordance with the NAREIT definition. Prior to 1999, straight-line rents were excluded in computing FFO. Straight-line rents (net of related write-offs) for the three month periods ended March 31, 1999 and 1998 were $381,000 and $29,000, respectively. The reconciliation of net income to FFO for the three month periods ended March 31, 1999 and 1998 is as follows: Three months ended March 31, 1999 1998 ---- ---- Net income (loss) $ 765 $ (533) Depreciation of real estate and amortization of leasing costs 4,668 3,281 Income (loss) attributable to Operating Partnership Units 376 (88) Loss on sale of properties 1,284 -- Other items -- 11 ------- ------- Funds from operations $ 7,093 $ 2,671 ======= ======= Funds from operations per share (a) $ 0.19 $ 0.26 ======= ======= (a) Assumes full conversion of 11,184,143 and 1,623,000 OP Units into Common Shares for the three months ended March 31, 1999 and 1998, respectively, for a total weighted average Common Shares and OP Units of 36,603,358 and 10,177,177, respectively. LIQUIDITY AND CAPITAL RESOURCES Financing and Debt On March 23, 1999, the Company closed on a $7.0 million facility with Fleet Bank, NA which is secured by the Town Line Plaza. As of March 31, 1999, the Company had $4.0 million outstanding under this facility which matures March 15, 2002, bears interest at LIBOR plus 175 basis and requires the payment of principal amortized over a 25 year period. In connection with this facility, the Company also obtained two irrevocable letters of credit totaling $3.0 million. The first letter of credit for $2.0 million is required pursuant 13 LIQUIDITY AND CAPITAL RESOURCES, continued to the bankruptcy reorganization plan of the owner of the Mall 189 (see Property Acquisitions). The letter of credit is expected to be reduced in $500,000 increments as redevelopment of the property progresses. The second letter of credit for $1.0 million was obtained related to the settlement of certain litigation in 1998 with the former President of the Company. On February 24, 1999, the Company assumed $7.7 million in mortgage debt in connection with the acquisition of the Mad River Station shopping center. The debt, which matures May 23, 2005, bears interest at a fixed-rate of 9.6% and requires the payment of principal amortized over 25 years. The debt can be prepaid commencing May 23, 2000 with certain prepayment fees and May 23, 2002 without any such fees. As of March 31, 1999 interest on the Company's mortgage indebtedness ranged from 6.2% to 9.6% with maturities that ranged from June 1999 to March 2022. Of the total outstanding debt, $254.4 million, or 88%, was carried at fixed interest rates with a weighted average of 8.4% and $34.1 million, or 12%, was carried at variable rates with a weighted average of 6.7%. Of the total outstanding debt, $108.3 million will become due by 2000, with scheduled maturities of $13.0 million at a weighted average interest rate of 7.7% in 1999 and $95.3 million at a weighted average interest rate of 8.5% in 2000. As the Company does not anticipate having sufficient cash on hand to repay such indebtedness, it will need to refinance this indebtedness or select other alternatives based on market conditions at that time. The following table summarizes the Company's mortgage indebtedness as of March 31, 1999: March 31, December 31, Interest 1999 1998 Rate ---- ---- ---- Mortgage notes payable - variable-rate General Electric Capital Corp. $ 7,205 $ 6,989 7.81% (Commercial paper rate +2.75%) Fleet Bank, N.A. 8,240 8,268 6.74% (LIBOR + 1.78%) KBC Bank 14,676 14,760 6.22% (LIBOR + 1.25%) Fleet Bank, N.A. 4,000 - 6.69% (LIBOR + 1.75%) -------- -------- Total variable-rate debt 34,121 30,017 -------- -------- Mortgage notes payable - fixed rate Sun America Life Insurance Company 8,664 8,717 7.75% The Manufacturers Life Insurance Company (USA) 4,355 4,372 7.73% John Hancock Mutual Life Insurance Company 54,277 54,445 9.11% Metropolitan Life Insurance Company 41,000 41,000 7.75% Sun America Life Insurance Company 43,642 43,832 7.75% Anchor National Life Insurance Company 3,930 3,950 7.93% Lehman Brothers Holdings, Inc. 18,099 18,140 8.32% Northern Life Insurance Company 3,352 3,409 7.70% Bankers Security Life 2,311 2,351 7.70% Morgan Stanley Mortgage Capital 44,575 44,729 8.84% Nomura Asset Capital Corporation 22,528 22,599 9.02% Mellon Mortgage Company 7,643 - 9.60% -------- -------- Total fixed-rate debt 254,376 247,544 -------- -------- $288,497 $277,561 ======== ======== 14 Properties Payment Maturity Encumbered Terms -------- ---------- ------- Mortgage notes payable - variable-rate General Electric Capital Corp. 01/01/02 (1) (17) Fleet Bank, N.A. 05/31/02 (2) (17) KBC Bank 12/31/02 (3) (17) Fleet Bank, N.A. 03/15/02 (4) (17) Total variable-rate debt Mortgage notes payable - fixed rate Sun America Life Insurance Company 06/24/99 (5) $74(17) The