UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported)
June 30, 2007
DEVELOPERS DIVERSIFIED REALTY CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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1-11690
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34-1723097
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(State or other jurisdiction
of incorporation)
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(Commission
File Number)
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(IRS Employer
Identification No.)
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3300 Enterprise Parkway, Beachwood, Ohio
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44122
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(Address of principal executive offices)
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(Zip Code)
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Registrants telephone number, including area code
(216) 755-5500
(Former name or former address, if changed since last report.)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the
filing obligation of the registrant under any of the following provisions (see General Instruction
A.2. below):
o
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
o
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
o
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
o
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
Item
8.01 Other Events
This Form 8-K amends the Annual Report on Form 10-K of Developers Diversified Realty
Corporation (the Company) for the year ended December 31, 2006, which was filed on February 21,
2007 and was amended on March 6, 2007 to incorporate by reference into Part III portions of the
Companys definitive proxy statement for its 2007 Annual Shareholders Meeting and amended on
October 25, 2007 to include the financial statements of one of its joint ventures and to include
additional footnote disclosure about the Companys joint ventures (the Form 10-K as previously
amended, the Original Report).
This
Form 8-K reflects the impact of the classification of discontinued operations of
properties sold after January 1, 2007, pursuant to the requirements of Statement of Financial
Accounting Standards 144Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
144) for the three years ended December 31, 2006, 2005 and 2004. During the period January 1,
2007 to June 30, 2007, the Company disposed of 58 shopping center properties (including one
property held for sale at December 31, 2006) aggregating 5.4 million square feet. In addition,
joint ventures that the Company accounts for under the equity method of accounting disposed of five
shopping center properties during the six-month period ended June 30, 2007 aggregating 0.3 million
square feet. In compliance with SFAS 144, the Company has reported revenues, expenses and gains on
the disposition of these properties as income from discontinued operations for each period
presented in its quarterly reports filed since the properties were disposed of (including the
comparable period of the prior year). The same retrospective adjustment of discontinued operations
required by SFAS 144 is required for previously issued annual financial statements, if those
financial statements are incorporated by reference in subsequent filings with the Securities and
Exchange Commission under the Securities Act of 1933 even though those financial statements relate
to periods prior to the date of the sale. Accordingly, the Company has reflected these
retrospective adjustments in, and is amending the following portions of the Original Report: Item
6 Selected Financial Data, Item 7 Managements Discussion and Analysis of Financial Condition
and Results of Operations and Item 15(a)(1) Financial Statements (including the
Companys Consolidated Financial Statements for the three years ended December 31, 2006, 2005 and
2004, Notes to the Consolidated Financial Statements and the Report of Independent Registered Public
Accounting Firm). These retrospective adjustments have no effect on the Companys previously reported
net income available to common shareholders.
All other items of the Original Report remain unchanged, and no attempt has been made to
update matters in the Original Report, except to the extent expressly provided above. Refer to the
Companys quarterly reports on Form 10-Q for periods subsequent to December 31, 2006.
Exhibits
(23)
Consent of PricewaterhouseCoopers LLP
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Item 6.
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SELECTED
FINANCIAL DATA
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The financial data included in the following table has been
derived from the financial statements for the last five years
and includes the information required by Item 301 of
Regulation S-K.
COMPARATIVE
SUMMARY OF SELECTED FINANCIAL DATA
(Amounts in thousands, except per share data)
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For the Years Ended December 31,
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2006 (1)
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2005 (1)
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2004 (1)
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2003 (1)
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2002 (1)
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Operating Data:
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Revenues
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$
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780,184
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$
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682,848
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$
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534,981
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$
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420,841
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$
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309,293
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Expenses:
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Rental operations
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259,768
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227,051
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177,881
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144,147
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102,188
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Depreciation &
amortization
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183,171
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154,704
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116,804
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83,606
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68,380
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442,939
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381,755
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294,685
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227,753
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170,568
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Interest income
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9,053
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10,004
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4,205
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5,082
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5,904
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Interest expense
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(211,132
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)
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(173,537
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(118,749
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)
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(81,830
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)
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(68,173
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Other expense
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(446
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)
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(2,532
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(1,779
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(10,119
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(1,018
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(202,525
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(166,065
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(116,323
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(86,867
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(63,287
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Income before equity in net income
from joint ventures, gain on disposition of joint venture
interests, minority interests, income tax of taxable REIT
subsidiaries and franchise taxes, discontinued operations, gain
on disposition of real estate and cumulative effect of adoption
of a new accounting standard
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134,720
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135,028
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123,973
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106,221
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75,438
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Equity in net income from joint
ventures
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30,337
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34,873
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40,895
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44,967
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32,769
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Gain on disposition of joint
venture interests
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7,950
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Minority interests
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(8,453
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(7,881
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(5,064
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(5,365
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(21,569
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Income tax benefit (expenses) of
taxable REIT subsidiaries and franchise taxes
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2,497
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(277
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(1,467
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(1,621
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(738
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Income from continuing operations
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159,101
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161,743
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158,337
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152,152
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85,900
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Discontinued operations:
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Income from discontinued operations
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11,089
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16,093
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21,223
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13,717
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8,365
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Gain on disposition of real
estate, net
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11,051
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16,667
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8,561
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460
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4,276
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22,140
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32,760
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29,784
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14,177
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12,641
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Income before gain on disposition
of real estate
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181,241
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194,503
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188,121
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166,329
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98,541
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Gain on disposition of real estate
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72,023
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88,140
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84,642
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73,932
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3,429
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Cumulative effect of adoption of a
new accounting standard
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(3,001
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Net income
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$
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253,264
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$
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282,643
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$
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269,762
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$
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240,261
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$
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101,970
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Net income applicable to common
shareholders
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$
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198,095
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$
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227,474
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$
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219,056
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$
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189,056
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$
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69,368
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2
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For the Years Ended December 31,
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2006 (1)
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2005 (1)
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2004 (1)
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2003 (1)
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2002 (1)
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Earnings per share
data Basic:
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Income from continuing operations
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$
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1.62
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$
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1.80
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$
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1.99
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$
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2.14
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$
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0.89
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Income from discontinued operations
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0.20
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0.30
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0.31
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0.17
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0.20
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Cumulative effect of adoption of a
new accounting standard
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(0.03
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)
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Net income applicable to common
shareholders
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$
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1.82
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$
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2.10
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$
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2.27
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$
|
2.31
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$
|
1.09
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Weighted average number of common
shares
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109,002
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108,310
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|
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96,638
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81,903
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|
|
|
63,807
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Earnings per share
data Diluted:
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Income from continuing operations
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$
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1.61
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$
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1.78
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$
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1.97
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$
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2.10
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$
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0.88
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Income from discontinued operations
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|
0.20
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|
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|
0.30
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|
|
0.30
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0.17
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|
|
|
0.19
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Cumulative effect of adoption of a
new accounting standard
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|
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|
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|
(0.03
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)
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|
|
|
|
|
|
|
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|
|
|
|
|
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Net income applicable to common
shareholders
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|
$
|
1.81
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|
$
|
2.08
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$
|
2.24
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|
|
$
|
2.27
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|
|
$
|
1.07
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
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Weighted average number of common
shares
|
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|
109,613
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|
|
|
109,142
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|
|
|
99,024
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|
|
|
84,188
|
|
|
|
64,837
|
|
Cash dividends
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$
|
2.36
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|
|
$
|
2.16
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$
|
1.94
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|
|
$
|
1.69
|
|
|
$
|
1.52
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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At December 31,
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|
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2006
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|
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2005
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2004
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2003
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|
|
2002
|
|
|
Balance Sheet Data:
|
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|
|
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|
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|
|
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Real estate (at cost)
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$
|
7,442,135
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|
$
|
7,029,337
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$
|
5,603,424
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|
|
$
|
3,884,911
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|
|
$
|
2,804,056
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Real estate, net of accumulated
depreciation
|
|
|
6,580,869
|
|
|
|
6,336,514
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|
|
|
5,035,193
|
|
|
|
3,426,698
|
|
|
|
2,395,264
|
|
Investments in and advances to
joint ventures
|
|
|
291,685
|
|
|
|
275,136
|
|
|
|
288,020
|
|
|
|
260,143
|
|
|
|
258,610
|
|
Total assets
|
|
|
7,179,753
|
|
|
|
6,862,977
|
|
|
|
5,583,547
|
|
|
|
3,941,151
|
|
|
|
2,776,852
|
|
Total debt
|
|
|
4,248,812
|
|
|
|
3,891,001
|
|
|
|
2,718,690
|
|
|
|
2,083,131
|
|
|
|
1,498,798
|
|
Shareholders equity
|
|
|
2,496,183
|
|
|
|
2,570,281
|
|
|
|
2,554,319
|
|
|
|
1,614,070
|
|
|
|
945,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006 (1)
|
|
|
2005 (1)
|
|
|
2004 (1)
|
|
|
2003 (1)
|
|
|
2002 (1)
|
|
|
Cash Flow Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow provided by (used for):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
340,692
|
|
|
$
|
355,423
|
|
|
$
|
292,226
|
|
|
$
|
263,129
|
|
|
$
|
210,739
|
|
Investing activities
|
|
|
(203,047
|
)
|
|
|
(339,443
|
)
|
|
|
(1,134,601
|
)
|
|
|
(16,246
|
)
|
|
|
(279,997
|
)
|
Financing activities
|
|
|
(139,922
|
)
|
|
|
(35,196
|
)
|
|
|
880,553
|
|
|
|
(251,561
|
)
|
|
|
66,560
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
|
|
2006 (1)
|
|
|
2005 (1)
|
|
|
2004 (1)
|
|
|
2003 (1)
|
|
|
2002 (1)
|
|
|
Other Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations (2):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
198,095
|
|
|
$
|
227,474
|
|
|
$
|
219,056
|
|
|
$
|
189,056
|
|
|
$
|
69,368
|
|
Depreciation and amortization of
real estate investments
|
|
|
185,449
|
|
|
|
169,117
|
|
|
|
130,536
|
|
|
|
93,174
|
|
|
|
76,462
|
|
Equity in net income from joint
ventures
|
|
|
(30,337
|
)
|
|
|
(34,873
|
)
|
|
|
(40,895
|
)
|
|
|
(44,967
|
)
|
|
|
(32,769
|
)
|
Gain on disposition of joint
venture interests
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,950
|
)
|
|
|
|
|
Joint ventures funds from
operations (2)
|
|
|
44,473
|
|
|
|
49,302
|
|
|
|
46,209
|
|
|
|
47,942
|
|
|
|
44,473
|
|
Minority interests (OP Units)
|
|
|
2,116
|
|
|
|
2,916
|
|
|
|
2,607
|
|
|
|
1,769
|
|
|
|
1,450
|
|
Gain on disposition of depreciable
real estate investments, net
|
|
|
(21,987
|
)
|
|
|
(58,834
|
)
|
|
|
(68,179
|
)
|
|
|
(67,352
|
)
|
|
|
(4,276
|
)
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds from operations applicable
to common shareholders (2)
|
|
|
377,809
|
|
|
|
355,102
|
|
|
|
292,335
|
|
|
|
211,672
|
|
|
|
154,708
|
|
Preferred dividends
|
|
|
55,169
|
|
|
|
55,169
|
|
|
|
50,706
|
|
|
|
51,205
|
|
|
|
32,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
432,978
|
|
|
$
|
410,271
|
|
|
$
|
343,041
|
|
|
$
|
262,877
|
|
|
$
|
187,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares and
OP Units (Diluted) (3)
|
|
|
110,826
|
|
|
|
110,700
|
|
|
|
99,147
|
|
|
|
84,319
|
|
|
|
65,910
|
|
|
|
|
(1)
|
|
As described in the consolidated
financial statements, the Company acquired 20 properties in
2006 (including 15 of which were acquired through joint ventures
and four of which the Company acquired its joint venture
partners interest), 52 properties in 2005
(including 36 of which were acquired through joint ventures
and one of which the Company acquired its joint venture
partners interest), 112 properties in 2004
(18 of which were acquired through joint ventures and one
of which the Company acquired its joint venture partners
interest), 124 properties in 2003 (three of which the
Company acquired its joint venture partners interest) and
11 properties in 2002 (four of which the Company acquired
its joint venture partners interests). The Company sold
15 properties in 2006 (nine of which were owned through
joint ventures), 47 properties in 2005 (12 of which
were owned through joint ventures), 28 properties in 2004
(13 of which were owned through joint ventures),
38 properties in 2003 (12 of which were owned through
joint ventures) and 15 properties in 2002 (six of which
were owned through joint ventures). All amounts have been
presented in accordance with Statement of Financial Accounting
Standards (SFAS) No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets. In accordance with that standard, long-lived
assets that were sold or are classified as held for sale as a
result of disposal activities, have been classified as
discontinued operations for all periods presented.
