Coordinated operation of microgrids requires that energy management system takes into account both the available power in renewable energy sources (RES) and storage capacity of energy storage systems (ESS). In this paper, a coordinated architecture of islanded AC microgrids with smooth switching droop control (SSDC) is derived. Based on the proposed SSDC approach, flexible power control of each ESS/RES unit can be obtained with seamless modes changes. Furthermore, decentralized power management can be achieved by executing frequency bus-signaling (FBS). The power management principle based on different operational modes is explained in details, and small-signal analysis is carried out for SSDC. Real-time hardware-in-the-loop (HiL) results of an islanded microgrid are provided under several scenarios to validate the proposed coordinated control strategy.