Manufacturers Life Insurance Company (USA) 12/10/99 (6) $34(17) John Hancock Mutual Life Insurance Company 04/01/00 (7) $455(17) Metropolitan Life Insurance Company 06/01/00 (8) (16) Sun America Life Insurance Company 01/01/01 (9) $346(17) Anchor National Life Insurance Company 01/01/04 (10) $33(17) Lehman Brothers Holdings, Inc. 03/01/04 (11) $139(17) Northern Life Insurance Company 12/01/08 (12) $41(17) Bankers Security Life 12/01/08 (12) $28(17) Morgan Stanley Mortgage Capital 11/01/21 (13) $380(17) Nomura Asset Capital Corporation 03/11/22 (14) $193(17) Mellon Mortgage Company 05/23/05 (15) $71(17) Total fixed-rate debt Notes: (1) Soundview Marketplace (8) Valmont Plaza (13) Midway Plaza Luzerne Street Plaza Northside Mall (2) Village Commons Green Ridge Plaza New Smyrna Beach Crescent Plaza Cloud Springs Plaza (3) Marley Run Apartments East End Centre Troy Plaza Martintown Plaza (4) Town Line (9) Bloomfield Town Square Kings Fairgrounds Atrium Mall Shillington Plaza (5) Village Apartments Walnut Hill Shopping Center Dunmore Plaza GHT Apartments Kingston Plaza (6) Hobson West Plaza Colony Apartments Twenty Fifth Street Shopping Center Circle Plaza (7) New Loudon Centre (10) Pittston Plaza Mountainville Plaza Ledgewood Mall Plaza 15 Plaza 422 (11) Glen Oaks Apartments Birney Plaza Berlin Shopping Center Monroe Plaza Route 6 Mall (12) Manahawkin Shopping Center Ames Plaza Tioga West Bradford Towne Centre (14) Northwood Centre (15) Mad River (16) Interest only monthly (17) Monthly principal and interest 15 LIQUIDITY AND CAPITAL RESOURCES, continued Reinstatement of Dividend On February 4, 1999, the Company reinstated the payment of dividends declaring a quarterly dividend of $0.12 per Common Share. The dividend was paid April 15, 1999 to shareholders of record as of March 31, 1999. Acquisition and development of properties On February 24, 1999, the Company acquired the Mad River Station, a 154,000 square foot shopping center located in Dayton, Ohio for $11.5 million. The Company assumed $7.7 million in mortgage debt and funded the remaining purchase price from working capital. The center, which is 97% leased, is anchored by Babies 'R' Us, Office Depot and Pier One Imports. On May 5, 1999, the Company acquired the general partner's interest in the entity owning the Mall 189, a 122,000 square foot shopping center located in South Burlington, Vermont for approximately $6.5 million. The center was acquired out of bankruptcy by restructuring and assuming the mortgage debt of $6.2 million. Mall 189 is a partially enclosed mall which will be converted into a conventional strip center format at an estimated cost of $4.0 million. The existing tenants include a 31,600 square foot Grand Union supermarket that is currently paying a below-market rent. The Company is currently redeveloping a 39,700 square foot retail and residential building located in Greenwich, Connecticut. The building, which is currently vacant, is being completely refurbished, and when completed in 1999 will consist of approximately 17,000 square feet of retail space and 21 apartments (approximately 15,000 square feet). Approximately 12,300 square feet of retail space has been pre-leased to a national tenant. As of March 31, 1999, costs incurred to date were $12.8 million. The Company expects that an additional $3.1 million will be required to complete this project. The Company completed the installation of Walmart and Circuit City in approximately 121,000 and 33,000 square feet, respectively, in the Ledgewood Mall in Ledgewood, New Jersey. Both tenants commenced paying rent during the first quarter of 1999. Remaining costs estimated to be paid for these projects total $1.5 million. For the remaining portfolio, the Company currently estimates that capital outlays of approximately $3.8 million will be required for tenant improvements, related renovations and other property improvements related to executed leases. 16 LIQUIDITY AND CAPITAL RESOURCES, continued Sources of capital for funding property development, property expansion and renovation and future property acquisitions are expected to be obtained from additional debt financings , additional equity offerings and from sales of existing properties. The Company has generated additional working capital as a result of its continuing plan to dispose of certain under-performing properties. The Company sold two properties during the three month period ended March 31, 1999. The Company sold the Searstown Mall on February 1, 1999 and the Auburn Plaza on March 29, 1999 generating $6.1 million of working capital. As of March 31, 1999, the Company had total cash available of $15.7 million as well as 11 properties which are currently unencumbered and therefore available as potential collateral for future borrowings. The Company anticipates that cash flow from operating activities will continue