|
|
(2)
|
|
Management believes that Funds From
Operations (FFO), which is a non-GAAP financial
measure, provides an additional and useful means to assess the
financial performance of a REIT. It is frequently used by
securities analysts, investors and other interested parties to
evaluate the performance of REITs, most of which present FFO
along with net income as calculated in accordance with GAAP. FFO
applicable to common shareholders is generally defined and
calculated by the Company as net income, adjusted to exclude:
(i) preferred dividends, (ii) gains (or losses) from
disposition of depreciable real estate property, except for
those sold through the Companys merchant building program,
which are presented net of taxes, (iii) sales of
securities, (iv) extraordinary items and (v) certain
non-cash items. These non-cash items principally include real
property depreciation, equity income from joint ventures and
equity income from minority equity investments and adding the
Companys proportionate share of FFO from its
unconsolidated joint ventures and minority equity investments,
determined on a consistent basis. Management believes that FFO
provides the Company and investors with an important indicator
of the Companys operating performance. This measure of
performance is used by the Company for several business purposes
and for REITs it provides a recognized measure of performance
other than GAAP net income, which may include non-cash items
(often large). Other real estate companies may calculate FFO in
a different manner.
|
|
(3)
|
|
Represents weighted average shares
and operating partnership units, or OP Units, at the end of
the respective period.
|
4
|
|
Item 7.
|
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The following discussion should be read in conjunction with the
consolidated financial statements, the notes thereto and the
comparative summary of selected financial data appearing
elsewhere in this report. Historical results and percentage
relationships set forth in the consolidated financial
statements, including trends that might appear, should not be
taken as indicative of future operations. The Company considers
portions of this information to be forward-looking
statements within the meaning of Section 27A of the
Securities Exchange Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, both as amended, with respect
to the Companys expectations for future periods.
Forward-looking statements include, without limitation,
statements related to acquisitions (including any related pro
forma financial information) and other business development
activities, future capital expenditures, financing sources and
availability and the effects of environmental and other
regulations. Although the Company believes that the expectations
reflected in those forward-looking statements are based upon
reasonable assumptions, it can give no assurance that its
expectations will be achieved. For this purpose, any statements
contained herein that are not statements of historical fact
should be deemed to be forward-looking statements. Without
limiting the foregoing, the words believes,
anticipates, plans, expects,
seeks, estimates and similar expressions
are intended to identify forward-looking statements. Readers
should exercise caution in interpreting and relying on
forward-looking statements since they involve known and unknown
risks, uncertainties and other factors that are, in some cases,
beyond the Companys control and that could materially
affect the Companys actual results, performance or
achievements.
Factors that could cause actual results, performance or
achievements to differ materially from those expressed or
implied by forward-looking statements include, but are not
limited to, the following:
|
|
|
|
|
The Company is subject to general risks affecting the real
estate industry, including the need to enter into new leases or
renew leases on favorable terms to generate rental revenues;
|
|
|
|
The Company could be adversely affected by changes in the local
markets where its properties are located, as well as by adverse
changes in national economic and market conditions;
|
|
|
|
The Company may fail to anticipate the effects on its properties
of changes in consumer buying practices, including sales over
the Internet and the resulting retailing practices and space
needs of its tenants;
|
|
|
|
The Company is subject to competition for tenants from other
owners of retail properties, and its tenants are subject to
competition from other retailers and methods of distribution.
The Company is dependent upon the successful operations and
financial condition of its tenants, in particular of its major
tenants, and could be adversely affected by the bankruptcy of
those tenants;
|
|
|
|
The Company may not realize the intended benefits of an
acquisition or merger transaction. The assets may not perform as
well as the Company anticipated or the Company may not
successfully integrate the assets and realize the improvements
in occupancy and operating results that the Company anticipates.
The acquisition of certain assets may subject the Company to
liabilities, including environmental liabilities;
|
|
|
|
The Company may not be able to consummate its merger with Inland
Retail Real Estate Trust, Inc. (IRRETI), as it is
subject to certain conditions, including IRRETI shareholder
approval (see 2006 Activity-Strategic Real Estate
Transactions IRRETI Merger below);
|
|
|
|
Although the Company anticipates completing the IRRETI merger in
late February 2007, the merger is subject to certain closing
conditions, including IRRETI shareholder approval. Once the
merger is completed, the Company may not realize the intended
benefits of the merger. For example, the Company may not achieve
the anticipated costs savings and operating efficiencies, the
Company may not be able to complete loan assumptions or
financing on favorable terms. The Company may not effectively
integrate the operations of IRRETI and the IRRETI portfolio,
including its development projects, may not perform as well as
the Company anticipates;
|
|
|
|
The Company may fail to identify, acquire, construct or develop
additional properties that produce a desired yield on invested
capital, or may fail to effectively integrate acquisitions of
properties or portfolios of
|
5
|
|
|
|
|
properties. In addition, the Company may be limited in its
acquisition opportunities due to competition and other factors;
|
|
|
|
|
|
The Company may fail to dispose of properties on favorable
terms. In addition, real estate investments can be illiquid and
limit the Companys ability to promptly make changes to its
portfolio to respond to economic and other conditions;
|
|
|
|
The Company may abandon a development opportunity after
expending resources if it determines that the development
opportunity is not feasible or if it is unable to obtain all
necessary zoning and other required governmental permits and
authorizations;
|
|
|
|
The Company may not complete projects on schedule as a result of
various factors, many of which are beyond the Companys
control, such as weather, labor conditions and material
shortages, resulting in increased debt service expense and
construction costs and decreases in revenue;
|
|
|
|
The Companys financial condition may be affected by
required payments of debt or related interest, the risk of
default and restrictions on its ability to incur additional debt
or enter into certain transactions under its credit facilities
and other documents governing its debt obligations. In addition,
the Company may encounter difficulties in obtaining permanent
financing;
|
|
|
|
Debt
and/or
equity financing necessary for the Company to continue to grow
and operate its business may not be available or may not be
available on favorable terms;
|
|
|
|
The Company is subject to complex regulations related to its
status as a real estate investment trust (REIT) and
would be adversely affected if it failed to qualify as a REIT;
|
|
|
|
The Company must make distributions to shareholders to continue
to qualify as a REIT, and if the Company borrows funds to make
distributions, those borrowings may not be available on
favorable terms;
|
|
|
|
Partnership or joint venture investments may involve risks not
otherwise present for investments made solely by the Company,
including the possibility a partner or co-venturer might become
bankrupt, might at any time have different interests or goals
than those of the Company and may take action contrary to the
Companys instructions, requests, policies or objectives,
including the Companys policy with respect to maintaining
its qualification as a REIT;
|
|
|
|
The Company may not realize anticipated returns from its real
estate assets outside of the United States. The Company expects
to continue to pursue international opportunities that may
subject the Company to different or greater risk from those
associated with its domestic operations. The Company holds an
interest in a joint venture in Brazil and assets in Puerto Rico;
|
|
|
|
International development and ownership activities carry risks
that are different from those the Company faces with the
Companys domestic properties and operations. These risks
include:
|
|
|
|
|
|
Adverse effects of changes in exchange rates for foreign
currencies;
|
|
|
|
Changes in foreign political environments;
|
|
|
|
Challenges of complying with a wide variety of foreign laws
including corporate governance, operations, taxes and litigation;
|
|
|
|
Different lending practices;
|
|
|
|
Cultural differences;
|
|
|
|
Changes in applicable laws and regulations in the United States
that affect foreign operations;
|
|
|
|
Difficulties in managing international operations and
|
|
|
|
Obstacles to the repatriation of earnings and cash.
|
6
|
|
|
|
|
Although the Companys international activities currently
are a relatively small portion of the Companys business,
to the extent the Company expands its international activities,
these risks could significantly increase and adversely affect
its results of operations and financial condition;
|
|
|
|
|
|
The Company is subject to potential environmental liabilities;
|
|
|
|
The Company may incur losses that are uninsured or exceed policy
coverage due to its liability for certain injuries to persons,
property or the environment occurring on its properties;
|
|
|
|
The Company could incur additional expenses in order to comply
with or respond to claims under the Americans with Disabilities
Act or otherwise be adversely affected by changes in government
regulations, including changes in environmental, zoning, tax and
other regulations and
|
|
|
|
Changes in interest rates could adversely affect the market
price of the Companys common shares, as well as its
performance and cash flow.
|
Executive
Summary
Market
Position
The Company is the leading owner, developer and manager of
market-dominant open-air community shopping centers in the
United States. The Company believes this format provides an
optimal environment for some of the nations most
successful retailers by appealing to consumers shopping
preferences for value and convenience. The Company also believes
its investment in this retail format enables it to capture some
of the strongest growth in retail real estate.
Community shopping centers are large, retail properties that
draw shoppers from the immediate neighborhood, as well as the
surrounding trade area, and typically have the following
characteristics:
|
|
|
|
|
250,000 - 1,000,000 total square feet of retail stores;
|
|
|
|
Two or more national tenant anchors such as Target, Wal-Mart,
Home Depot or Lowes Home Improvement;
|
|
|
|
Two or more junior anchor tenants such as Bed Bath &
Beyond, Kohls, Circuit City, T.J. Maxx or PETsMART;
|
|
|
|
20,000 - 80,000 square feet of small retail
shops and
|
|
|
|
Two to four outparcels available for sale or ground lease.
|
7
The following table sets forth information as to anchor
and/or
national retail tenants that individually accounted for at least
1.0% of total annualized base rent of the wholly-owned
properties and the Companys proportionate share of joint
venture properties as of December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
% of Total
|
|
|
% of Total
|
|
|
|
Shopping Center
|
|
|
Shopping Center
|
|
Tenant
|
|
Base Rent
|
|
|
GLA
|
|
|
Wal-Mart/Sams Club
|
|
|
4.5
|
%
|
|
|
7.7
|
%
|
Mervyns
|
|
|
2.8
|
|
|
|
2.5
|
|
Royal Ahold (Tops Markets)
|
|
|
2.8
|
|
|
|
2.7
|
|
T.J.
Maxx/Marshalls/A.J. Wright/Homegoods
|
|
|
2.0
|
|
|
|
2.4
|
|
PETsMART
|
|
|
1.9
|
|
|
|
1.5
|
|
Bed Bath & Beyond
|
|
|
1.6
|
|
|
|
1.4
|
|
Lowes Home Improvement
|
|
|
1.6
|
|
|
|
2.7
|
|
Kohls
|
|
|
1.5
|
|
|
|
2.1
|
|
The Gap/Old Navy/Banana Republic
|
|
|
1.2
|
|
|
|
0.9
|
|
Michaels
|
|
|
1.2
|
|
|
|
1.1
|
|
Sears/Kmart
|
|
|
1.2
|
|
|
|
3.4
|
|
Barnes &
Noble/B. Dalton
|
|
|
1.1
|
|
|
|
0.7
|
|
Home Depot
|
|
|
1.1
|
|
|
|
1.4
|
|
OfficeMax
|
|
|
1.1
|
|
|
|
1.1
|
|
AMC Theatres
|
|
|
1.0
|
|
|
|
0.4
|
|
Staples
|
|
|
1.0
|
|
|
|
0.9
|
|
8
The following table sets forth information as to anchor
and/or
national retail tenants that individually accounted for at least
1.0% of total annualized base rent of the wholly-owned
properties and the Companys joint venture properties as of
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholly-Owned Properties
|
|
|
Joint Venture Properties
|
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
% of
|
|
|
|
Shopping
|
|
|
Company-
|
|
|
Shopping
|
|
|
Company-
|
|
|
|
Center Base
|
|
|
Owned
|
|
|
Center Base
|
|
|
Owned
|
|
|
|
Rental
|
|
|
Shopping
|
|
|
Rental
|
|
|
Shopping
|
|
Tenant
|
|
Revenues
|
|
|
Center GLA
|
|
|
Revenues
|
|
|
Center GLA
|
|
|
Wal-Mart/Sams Club
|
|
|
5.2
|
%
|
|
|
8.7
|
%
|
|
|
1.8
|
%
|
|
|
3.1
|
%
|
Royal Ahold (Tops Markets)
|
|
|
3.0
|
|
|
|
2.7
|
|
|
|
2.7
|
|
|
|
3.2
|
|
T.J. Maxx/Marshalls/A.J. Wright/Homegoods
|
|
|
2.0
|
|
|
|
2.3
|
|
|
|
2.7
|
|
|
|
3.5
|
|
PETsMART
|
|
|
1.9
|
|
|
|
1.5
|
|
|
|
2.4
|
|
|
|
2.2
|
|
Lowes Home Improvement
|
|
|
1.8
|
|
|
|
3.0
|
|
|
|
0.8
|
|
|
|
1.1
|
|
Bed Bath & Beyond
|
|
|
1.6
|
|
|
|
1.4
|
|
|
|
1.8
|
|
|
|
1.8
|
|
Kohls
|
|
|
1.4
|
|
|
|
1.9
|
|
|
|
2.4
|
|
|
|
4.1
|
|
Sears/Kmart
|
|
|
1.4
|
|
|
|
3.8
|
|
|
|
0.2
|
|
|
|
1.4
|
|
The Gap/Old Navy/Banana Republic
|
|
|
1.2
|
|
|
|
0.8
|
|
|
|
1.1
|
|
|
|
0.9
|
|
Home Depot
|
|
|
1.2
|
|
|
|
1.5
|
|
|
|
0.6
|
|
|
|
0.6
|
|
Michaels
|
|
|
1.1
|
|
|
|
1.0
|
|
|
|
1.3
|
|
|
|
1.4
|
|
OfficeMax
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
1.2
|
|
|
|
1.4
|
|
Barnes & Noble/B. Dalton
|
|
|
1.0
|
|
|
|
0.6
|
|
|
|
1.5
|
|
|
|
0.9
|
|
Dollar Tree
|
|
|
1.0
|
|
|
|
1.1
|
|
|
|
0.5
|
|
|
|
0.7
|
|
Staples
|
|
|
1.0
|
|
|
|
0.9
|
|
|
|
0.4
|
|
|
|
0.4
|
|
Dicks Sporting Goods
|
|
|
0.9
|
|
|
|
1.0
|
|
|
|
1.0
|
|
|
|
1.0
|
|
AMC Theatres
|
|
|
0.8
|
|
|
|
0.3
|
|
|
|
1.5
|
|
|
|
1.0
|
|
Best Buy
|
|
|
0.8
|
|
|
|
0.7
|
|
|
|
1.5
|
|
|
|
1.4
|
|
Ross Dress For Less
|
|
|
0.8
|
|
|
|
0.8
|
|
|
|
1.3
|
|
|
|
1.3
|
|
Circuit City
|
|
|
0.7
|
|
|
|
0.5
|
|
|
|
1.3
|
|
|
|
1.3
|
|
DSW/Filenes Basement/Value
City Department Stores
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
1.0
|
|
|
|
0.9
|
|
Linens N Things
|
|
|
0.4
|
|
|
|
0.3
|
|
|
|
1.5
|
|
|
|
1.4
|
|
Mervyns
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
7.8
|
|
|
|
8.2
|
|
Investment
Strategy
The Company pursues the following key initiatives to enhance its
competitive position, capture emerging trends and maximize
long-term shareholder value:
|
|
|
|
|
Acquisition of high-quality stabilized retail real estate
portfolios through joint ventures with institutional capital
partners to preserve the Companys equity and enhance its
investment returns through the creation of long-term fee income
and promoted interests in the asset value;
|
|
|
|
Ground-up
development of new retail assets, as well as expansion and
redevelopment of existing assets, to capture the valuation
differential between development returns and current market
pricing for stabilized retail assets;
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Value-added investments in well-located retail properties in
need of re-tenanting or redevelopment and forward commitments
with local joint venture partners as a means of controlling
market-dominant sites and earning disproportionately higher
returns on invested equity through fee income and promoted
interests;
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9
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Opportunities for retail investment in select international
markets through joint ventures with dominant local retail
developers and property managers to take advantage of growing
consumerism in international markets and the increasing
globalization of the retail industry and
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|
Capital recycling opportunities to sell low-growth or non-core
assets to increase the Companys internal growth and
generate capital for reinvestment into higher yielding retail
assets that better fit the Companys long-term investment
strategy.
|
The Company leverages its unique set of core competencies in the
implementation of its investment strategy. The Company believes
its aggregate skill set and market position enable it to earn
investment returns superior to its competitors. Such core
competencies include:
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Premier relationships with the nations leading retailers;
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Broad in-house development and redevelopment capability;
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Dedicated ancillary income and peripheral land development
departments;
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National asset management platform focused on maximizing
portfolio profitability through strategic leasing and efficient
property management;
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Ability to successfully source and execute accretive
acquisitions, as well as integrate large portfolios into the
Companys operations and
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|
Efficient access to capital through multiple relationships with
private capital partners, banking institutions and other capital
sources.
|
Executive
Management Team
The Companys executive management team is responsible for
the implementation of its investment strategy. This team is
comprised of experienced professionals who have worked together
for many years through the Companys growth and who also
bring a breadth of experience from many years in other facets of
the retail real estate industry.
The Companys executive management team is committed to
providing the investment community with extensive disclosure to
enhance financial transparency. The National Association of Real
Estate Investment
Trusts
®
(NAREIT), the representative voice for
U.S. REITs and publicly traded real estate companies
worldwide, has selected the Companys Management
Discussion & Analysis as the large cap winner of its
Gold Award for outstanding financial disclosure for the last
four consecutive years.
Executive
Management Team
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Years
|
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Years in
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|
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with
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|
Real Estate
|
|
Name
|
|
Title
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Company
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|
|
Industry
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|
Scott A. Wolstein
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CEO & Chairman
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25
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(1)
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25
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|
David M. Jacobstein
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President & COO
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7
|
|
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|
21
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Daniel B. Hurwitz
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Senior EVP & CIO
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7
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20
|
|
Joan U. Allgood
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|
EVP-Corporate
Transactions & Governance
|
|
|
19
|
(1)
|
|
|
24
|
|
Richard E. Brown
|
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EVP-International
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|
|
7
|
|
|
|
26
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Timothy J. Bruce
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|
EVP-Development
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4
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|
|
|
20
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|
William H. Schafer
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|
EVP & CFO
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14
|
(1)
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|
22
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|
Robin R. Walker-Gibbons
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EVP-Leasing
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11
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25
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Average per Executive
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12
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23
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Total Years
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94
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183
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(1)
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|
Affiliated with pre-IPO entity. IPO
in February 1993.
|
10
Growth
Opportunities
Despite changes in the overall economy, retail sales over the
last 10 years have grown by more than 70% and, according to
the U.S. Census, are expected to continue growing at an
annual rate of approximately 4%. As retail sales continue to
grow, the Company believes it is well-positioned to benefit from
shoppers preferences for an open-air retail format
compared to an enclosed mall format, as well as consumers
shift from shopping at traditional department stores in favor of
specialized category killers and general merchandise
discounters.
11
Because of these long-term retail trends, the Company is
experiencing significant tenant demand for retail space in its
portfolio. Traditional community center tenants such as Target,
Wal-Mart, Lowes Home Improvement, Home Depot, Kohls,
PETsMART, Bed Bath & Beyond, etc., continue to grow
their store locations by 8% to 12% annually. Moreover, many
traditionally mall-based retailers are migrating to the open-air
format, where their occupancy costs, as a percentage of sales,
are significantly lower. Through its growing lifestyle center
and hybrid center portfolios, the Company is expanding the
roster of tenants with which it has leasing relationships.
As a result of this tenant demand, the aggregate occupancy of
the Companys shopping center portfolio was 95.2% at
December 31, 2006, which is consistent with the
Companys long-term average occupancy rate since 1987 of
approximately 96%. This performance underscores the
portfolios ability to withstand economic fluctuations,
retailer bankruptcies and store closures, which in turn,
produces highly stable and consistent cash flow.