to provide adequate capital for all debt service payments, recurring capital expenditures and REIT distribution requirements. HISTORICAL CASH FLOW The following discussion of historical cash flow compares the Company's cash flow for the three month period ended March 31, 1999 ("1999") with the Company's cash flow for the three month period ended March 31, 1998 ("1998"). Net cash provided by operating activities increased from $2.5 million for 1998 to $2.6 million for 1999. This variance was primarily attributable to an increase in operating income before non-cash expenses in 1999 offset, primarily, by $2.6 million additional cash used in 1999 for the payment of accounts payable and accrued expenses. Investing activities used $4.9 million during 1999, representing a $686,000 increase from $4.3 million of cash used during 1998. This was a result of a $6.8 million increase in expenditures for real estate acquisitions, development and tenant installation in 1999, offset by net sales proceeds of $6.1 million received in 1999 following the sale of two properties. Net cash provided by financing activities of $2.9 million for 1999 increased $1.7 million compared to $1.2 million provided in 1998. The increase resulted primarily from additional borrowings in 1999. 17 INFLATION The Company's long-term leases contain provisions designed to mitigate the adverse impact of inflation on the Company's net income. Such provisions include clauses enabling the Company to receive percentage rents based on tenants' gross sales, which generally increase as prices rise, and/or, in certain cases, escalation clauses, which generally increase rental rates during the terms of the leases. Such escalation clauses are often related to increases in the consumer price index or similar inflation indexes. In addition, many of the Company's leases are for terms of less than ten years, which permits the Company to seek to increase rents upon re-rental at market rates if rents are below the then existing market rates. Most of the Company's leases require the tenants to pay their share of operating expenses, including common area maintenance, real estate taxes, insurance and utilities, thereby reducing the Company's exposure to increases in costs and operating expenses resulting from inflation. YEAR 2000 COMPLIANCE The year 2000 ("Y2K") problem refers to computer applications using only the last two digits to refer to a year rather than all four digits. As a result, these applications could fail or create erroneous results if they recognize "00" as the year 1900 rather than year 2000. The Company has taken Y2K initiatives in three general areas which represent the areas that could have an impact on the Company: information technology systems, non-information technology systems and third party issues. The following is a summary of these initiatives: Information technology and related costs: The Company's information technology systems generally consist of file servers, workstations, operating systems and applications which are all purchased systems. The Company's assessment and testing of these systems has revealed that they are Y2K compliant. Non-information technology and related costs: Non-information technology consists mainly of facilities management systems such as telephone, utility and security systems for its properties. The Company is in the process of identifying date sensitive systems and equipment including HVAC units, telephones, security systems and alarms, fire and flood warning systems and general office systems at its properties. Assessment and testing of these systems is approximately 75% complete and is expected to be completed by no later than the third quarter of 1999. The identification and remediation of systems at the properties is being accomplished by Company personnel with the assistance of consultants, for which both costs are being recorded as normal operating expense. Based on preliminary assessment the cost of any upgrades or replacement is not expected to be significant. 18 YEAR 2000 COMPLIANCE, continued Third parties and related costs: The Company continues to assess major third parties' Y2K readiness including tenants, contractors and key suppliers of out-sourced services including, property maintenance, stock transfer, debt servicing, banking collection and disbursement, payroll and benefits. Some of these third parties are publicly traded corporations subject to disclosure requirements for which the Company currently monitors Y2K disclosures in SEC filings. The majority of the Company's private vendors are small suppliers that the Company believes can manually execute their business and are readily replaceable. Management also believes there is no material risk of being unable to procure necessary supplies and services. The Company has requested all significant vendors and tenants to complete