Tenant demand for new store locations is also driving the growth
of the Companys development pipeline, which represents
over $3.5 billion in gross project costs. The Company is
pursuing development of a variety of open-air shopping centers
that reflect popular consumer shopping trends, including:
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Lifestyle centers, which feature a critical mass of specialty
retailers traditionally found in enclosed malls;
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Hybrid centers, which combine community center tenants with
lifestyle tenants and
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Mixed use centers, which complement retail space with
residential or office components.
|
The Company believes that as consolidation in the retail REIT
industry continues and as more retailers and retail landlords
grow their international operations, the dominant,
world-class REITs will earn superior returns. To that end,
the Company has formed a department dedicated to sourcing
foreign investment opportunities and managing relationships with
international joint venture partners. The Company has undertaken
a joint venture investment in Brazil and continues to evaluate
opportunities for prudent expansion in other emerging markets.
Historical
Performance
The Company has experienced significant growth over the past
several years. During the last four years, the Company acquired
large, privately-held retail portfolios from Benderson
Development Company (Benderson)
12
and Caribbean Property Group (CPG). Also during that
time, the Company acquired JDN Realty Corporation, a publicly
traded retail REIT. The Company recently announced its pending
acquisition of IRRETI, a registered, non-traded retail REIT.
This portfolio growth, when combined with the internal growth of
the Companys core portfolio shopping centers and the value
created through the Companys development platform, has
contributed to the Companys increased FFO and dividends
per share. The Companys ability to consistently increase
these key financial metrics in various economic environments has
contributed to significant appreciation in the value of the
Companys common stock over the last several years.
The Companys total market capitalization (defined as
common shares and OP Units outstanding multiplied by the closing
price of the common shares on the New York Stock Exchange at
December 31, 2006, plus preferred shares at liquidation
value and consolidated debt) has also increased significantly as
a result of both the growth in the Companys asset base and
its common stock price. The total market capitalization was
$11.9 billion at December 31, 2006.
13
At December 31, 2006, the Company owned 467 shopping
centers (167 of which are owned through unconsolidated joint
ventures and 39 that are consolidated by the Company) in
44 states, plus Puerto Rico and Brazil, comprising
approximately 85.3 million square feet of Company-owned GLA
(approximately 109.1 million square feet of total GLA). In
addition, the Company owned or had an interest in seven office
and industrial properties in five states comprising
approximately 0.8 million square feet.
Year in
Review 2006
Net income for the year ended December 31, 2006, was
$253.3 million, or $1.81 per share (diluted), compared
to net income of $282.6 million, or $2.08 per share
(diluted) for the prior comparable period. FFO applicable to
common shareholders for the year ended December 31, 2006,
was $377.8 million compared to the year ended
December 31, 2005, of $355.1 million, an increase of
6.4%. The decrease in net income of approximately
$29.3 million is due to (i) increases in NOI from
operating properties, offset by (ii) decreases in non-FFO
gains on disposition of real estate, (iii) increases in
depreciation of the assets acquired and developed and
(iv) increases in short-term interest rates and related
interest expense. The reduction in net income per share is
directly affected by the decrease in net income generated from
the factors described above.
The Companys operating and development portfolios continue
to be driven by tenant demand for new store locations in the
open air format. Property fundamentals continue to perform and
same store net operating income (NOI) growth is
improving as the Company implements new asset management
strategies to increase rents and improve profitability. With
respect to the Companys investment strategy, certain 2006
results should have important long-term implications to
shareholders and creation of shareholder value. A few examples
are summarized below:
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First, the Companys new relationship with TIAA-CREF (see
2006 Strategic Transactions) and its existing relationship with
MDT, two infinite-life vehicles, provide DDR with alternative
sources of private equity and a fee stream that is both highly
profitable and easily scaleable given the Companys
existing operating platform.
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|
Second, the continued growth of the development pipeline and
redevelopments, with average leveraged investment returns in the
low double digits, represents a value creation opportunity for
the Company.
|
14
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Strong development competencies can manufacture new products at
yields significantly above cap rates currently available in the
market for acquisitions. The Companys in-house development
capability creates a competitive advantage, particularly with
larger projects that need more expertise to successfully
navigate the entitlement process and more financial strength to
fund the project through to completion.
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Third, the Company invested approximately $485 million in
value-add
projects and forward commitments through the Coventry II
Joint Venture during 2006. Although Coventry has deployed its
remaining capital from Fund II, the Company will still
leverage its internal expertise by pursuing
value-add
opportunities and placing such opportunities both with Coventry
and other capital sources, as appropriate. The Company continues
to seek amply opportunities to create value and to exercise
greater flexibility with which to operate.
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Lastly, the Company has expanded with an international
investment division to evaluate new opportunities and manage
existing foreign joint venture relationships.
|
Since the announcement of the proposed merger with IRRETI, the
Company has been executing a financing plan. With these
arrangements in place, a significant amount of the initial
financing risk associated with the transaction may be
eliminated. The financing options available to DDR, combined
with the equity raised through a forward transaction and the
issuance of equity to IRRETI shareholders, should provide DDR
with sufficient flexibility with its debt covenants. The Company
continues to prove its ability to finance large portfolio
acquisitions and effectively maintain financial ratios at
consistent levels. The Company intends to continue to operate
its business within these parameters.
After the completion of the merger, the Company expects to
complete additional joint venture transactions and non-core
asset sales from both the DDR and IRRETI portfolios to allow for
financial flexibility and investment in higher-yielding assets.
The Company has reviewed the combined portfolios to identify
assets that could be sold to a joint venture and assets that
could be sold to outside interests. The Company performed a
strategic asset management initiative and gathered detailed
input from its leasing, development and property management
teams. A pool of high quality assets was identified for which
the Company would expect to maintain
day-to-day
leasing and management responsibilities, but were found to be
better suited for a joint venture structure. As a result of this
exercise, the Company is currently negotiating potential joint
ventures with potential private equity partners. A second group
of assets was identified that, due to their smaller size, market
position, and future growth potential, does not fit the
Companys long-term investment objectives. The sale of such
assets by the Company will enhance the overall quality of the
portfolio and improve the Companys balance sheet through
this initiative.
The Company intends to maintain a portfolio of dominant centers
in quality markets where population density, income growth and
buying power will substantially increase over time. Dominance
has its benefits and the Company intends to leverage its
position in growing markets and generate increasing leasing
spreads over time.
CRITICAL
ACCOUNTING POLICIES
The consolidated financial statements of the Company include
accounts of the Company and all majority-owned subsidiaries
where the Company has financial or operating control. The
preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires management to make estimates and assumptions in certain
circumstances that affect amounts reported in the accompanying
consolidated financial statements and related notes. In
preparing these financial statements, management has utilized
available information, including the Companys history,
industry standards and the current economic environment, among
other factors, in forming its estimates and judgments of certain
amounts included in the consolidated financial statements,
giving due consideration to materiality. It is possible that the
ultimate outcome as anticipated by management in formulating its
estimates inherent in these financial statements might not
materialize. Application of the critical accounting policies
described below involves the exercise of judgment and the use of
assumptions as to future uncertainties. As a result, actual
results could differ from these estimates. In addition, other
companies
15
may utilize different estimates that may affect the
comparability of the Companys results of operations to
those of companies in similar businesses.
Revenue
Recognition and Accounts Receivable
Rental revenue is recognized on a straight-line basis that
averages minimum rents over the current term of the leases.
Certain of these leases provide for percentage and overage rents
based upon the level of sales achieved by the tenant. Percentage
and overage rents are recognized after a tenants reported
sales have exceeded the applicable sales break point set forth
in the applicable lease. The leases also typically provide for
tenant reimbursements of common area maintenance and other
operating expenses and real estate taxes. Accordingly, revenues
associated with tenant reimbursements are recognized in the
period in which the expenses are incurred based upon the tenant
lease provision. Management fees are recorded in the period
earned. Ancillary and other property-related income, which
includes the leasing of vacant space to temporary tenants, are
recognized in the period earned. Lease termination fees are
included in other income and recognized and earned upon
termination of a tenants lease and relinquishment of space
in which the Company has no further obligation to the tenant.
Acquisition and financing fees are recognized at the completion
of the respective transaction and earned in accordance with the
underlying agreements. Fee income derived from the
Companys joint venture investments is recognized to the
extent attributable to the unaffiliated ownership interest.
The Company makes estimates of the collectibility of its
accounts receivable related to base rents, including
straight-line rentals, expense reimbursements and other revenue
or income. The Company specifically analyzes accounts receivable
and analyzes historical bad debts, customer credit worthiness,
current economic trends and changes in customer payment terms
when evaluating the adequacy of the allowance for doubtful
accounts. In addition, with respect to tenants in bankruptcy,
the Company makes estimates of the expected recovery of
pre-petition and post-petition claims in assessing the estimated
collectibility of the related receivable. In some cases, the
ultimate resolution of these claims can exceed one year. These
estimates have a direct impact on the Companys net income
because a higher bad debt reserve results in less net income.
Real
Estate
Land, buildings and fixtures and tenant improvements are
recorded at cost and stated at cost less accumulated
depreciation. Expenditures for maintenance and repairs are
charged to operations as incurred. Significant renovations
and/or
replacements that improve or extend the life of the asset are
capitalized and depreciated over their estimated useful lives.
Properties are depreciated using the straight-line method over
the estimated useful lives of the assets. The estimated useful
lives are as follows:
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|
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Buildings
|
|
Useful lives, ranging from 30 to
40 years
|
Furniture/fixtures and tenant
improvements
|
|
Useful lives, which approximate
lease terms, where applicable
|
The Company is required to make subjective assessments as to the
useful lives of its properties for purposes of determining the
amount of depreciation to reflect on an annual basis with
respect to those properties. These assessments have a direct
impact on the Companys net income. If the Company would
lengthen the expected useful life of a particular asset, it
would be depreciated over more years and result in less
depreciation expense and higher net income.
Assessment of recoverability by the Company of certain other
lease-related assets must be made when the Company has a reason
to believe that the tenant may not be able to perform under the
terms of the lease as originally expected. This requires
management to make estimates as to the recoverability of such
assets.
Gains from disposition of outlots, land parcels and shopping
centers are generally recognized using the full accrual or
partial sale method (as applicable) in accordance with the
provisions of SFAS No. 66, Accounting for Real
Estate Sales, provided that various criteria relating to
the terms of sale and any subsequent involvement by the Company
with the properties sold are met.
16
LongLived
Assets
On a periodic basis, management assesses whether there are any
indicators that the value of real estate properties may be
impaired. A propertys value is impaired only if
managements estimate of the aggregate future cash flows
(undiscounted and without interest charges) to be generated by
the property are less than the carrying value of the property.
In managements estimate of cash flows, it considers
factors such as expected future operating income, trends and
prospects, the effects of demand, competition and other factors.