Y2K questionnaires and to date has not received any response from such third parties indicating that they have a significant Y2K problem. Third party assessment is approximately 75% complete and expected to be completed by the third quarter of 1999. The assessment of third party readiness is being conducted by Company personnel whose costs are recorded as normal operating expenses. The Company is not yet in a position to estimate the cost of third party compliance issues to the Company, but has no reason to believe that such costs will be material. Risks: The principal risk to the Company relating to the implementation of its accounting system hardware and software upgrades is failure to correctly bill tenants by December 31, 1999 and pay invoices when due. Management believes it has adequate resources, or could obtain the needed resources, to manually bill tenants and pay bills until the systems become operational. The principal risks to the Company relating to non-information systems at the properties are failure to identify time-sensitive systems and inability to find an appropriate replacement system. The Company believes that adequate replacement components or new systems are available at reasonable prices and are in good supply. The Company also believes that adequate time and resources are available to remediate these areas as needed. The principal risks to the Company in its relationship with third parties are failure of third party systems used to conduct business such as: disruption of tenant operations at the properties; banks being unable to process receipts and disbursements; vendors being unable to supply needed materials and services to the Company's properties; and processing of out-sourced employee payroll. Based on Y2K compliance work done to date, the Company has no reason to believe that key tenants, banks and suppliers will not be Y2K compliant in all material respects or cannot be replaced within an acceptable timeframe. 19 YEAR 2000 COMPLIANCE, continued Contingency plans: The Company intends to deal with contingency planning during the third quarter of 1999 after the results of the above assessments and related remediation are known. The Company's description of its Y2K compliance issue is based upon information obtained by management through evaluations of internal business systems and tenant and vendor compliance efforts. No assurance can be given that the Company will be able to address the Y2K issues for all its systems in a timely manner or that it will not encounter unexpected difficulties or significant expenses relating to adequately addressing the Y2K issue. If the Company or the major tenants or vendors with whom the Company does business fail to address their major issues, the Company's operating results or financial position could be materially adversely affected. Item 3. Quantitative and qualitative disclosures about market risk The Company's primary market risk exposure is to changes in interest rates related to the Company's mortgage debt. See the discussion under Item 2. of this report for certain quantitative details related to the Company's mortgage debt. Currently, the Company manages its exposure to fluctuations in interest rates primarily through the use of fixed-rate debt. As of March 31, 1999, the Company had total mortgage debt of $288.5 million of which $254.4 million, or 88%, is fixed-rate and $34.1 million, or 12%, is variable-rate based upon either LIBOR or the lender's commercial paper rate, plus certain spreads. The Company may seek variable-rate financing if and when pricing and other commercial and financial terms warrant. As such, the Company would consider hedging against the interest rate risk related to such variable-rate debt through interest rate swaps and protection agreements, or other means. 20 Part II. Other Information Item 1. Legal Proceedings There have been no material legal proceedings beyond those previously disclosed in the Registrants previously filed Annual Report on Form 10-K for the year ended December 31, 1998. Item 2. Changes in Securities Other On April 9, 1999, Marvin Slomowitz, the former principal shareholder, converted 100,000 OP Units to Common Shares on a one-for-one basis. Item 3. Defaults Upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 6. Exhibits and Reports on Form 8-K The following exhibit is included herein: 27 Financial Data Schedule (EDGAR filing only) Reports on Form 8-K - The Company did not file any report on Form 8-K during the three month period ended March 31, 1999. 21 SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has fully caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ACADIA REALTY TRUST By: /s/ Ross Dworman Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Perry Kamerman Senior Vice President of Finance (Principal Financial and Accounting Officer) Date: May 14, 1999 22