In addition, the undiscounted cash flows may consider a
probability-weighted cash flow estimation approach when
alternative courses of action to recover the carrying amount of
a long-lived asset are under consideration or a range is
estimated. The determination of undiscounted cash flows requires
significant estimates by management and considers the expected
course of action at the balance sheet date. Subsequent changes
in estimated undiscounted cash flows arising from changes in
anticipated actions could impact the determination of whether an
impairment exists and whether the effects could have a material
impact on the Companys net income. To the extent an
impairment has occurred, the loss will be measured as the excess
of the carrying amount of the property over the fair value of
the property.
When assets are identified by management as held for sale, the
Company discontinues depreciating the assets and estimates the
sales price, net of selling costs of such assets. If, in
managements opinion, the net sales price of the assets
that have been identified for sale is less than the net book
value of the assets, an impairment charge is recorded.
The Company is required to make subjective assessments as to
whether there are impairments in the value of its real estate
properties and other investments. These assessments have a
direct impact on the Companys net income because recording
an impairment charge results in an immediate negative adjustment
to net income.
The Company allocates the purchase price to assets acquired and
liabilities assumed on a gross basis based on their relative
fair values at the date of acquisition pursuant to the
provisions of SFAS No. 141, Business
Combinations. In estimating the fair value of the tangible
and intangible assets and liabilities acquired, the Company
considers information obtained about each property as a result
of its due diligence, marketing and leasing activities. It
applies various valuation methods, such as estimated cash flow
projections utilizing appropriate discount and capitalization
rates, estimates of replacement costs net of depreciation, and
available market information. Depending upon the size of the
acquisition, the Company may engage an outside appraiser to
perform a valuation of the tangible and intangible assets
acquired. The Company is required to make subjective estimates
in connection with these valuations and allocations.
Off
Balance Sheet Arrangements
The Company has a number of off balance sheet joint ventures and
other unconsolidated arrangements with varying structures. The
Company consolidates certain entities in which it owns less than
a 100% equity interest if it is deemed to have a controlling
interest or is the primary beneficiary in a variable interest
entity, as defined in Financial Interpretation (FIN)
No. 46, Consolidation of Variable Interest
Entities (FIN 46(R)) or is deemed the
general partner pursuant to EITF 04-05.
To the extent that the Company contributes assets to a joint
venture, the Companys investment in the joint venture is
recorded at the Companys cost basis in the assets that
were contributed to the joint venture. To the extent that the
Companys cost basis is different from the basis reflected
at the joint venture level, the basis difference is amortized
over the life of the related assets and included in the
Companys share of equity in net income of joint ventures.
In accordance with the provisions of Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures,
the Company will recognize gains on the contribution of real
estate to joint ventures, relating solely to the outside
partners interest, to the extent the economic substance of
the transaction is a sale.
Discontinued
Operations
Pursuant to the definition of a component of an entity as
described in SFAS No. 144, assuming no significant
continuing involvement, the sale of a retail or industrial
property is considered a discontinued operation. In addition,
the operations from properties classified as held for sale are
considered a discontinued operation. The Company generally
considers assets to be held for sale when the transaction has
been approved by the appropriate
17
level of management and there are no known significant
contingencies relating to the sale such that the sale of the
property within one year is considered probable. Accordingly,
the results of operations of operating properties disposed of or
classified as held for sale, for which the Company has no
significant continuing involvement, are reflected as
discontinued operations. On occasion, the Company will receive
unsolicited offers from third parties to buy an individual
shopping center. The Company generally will classify properties
as held for sale when a sales contract is executed with no
contingencies and the prospective buyer has significant funds at
risk to ensure performance.
Interest expense, which is specifically identifiable to the
property, is used in the computation of interest expense
attributable to discontinued operations. Consolidated interest
and debt at the corporate level is allocated to discontinued
operations pursuant to the methods prescribed under Emerging
Issue Task Force (EITF)
87-24,
Allocation of Interest to Discontinued Operations,
based on the proportion of net assets sold.
Included in discontinued operations as of and for the three
years ending December 31, 2006, are 115 properties, including 58 properties sold during 2007 (one of which was considered
held for sale at December 31, 2006) aggregating 11.0 million
square feet of gross leasable area. The operations of such properties have
been reflected on a comparative basis as discontinued operations
in the consolidated financial statements for each of the three
years ending December 31, 2006, included herein.
StockBased
Employee Compensation
The Company applied Accounting Principles Board
(APB) Opinion No. 25, Accounting for
Stock Issued to Employees, in accounting for its
stock-based compensation plans, prior to January 1, 2006.
Accordingly, the Company did not recognize compensation cost for
stock options when the option exercise price equaled or exceeded
the market value on the date of the grant. The Company adopted
SFAS 123(R), Share-Based Payment,
(SFAS 123(R)) on January 1, 2006. The following table
illustrates the effect on net income and earnings per share if
the Company had applied the fair value recognition provisions of
SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment
of SFAS No. 123, for the years ended
December 31, 2005 and 2004 (in thousands, except per share
amounts):
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|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Add: Stock-based employee
compensation included in reported net income
|
|
|
5,652
|
|
|
|
6,308
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value based method
for all awards
|
|
|
(5,319
|
)
|
|
|
(5,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,976
|
|
|
$
|
271,008
|
|
|
|
|
|
|
|
|
|
|
Earnings Per Share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
2.10
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
2.09
|
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
|
Certain of the Companys executive officers were granted
performance unit awards that provide for the issuance of up to
666,666 common shares. The amount of the total grant is
determined based on the annualized total shareholders
return over a five-year period with the common shares issued
vesting over the remaining five-year period. As of
December 31, 2006, the determination period for all of
these awards was complete and the maximum common shares of
666,666 was achieved.
SFAS 123(R) requires all share-based payments to employees,
including grants of employee stock options, to be recognized in
the financial statements based on their fair value. The fair
value is estimated at the date of grant
18
using a Black-Scholes option pricing model with weighted average
assumptions for the activity under stock plans. Option pricing
model input assumptions, such as expected volatility, expected
term and risk-free interest rate, impact the fair value
estimate. Further, the forfeiture rate impacts the amount of
aggregate compensation. These assumptions are subjective and
generally require significant analysis and judgment to develop.
When estimating fair value, some of the assumptions will be
based on or determined from external data, and other assumptions
may be derived from historical experience with share-based
payment arrangements. The appropriate weight to place on
historical experience is a matter of judgment, based on relevant
facts and circumstances.
The risk-free interest rate is based upon a U.S. Treasury Strip
with a maturity date that approximates the expected term of the
option. The expected life of an award is derived by referring to
actual exercise experience. The expected volatility of stock is
derived by referring to changes in the Companys historical
stock prices over a time frame similar to the expected life of
the award.
Accrued
Liabilities
The Company makes certain estimates for accrued liabilities
including accrued professional fees, interest, real estate
taxes, insurance and litigation reserves. These estimates are
subjective and based on historical payments, executed
agreements, anticipated trends and representations from service
providers. These estimates are prepared based on information
available at each balance sheet date and are reevaluated upon
the receipt of any additional information. Many of these
estimates are for payments that occur in one year. These
estimates have a direct impact on the Companys net income
because a higher accrual will result in less net income.
The Company has made estimates in assessing the impact of the
Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in
Income Taxes An Interpretation of
FAS No. 109 (FIN 48). The
assessment of this provision requires management to estimate the
amounts recorded in preparing the Companys tax provision.
These estimates could have a direct impact as a difference in
the tax provision could alter the Companys net income.
Comparison
of 2006 to 2005 Results of Operations Continuing
Operations
Revenues
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Base and percentage rental revenues
|
|
$
|
545,126
|
|
|
$
|
487,648
|
|
|
$
|
57,478
|
|
|
|
11.8
|
%
|
Recoveries from tenants
|
|
|
170,323
|
|
|
|
149,553
|
|
|
|
20,770
|
|
|
|
13.9
|
|
Ancillary income and other
property income
|
|
|
19,584
|
|
|
|
14,237
|
|
|
|
5,347
|
|
|
|
37.6
|
|
Management, development and other
fee income
|
|
|
30,294
|
|
|
|
22,859
|
|
|
|
7,435
|
|
|
|
32.5
|
|
Other
|
|
|
14,857
|
|
|
|
8,551
|
|
|
|
6,306
|
|
|
|
73.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
780,184
|
|
|
$
|
682,848
|
|
|
$
|
97,336
|
|
|
|
14.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base and percentage rental revenues relating to new leasing,
re-tenanting and expansion of the Core Portfolio Properties
(shopping center properties owned as of January 1, 2005,
including the assets located in Puerto Rico for a comparable
eleven months of ownership, but excluding properties under
development and those classified as discontinued operations)
(Core Portfolio Properties) increased approximately
$11.1 million, or 2.5%, for the year
19
ended December 31, 2006, as compared to the same period in
2005. The increase in base and percentage rental revenues is due
to the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Core Portfolio Properties
|
|
$
|
11.1
|
|
Acquisition of real estate assets
|
|
|
44.5
|
|
Development and redevelopment of
14 shopping center properties
|
|
|
3.6
|
|
Consolidation of a joint venture
asset (EITF
04-05)
|
|
|
4.3
|
|
Transfer of 18 properties to
unconsolidated joint ventures
|
|
|
(9.3
|
)
|
Business center properties under
redevelopment
|
|
|
(1.4
|
)
|
Service Merchandise assets(1)
|
|
|
2.9
|
|
Straight-line rents
|
|
|
1.8
|
|
|
|
|
|
|
|
|
$
|
57.5
|
|
|
|
|
|
|
|
|
|
(1)
|
|
During 2006 the Company acquired
the Service Merchandise sites previously owned through the
KLA/SM Joint Venture and subsequently sold these assets to the
Service Holdings LLC Joint Venture. These assets were
consolidated within the Companys accounts for
approximately two months during the third quarter of 2006.
|
At December 31, 2006, the aggregate occupancy of the
Companys shopping center portfolio was 95.2%, as compared
to 95.3% at December 31, 2005. The Company owned 467
shopping centers at December 31, 2006. The average
annualized base rent per occupied square foot was $11.56 at
December 31, 2006, as compared to $11.01 at
December 31, 2005.
At December 31, 2006, the aggregate occupancy of the
Companys wholly-owned shopping centers was 94.1%, as
compared to 94.4% at December 31, 2005. The Company owned
261 wholly-owned shopping centers at December 31, 2006. The
average annualized base rent per leased square foot was $10.80
at December 31, 2006, as compared to $10.42 at
December 31, 2005.
At December 31, 2006, the aggregate occupancy of the
Companys joint venture shopping centers was 96.9%, as
compared to 97.0% at December 31, 2005. The Companys
joint ventures owned 167 shopping centers including 39
consolidated centers primarily owned through the Mervyns Joint
Venture at December 31, 2006. The average annualized base
rent per leased square foot was $12.69 at December 31,
2006, as compared to $12.05 at December 31, 2005.
At December 31, 2006, the aggregate occupancy of the
Companys business centers was 42.1%, as compared to 43.2%
at December 31, 2005. The business centers consist of seven
assets in five states.
Recoveries from tenants increased $20.9 million, or 13.3%,
for the year ended December 31, 2006, as compared to the
same period in 2005. This increase is primarily due to an
increase in operating expenses and real estate taxes that
aggregated $26.7 million, primarily due to acquisitions and
developments coming on line as discussed below. Recoveries were
approximately 85.6% and 86.5% of operating expenses and real
estate taxes for the years ended December 31, 2006 and
2005, respectively.
20
The increase in recoveries from tenants was primarily related to
the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Acquisition and
development/redevelopment of 32 shopping center properties in
2006 and 2005
|
|
$
|
17.9
|
|
Transfer of properties to joint
ventures in 2006 and 2005
|
|
|
(3.3
|
)
|
Consolidation of a joint venture
asset (EITF
04-05)
|
|
|
1.2
|
|
Service Merchandise assets
|
|
|
0.8
|
|
Net increase in operating expenses
at the remaining shopping center and business center properties
|
|
|
4.2
|
|
|
|
|
|
|
|
|
$
|
20.8
|
|
|
|
|
|
|
Ancillary and other properly related income increased due to
income earned from the acquisition of portfolios from CPG and
Benderson. The Company believes that its ancillary income will
continue to grow with additional opportunities in these
portfolios. The Company believes that its ancillary income
program continues to be an industry leader among
open-air shopping centers. Continued growth is
anticipated in the area of ancillary or non-traditional revenue,
as additional revenue opportunities are pursued and as currently
established revenue opportunities proliferate throughout the
Companys core, acquired and development portfolios.
Ancillary revenue opportunities have in the past included
short-term and seasonal leasing programs, outdoor advertising
programs, wireless tower development programs, energy management
programs, sponsorship programs and various other programs.
The increase in management, development and other fee income,
which aggregated $7.4 million, is primarily due to
unconsolidated joint venture interests formed in 2005, the
continued growth of the MDT Joint Venture aggregating
$1.3 million and an increase in other income of
approximately $4.9 million. This increase was offset by the
sale of several of the Companys joint venture properties
that contributed approximately $1.8 million in management
fee income in the prior year and a decrease in development fee
income of approximately $0.2 million. The remaining
increase of $3.2 million is due to an increase in other fee
income. Management fee income is expected to continue to
increase as the MDT Joint Venture and other joint ventures
acquire additional properties and as unconsolidated joint
venture assets under development become operational.
Additionally, the proposed TIAA-CREF joint venture is
anticipated to generate additional management fee income in
2007. Development fee income was primarily earned relating to
the redevelopment of assets through the Coventry II Joint
Venture. The Company expects to continue to pursue additional
development joint ventures as opportunities present themselves.
Other income is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Lease termination fees (1)
|
|
$
|
14.0
|
|
|
$
|
5.2
|
|
Financing fees (2)
|
|
|
0.4
|
|
|
|
2.4
|
|
Other
|
|
|
0.5
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
14.9
|
|
|
$
|
8.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For the year ended
December 31, 2006, the Company executed lease terminations
on four vacant Wal-Mart spaces in the Companys
wholly-owned portfolio.
|
|
(2)
|
|
Represents financing fees received
in connection with the MDT Joint Venture, excluding the
Companys retained ownership of approximately 14.5%. The
Companys fees are earned in conjunction with the timing
and amount of the transaction by the joint venture.
|
21
Expenses
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating and maintenance
|
|
$
|
108,013
|
|
|
$
|
92,575
|
|
|
$
|
15,438
|
|
|
|
16.7
|
%
|
Real estate taxes
|
|
|
91,076
|
|
|
|
80,428
|
|
|
|
10,648
|
|
|
|
13.2
|
|
General and administrative
|
|
|
60,679
|
|
|
|
54,048
|
|
|
|
6,631
|
|
|
|
12.3
|
|
Depreciation and amortization
|
|
|
183,171
|
|
|
|
154,704
|
|
|
|
28,467
|
|
|
|
18.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
442,939
|
|
|
$
|
381,755
|
|
|
$
|
61,184
|
|
|
|
16.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses include the Companys
provision for bad debt expense, which approximated 0.8% and 1.0%
of total revenues (including discontinued operations) for the years ended December 31, 2006 and
2005, respectively (see Economic Conditions).
The increase in rental operation expenses, excluding general and
administrative, is due to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
|
|
|
|
|
|
|
and
|
|
|
Real Estate
|
|
|
|
|
|
|
Maintenance
|
|
|
Taxes
|
|
|
Depreciation
|
|
|
Core Portfolio Properties
|
|
$
|
4.3
|
|
|
$
|
5.1
|
|
|
$
|
5.2
|
|
Acquisition and
development/redevelopment of 32 shopping center properties
|
|
|
11.6
|
|
|
|
6.8
|
|
|
|
20.7
|
|
Consolidation of a joint venture
asset (EITF
04-05)
|
|
|
0.5
|
|
|
|
0.7
|
|
|
|
1.0
|
|
Transfer of 18 properties to
unconsolidated joint ventures
|
|
|
(1.6
|
)
|
|
|
(2.4
|
)
|
|
|
(2.4
|
)
|
Business center properties
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
0.6
|
|
Service Merchandise assets
|
|
|
1.2
|
|
|
|
0.5
|
|
|
|
1.3
|
|
Provision for bad debt expense
|
|
|
(0.6
|
)
|
|
|
|
|
|
|
|
|
Personal property
|
|
|
|
|
|
|
|
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15.4
|
|
|
$
|
10.6
|
|
|
$
|
28.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In the third quarter of 2006, the Company formed two
wholly-owned captive insurance companies (the
Captives). The Captives will insure the
Companys self-insured retentions for the first $100,000 of
general liability insurance and the first $100,000 of property
damage insurance on a per occurrence basis. The Company believes
the wholly-owned captive insurance companies, licensed and
regulated by the state of Vermont, are adequately funded to
cover the per-occurrence retentions for liability coverage and
property damage subject to certain aggregate limits as defined
in the respective policies. While the Company believes that the
self-insurance reserves are adequate, the Company cannot assure
that the self-insurance reserves will be adequate to cover any
incurred losses.
The increase in general and administrative expenses is primarily
attributable to certain executive outperformance incentive
compensation plans as noted below in the adoption of
SFAS 123(R) of approximately $2.6 million and
increased expense from the directors deferred compensation plan
of approximately $0.9 million. Other increases in general
and administrative costs are a result of the growth of the
Company and include salaries and wages, information systems and
legal and consulting costs of approximately $0.3 million,
$0.8 million and $0.9 million, respectively. Total
general and administrative expenses were approximately 4.8% and
4.6% of total revenues, including total revenues of joint
ventures, for the years ended December 31, 2006 and 2005,
respectively.
The Company continues to expense internal leasing salaries,
legal salaries and related expenses associated with certain
leasing and re-leasing of existing space. In addition, the
Company capitalized certain direct and incremental internal
construction and software development and implementation costs
consisting of direct wages and benefits, travel expenses and
office overhead costs of $10.0 million and
$6.2 million in 2006 and 2005, respectively.
22
The Company adopted SFAS 123(R) as required on
January 1, 2006, using the modified prospective method. The
Companys consolidated financial statements as of the year
ended December 31, 2006, reflect the impact of
SFAS 123(R). In accordance with the modified prospective
method, the Companys consolidated financial statements for
prior periods have not been restated to reflect the impact of
SFAS 123(R). The compensation cost recognized under
SFAS 123(R) was approximately $8.3 million for the
year ended December 31, 2006. There were no significant
capitalized stock-based compensation costs at December 31,
2006. For the year ended December 31, 2005, the Company
recorded compensation expense related to its restricted stock
plan and its performance unit awards of approximately
$5.7 million.
Other Income and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Interest income
|
|
$
|
9,053
|
|
|
$
|
10,004
|
|
|
$
|
(951
|
)
|
|
|
(9.5
|
)%
|
Interest expense
|
|
|
(211,132
|
)
|
|
|
(173,537
|
)
|
|
|
(37,595
|
)
|
|
|
21.7
|
|
Other expense, net
|
|
|
(446
|
)
|
|
|
(2,532
|
)
|
|
|
2,086
|
|
|
|
(82.4
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(202,525
|
)
|
|
$
|
(166,065
|
)
|
|
$
|
(36,460
|
)
|
|
|
22.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income for the year ended December 31, 2006,
decreased primarily as a result of advances to the Service
Merchandise joint venture beginning in July 2005. This advance
was repaid as the Company acquired its partners interest
in the KLA/SM Joint Venture in August 2006. The 51 KLA/SM Joint
Venture assets were sold to a newly formed Service Holdings LLC
Joint Venture, which the Company has a 20% ownership interest,
and the Company did not advance funds to this new entity to fund
the acquisition.
Interest expense increased primarily due to the acquisition of
assets and associated borrowings combined with other development
assets becoming operational and the increase in short-term
interest rates. The weighted average debt outstanding and
related weighted average interest rate during the year ended
December 31, 2006, was $4.1 billion and 5.8%, compared
to $3.6 billion and 5.5%, for the same period in 2005. At
December 31, 2006, the Companys weighted average
interest rate was 5.8%, compared to 5.7% at December 31,
2005. Interest costs capitalized, in conjunction with
development and expansion projects and development joint venture
interests, were $20.0 million for the year ended
December 31, 2006, compared to $12.7 million for the
same period in 2005.
Other expense is comprised of litigation settlements or costs
and abandoned acquisition and development project costs.
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Equity in net income of joint
ventures
|
|
$
|
30,337
|
|
|
$
|
34,873
|
|
|
$
|
(4,536
|
)
|
|
|
(13.0
|
)%
|
Minority interests
|
|
|
(8,453
|
)
|
|
|
(7,881
|
)
|
|
|
(572
|
)
|
|
|
7.3
|
|
Income tax benefit (expense) of
taxable REIT subsidiaries and franchise taxes
|
|
|
2,497
|
|
|
|
(277
|
)
|
|
|
2,774
|
|
|
|
(1,001.4
|
)
|
23
A summary of the decrease in equity in net income of joint
ventures for the year ended December 31, 2006, is comprised
of the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Reduction in gains from
disposition transactions as compared to 2005
|
|
$
|
(6.4
|
)
|
Disposition of joint venture
interests to DDR
|
|
|
1.5
|
|
Adoption of EITF
04-05
|
|
|
(0.8
|
)
|
Acquisition of assets by
unconsolidated joint ventures
|
|
|
1.9
|
|
Debt refinancing and increased
interest rates at various joint ventures
|
|
|
(0.7
|
)
|
|
|
|
|
|
|
|
$
|
(4.5
|
)
|
|
|
|
|
|
The decrease in equity in net income of joint ventures is due to
several factors, including increased interest costs resulting
from an increase in interest rates on variable rate borrowings
and refinancings at higher debt proceeds levels at certain joint
ventures. These decreases were partially offset by an increase
in joint venture income from newly formed joint ventures in 2005
and 2006, including assets acquired by the Companys MDT
Joint Venture. In 2006, the Companys unconsolidated joint
ventures recognized an aggregate gain from the disposition of
joint venture assets of $20.3 million, of which the
Companys proportionate share was $3.1 million. In
addition, in 2006 the Company recognized promoted income of
approximately $5.5 million relating to the disposition of a
shopping center. In 2005, the Companys unconsolidated
joint ventures recognized an aggregate gain from the disposition
of joint venture assets of $49.0 million, of which the
Companys proportionate share was $13.0 million.
The Companys unconsolidated joint ventures sold the
following assets in the years ended December 31, 2006 and
2005, which excludes the Companys acquisitions during the
year ended December 31, 2006, of its partners 50%
interest in shopping centers in Salisbury, Maryland, and
Phoenix, Arizona, its partners 75% interest in a shopping
center in Pasadena, California, and its partners 80%
interest in a development in Apex, North Carolina.
|
|
|
2006 Dispositions
|
|
2005 Dispositions
|
|
One 50% effectively owned shopping
center
|
|
Three 20% owned shopping centers
|
Four 25.5% effectively owned
shopping centers
|
|
One 24.75% owned shopping center
|
One 20.75% effectively owned
shopping center
|
|
Eight sites formerly occupied by
Service Merchandise
|
Two sites formerly occupied by
Service Merchandise
|
|
|
One 10% effectively owned shopping
center
|
|
|
Minority equity interest expense increased for the year ended
December 31, 2006, primarily due to the following (in
millions):
|
|
|
|
|
|
|
(Increase)
|
|
|
|
Decrease
|
|
|
Formation of the Mervyns Joint
Venture consolidated investment in September 2005, which is
owned approximately 50% by the Company
|
|
$
|
(3.9
|
)
|
Conversion of 0.4 million
operating partnership units into common shares of the Company in
2006
|
|
|
1.0
|
|
Consolidation of a joint venture
asset (EITF
04-05)
|
|
|
(0.7
|
)
|
Net decrease in net income from
consolidated joint venture investments
|
|
|
3.0
|
|
|
|
|
|
|
|
|
$
|
(0.6
|
)
|
|
|
|
|
|
24
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Income from discontinued operations
|
|
$
|
11,089
|
|
|
$
|
16,093
|
|
|
$
|
(5,004
|
)
|
|
|
(31.1
|
)%
|
Gain on disposition of real
estate, net
|
|
|
11,051
|
|
|
|
16,667
|
|
|
|
(5,616
|
)
|
|
|
(33.7
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,140
|
|
|
$
|
32,760
|
|
|
$
|
(10,620
|
)
|
|
|
(32.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in discontinued operations for the years ended
December 31, 2006 and 2005, are 58 properties sold from
January 1, 2007 to June 30, 2007, aggregating 5.4 million square feet, six properties sold in
2006, aggregating 0.8 million square feet, one property
classified as held for sale at December 31, 2006 and ten
shopping centers and 25 business centers sold in 2005,
aggregating 3.8 million square feet.
Gain on
Disposition of Real Estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gain on disposition of real estate
|
|
$
|
72,023
|
|
|
$
|
88,140
|
|
|
$
|
(16,117
|
)
|
|
|
(18.3
|
)%
|
The Company recorded gains on disposition of real estate and
real estate investments for the years ended December 31,
2006 and 2005, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Transfer of assets to the Service
Holdings LLC (1)
|
|
$
|
6.1
|
|
|
$
|
|
|
Transfer of assets to the DPG
Realty Holdings Joint Venture (2)
|
|
|
0.6
|
|
|
|
|
|
Transfer of assets to the MDT
Joint Venture (3)
|
|
|
9.2
|
|
|
|
81.2
|
|
Transfer of assets to the MDT
Preferred Joint Venture (4)
|
|
|
38.9
|
|
|
|
|
|
Land sales (5)
|
|
|
14.8
|
|
|
|
6.0
|
|
Previously deferred gains (6)
|
|
|
1.3
|
|
|
|
0.9
|
|
Other loss on dispositions
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.0
|
|
|
$
|
88.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
For the year ended
December 31, 2006, the Company transferred 51 retail sites
previously occupied by Service Merchandise. This disposition is
not classified as discontinued operations due to the
Companys continuing involvement through its retained
ownership interest and management agreements.
|
|
(2)
|
|
For the year ended
December 31, 2006, the Company transferred a newly
developed expansion area adjacent to a shopping center owned by
the joint venture. This disposition is not classified as
discontinued operations due to the Companys continuing
involvement through its retained ownership interest and
management agreements.
|
|
(3)
|
|
For the year ended
December 31, 2006, the Company transferred newly developed
expansion areas adjacent to four shopping centers owned by the
joint venture. For the year ended December 31, 2005, the
Company transferred 12 assets. These dispositions are not
classified as discontinued operations due to the Companys
continuing involvement through its retained ownership interest
and management agreements.
|
|
(4)
|
|
For the year ended
December 31, 2006, the Company transferred six assets.
These dispositions are not classified as discontinued operations
due to the Companys continuing involvement through its
retained ownership interest and management agreements.
|
|
(5)
|
|
These dispositions do not qualify
for discontinued operations presentation.
|
|
(6)
|
|
These were primarily attributable
to the recognition of additional gains from the leasing of units
associated with master lease and other obligations on disposed
properties.
|
25
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net Income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
(29,379
|
)
|
|
|
(10.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income decreased primarily due to a reduction in gain on
disposition of real estate and increased interest costs offset
by the acquisition of assets. A summary of the changes from 2005
is as follows (in millions):
|
|
|
|
|
Increase in net operating revenues
(total revenues in excess of operating and maintenance expenses
and real estate taxes)
|
|
$
|
71.2
|
|
Increase in general and
administrative expenses
|
|
|
(6.6
|
)
|
Increase in depreciation expense
|
|
|
(28.5
|
)
|
Decrease in interest income
|
|
|
(1.0
|
)
|
Increase in interest expense
|
|
|
(37.6
|
)
|
Change in other expense
|
|
|
2.1
|
|
Decrease in equity in net income
of joint ventures
|
|
|
(4.5
|
)
|
Increase in minority interest
expense
|
|
|
(0.6
|
)
|
Change in income tax
benefit/expense
|
|
|
2.8
|
|
Decrease in income from
discontinued operations
|
|
|
(5.0
|
)
|
Decrease in gain on disposition of
real estate of discontinued operations properties
|
|
|
(5.6
|
)
|
Decrease in gain on disposition of
real estate
|
|
|
(16.1
|
)
|
|
|
|
|
|
Decrease in net income
|
|
$
|
(29.4
|
)
|
|
|
|
|
|
Comparison
of 2005 to 2004 Results of Operations
Continuing
Operations
Revenues
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Base and percentage rental revenues
|
|
$
|
487,648
|
|
|
$
|
388,371
|
|
|
$
|
99,277
|
|
|
|
25.6
|
%
|
Recoveries from tenants
|
|
|
149,553
|
|
|
|
111,271
|
|
|
|
38,282
|
|
|
|
34.4
|
|
Ancillary income and other
property related income
|
|
|
14,237
|
|
|
|
6,972
|
|
|
|
7,265
|
|
|
|
104.2
|
|
Management, development and other
fee income
|
|
|
22,859
|
|
|
|
16,937
|
|
|
|
5,922
|
|
|
|
35.0
|
|
Other
|
|
|
8,551
|
|
|
|
11,430
|
|
|
|
(2,879
|
)
|
|
|
(25.2
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
682,848
|
|
|
$
|
534,981
|
|
|
$
|
147,867
|
|
|
|
27.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Base and percentage rental revenues relating to new leasing,
re-tenanting and expansion of the Core Portfolio Properties
(shopping center properties owned as of January 1, 2004,
excluding properties under development and those classified as
discontinued operations) increased approximately
$5.0 million, which is an increase of 2.0%, for
26
the year ended December 31, 2005, as compared to the same
period in 2004. The increase in base and percentage rental
revenues is due to the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Core Portfolio Properties
|
|
$
|
5.0
|
|
Acquisition of real estate assets
in 2005 and 2004
|
|
|
124.9
|
|
Development and redevelopment of
12 shopping center properties in 2005 and 2004
|
|
|
9.7
|
|
Transfer of 49 properties to
unconsolidated joint ventures in 2005 and 2004
|
|
|
(44.6
|
)
|
Business center properties
|
|
|
(2.6
|
)
|
Straightline rents
|
|
|
6.9
|
|
|
|
|
|
|
|
|
$
|
99.3
|
|
|
|
|
|
|
At December 31, 2005, the aggregate occupancy of the
Companys shopping center portfolio was 95.3%, as compared
to 94.7% at December 31, 2004. The Company owned 469
shopping centers at December 31, 2005. The average
annualized base rent per occupied square foot was $11.01 at
December 31, 2005, as compared to $10.79 at
December 31, 2004.
At December 31, 2005, the aggregate occupancy of the
Companys wholly-owned shopping centers was 94.4%, as
compared to 93.7% at December 31, 2004. The Company owned
269 wholly-owned shopping centers at December 31, 2005. The
average annualized base rent per leased square foot was $10.42
at December 31, 2005, as compared to $9.70 at
December 31, 2004.
At December 31, 2005, the aggregate occupancy rate of the
Companys joint venture shopping centers was 97.0%, as
compared to 97.1% at December 31, 2004. The Companys
joint ventures owned 200 shopping centers including 37
consolidated centers primarily owned through the Mervyns Joint
Venture at December 31, 2005. The average annualized base
rent per leased square foot was $12.05 at December 31,
2005, as compared to $12.15 at December 31, 2004. The
decrease in average annualized base per leased square foot is
attributed to the change in property owned by joint ventures.
For example, the average annual base rent per square foot
excluding the Mervyns Joint Venture that was acquired in the
third quarter of 2005 was $12.08 per square foot.
At December 31, 2005, the aggregate occupancy of the
Companys business centers was 43.2%, as compared to 76.0%
at December 31, 2004. The decrease in occupancy is a result
of the Company selling 25 of its business centers in September
2005. The remaining business centers consist of seven assets in
five states at December 31, 2005.
Recoveries were approximately 86.5% and 85.1% of operating
expenses and real estate taxes for the years ended
December 31, 2005 and 2004, respectively. The increase is
primarily attributable to changes in the Companys
portfolio of properties and an increase in occupancy.
The increase in recoveries from tenants was primarily related to
the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Acquisition of properties in 2005
and 2004
|
|
$
|
44.8
|
|
Transfer of properties to
unconsolidated joint ventures in 2005 and 2004
|
|
|
(11.9
|
)
|
Development properties becoming
operational and an increase in operating expenses at the
remaining shopping center and business center properties
|
|
|
5.4
|
|
|
|
|
|
|
|
|
$
|
38.3
|
|
|
|
|
|
|
Ancillary income increased due to income earned from acquisition
of properties from the CPG portfolio.
The increase in management, development and other fee income is
primarily from unconsolidated joint venture interests formed in
2004 and 2005 and the continued growth of the MDT Joint Venture
that aggregated $5.5 million. This increase was offset by
the disposition of several of the Companys joint venture
properties, which contributed approximately $0.7 million
management fee income in 2004. The remaining increase of
$0.2 million is
27
due to an increase in fee income at several of the
Companys operating joint ventures. Management fee income
is expected to continue to increase as the MDT Joint Venture and
other joint ventures acquire additional properties. Development
fee income was primarily earned through the redevelopment of
five assets through the Coventry II Joint Venture. The Company
expects to continue to pursue additional development joint
ventures as opportunities present themselves.
Other income is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
Lease termination fees and
bankruptcy settlements
|
|
$
|
5.2
|
|
|
$
|
6.4
|
|
Acquisition and financing
fees (1)
|
|
|
2.4
|
|
|
|
3.0
|
|
Other
|
|
|
1.0
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
8.6
|
|
|
$
|
11.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Financing fees received in
connection with the MDT Joint Venture. The Companys fees
are earned in conjunction with the timing and the amount of the
transaction at the joint venture.
|
Expenses
from Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Operating and maintenance
|
|
$
|
92,575
|
|
|
$
|
60,717
|
|
|
$
|
31,858
|
|
|
|
52.5
|
%
|
Real estate taxes
|
|
|
80,428
|
|
|
|
70,038
|
|
|
|
10,390
|
|
|
|
14.8
|
|
General and administrative
|
|
|
54,048
|
|
|
|
47,126
|
|
|
|
6,922
|
|
|
|
14.7
|
|
Depreciation and amortization
|
|
|
154,704
|
|
|
|
116,804
|
|
|
|
37,900
|
|
|
|
32.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
381,755
|
|
|
$
|
294,685
|
|
|
$
|
87,070
|
|
|
|
29.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance expenses include the Companys
provision for bad debt expense, which approximated 1.0% and 0.8%
of total revenues for the years ended December 31, 2005 and
2004, respectively (see Economic Conditions).
The increase in expenses from operations is due to the following
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and
|
|
|
|
|
|
|
|
|
|
Maintenance
|
|
|
Real Estate Taxes
|
|
|
Depreciation
|
|
|
Core Portfolio Properties
|
|
$
|
2.0
|
|
|
$
|
2.1
|
|
|
$
|
2.1
|
|
Acquisition and
development/redevelopment of shopping center properties
|
|
|
33.4
|
|
|
|
16.8
|
|
|
|
46.7
|
|
Transfer of 49 properties to
unconsolidated joint ventures
|
|
|
(6.1
|
)
|
|
|
(8.4
|
)
|
|
|
(11.1
|
)
|
Business center properties
|
|
|
|
|
|
|
(0.1
|
)
|
|
|
(0.6
|
)
|
Provision for bad debt expense
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
Personal property
|
|
|
|
|
|
|
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
31.9
|
|
|
$
|
10.4
|
|
|
$
|
37.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in general and administrative expenses is primarily
attributable to the growth of the Company through recent
acquisitions, expansions and developments, the acquisition of
assets from Benderson and CPG. Total general and administrative
expenses were approximately 4.6% and 4.9% of total revenues,
including total revenues of joint ventures, for the years ended
December 31, 2005 and 2004, respectively.
The Company expensed internal leasing salaries, legal salaries
and related expenses associated with the leasing and re-leasing
of existing space. In addition, the Company capitalized certain
direct and incremental
28
internal construction costs consisting of direct wages and
benefits, travel expenses and office overhead costs of
$6.2 million and $5.7 million in 2005 and 2004,
respectively.
Other
Income and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Interest income
|
|
$
|
10,004
|
|
|
$
|
4,205
|
|
|
$
|
5,799
|
|
|
|
137.9
|
%
|
Interest expense
|
|
|
(173,537
|
)
|
|
|
(118,749
|
)
|
|
|
(54,788
|
)
|
|
|
46.1
|
|
Other expense
|
|
|
(2,532
|
)
|
|
|
(1,779
|
)
|
|
|
(753
|
)
|
|
|
42.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(166,065
|
)
|
|
$
|
(116,323
|
)
|
|
$
|
(49,742
|
)
|
|
|
42.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income increased primarily as a result of advances to
the Service Merchandise joint venture and the Community Centers
V and VII joint ventures in 2005. The Service Merchandise
advance was $91.6 million at December 31, 2005. The
Community Centers advance was repaid in July 2005.
Interest expense increased primarily due to the acquisitions of
assets combined with other development assets becoming
operational and the increase in short-term interest rates. The
weighted average debt outstanding and related weighted average
interest rate during the year ended December 31, 2005, were
$3.6 billion and 5.5% compared to $2.8 billion and
5.0% for the same period in 2004. At December 31, 2005, the
Companys weighted average interest rate was 5.7%, compared
to 5.4% at December 31, 2004. Interest costs capitalized,
in conjunction with development and expansion projects and
development joint venture interests, were $12.7 million for
the year ended December 31, 2005, as compared to
$9.9 million for the same period in 2004.
Other expense is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Abandoned acquisition and
development projects
|
|
$
|
0.9
|
|
|
$
|
1.8
|
|
Litigation expense
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.5
|
|
|
$
|
1.8
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Equity in net income of joint
ventures
|
|
$
|
34,873
|
|
|
$
|
40,895
|
|
|
$
|
(6,022
|
)
|
|
|
(14.7
|
)%
|
Minority interests
|
|
|
(7,881
|
)
|
|
|
(5,064
|
)
|
|
|
(2,817
|
)
|
|
|
55.6
|
|
Income tax of taxable REIT
subsidiaries and franchise taxes
|
|
|
(277
|
)
|
|
|
(1,467
|
)
|
|
|
1,190
|
|
|
|
(81.1
|
)
|
The decrease in equity in net income of joint ventures is
comprised of the following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Reduction in sale transactions as
compared to 2004
|
|
$
|
(5.2
|
)
|
Joint ventures formed in 2004 and
2005
|
|
|
2.5
|
|
Debt refinancings, increased
interest rates and increased depreciation and amortization
charges at various joint ventures
|
|
|
(3.3
|
)
|
|
|
|
|
|
|
|
$
|
(6.0
|
)
|
|
|
|
|
|
The decrease in equity in net income of joint ventures is due to
several factors including increased interest costs resulting
from an increase in interest rates on variable rate borrowings
and refinancings at higher debt
29
proceeds levels at certain joint ventures. In addition, in 2005
the Companys unconsolidated joint ventures recognized an
aggregate gain from the disposition of joint venture assets of
$49.0 million, of which the Companys proportionate
share was $13.0 million. In 2004, the Companys
unconsolidated joint ventures recognized an aggregate gain from
the disposition of joint venture assets of approximately
$44.4 million, of which the Companys proportionate
share was $14.4 million. In 2004 the Company also
recognized promoted income of approximately $3.3 million
relating to the disposition of a shopping center transferred to
the MDT Joint Venture in November 2003 upon elimination of
contingencies and substantial completion and
lease-up
in
2004. The Companys joint ventures sold the following
assets:
|
|
|
2005 Dispositions
|
|
2004 Dispositions
|
|
Three 20% owned shopping centers
|
|
One 20% owned shopping center
|
One 24.75% owned shopping center
|
|
One 35% owned shopping center
|
Eight sites formerly occupied by
Service Merchandise
|
|
Ten sites formerly occupied by
Service Merchandise
|
|
|
A portion of a 24.75% owned
shopping center
|
These decreases above were partially offset by an increase in
joint venture income from newly formed joint ventures in 2004
and 2005, including assets acquired by the Companys MDT
Joint Venture.
Minority equity interest expense increased primarily due to the
following (in millions):
|
|
|
|
|
|
|
Increase
|
|
|
|
(Decrease)
|
|
|
Issuance of common operating
partnership units in conjunction with the acquisition of assets
from Benderson in May 2004
|
|
$
|
0.4
|
|
Formation of the Mervyns Joint
Venture consolidated investment in September 2005, which is
owned approximately 50% by the Company
|
|
|
1.6
|
|
Dividends on common operating
partnership units and a net increase in net income from
consolidated joint venture investments
|
|
|
1.0
|
|
Conversion of 0.2 million
operating partnership units into an equal amount of common
shares of the Company in 2004
|
|
|
(0.2
|
)
|
|
|
|
|
|
|
|
$
|
2.8
|
|
|
|
|
|
|
Income tax expense of the Companys taxable REIT
subsidiaries decreased due to a reduction in franchise taxes
from assets disposed of in 2004 and the loss on disposition of
an asset in 2005.
Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Income from discontinued operations
|
|
$
|
16,093
|
|
|
$
|
21,223
|
|
|
$
|
(5,130
|
)
|
|
|
(24.2
|
)%
|
Gain on disposition of real
estate, net
|
|
|
16,667
|
|
|
|
8,561
|
|
|
|
8,106
|
|
|
|
94.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
32,760
|
|
|
$
|
29,784
|
|
|
$
|
2,976
|
|
|
|
10.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in discontinued operations are the operations of 88
shopping center properties and 27 business center properties
aggregating approximately 11.0 million square feet of GLA,
of which 58 were sold from January 1, 2007 to June 30, 2007,
six were sold in 2006, one was considered held for sale
at December 31, 2006, 35 were sold in 2005 and 15 in 2004.
The Company recorded an impairment charge of $0.6 million
for the year ended December 31, 2005 and 2004, related to
the disposition of a shopping center in 2005 and the disposition
of a business center in 2004.
Gain on the disposition of discontinued operations is primarily
due to the disposition of 10 non-core properties and 25 business
center properties in 2005.
30
Gain on
Disposition of Real Estate and Cumulative Effect of Adoption of
a New Accounting Standard
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Gain on disposition of real estate
|
|
$
|
88,140
|
|
|
$
|
84,642
|
|
|
$
|
3,498
|
|
|
|
4.1
|
%
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
(3,001
|
)
|
|
|
3,001
|
|
|
|
(100.0
|
)
|
The cumulative effect of adoption of a new accounting standard
is attributable to the consolidation of a partnership that owns
a shopping center in Martinsville, Virginia, upon adoption of
FIN 46. This amount represents the minority partners
share of cumulative losses in the partnership that were
eliminated upon consolidation.
The Company recorded gains on disposition of real estate and
real estate investments for the years ended December 31,
2005 and 2004, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Transfer of assets to the MDT
Joint Venture (1)
|
|
$
|
81.2
|
|
|
$
|
65.4
|
|
Transfer of assets to the DPG
Realty Holdings Joint Venture (2)
|
|
|
|
|
|
|
4.2
|
|
Transfer of assets to the DDR
Markaz II Joint Venture (3)
|
|
|
|
|
|
|
2.5
|
|
Land sales (4)
|
|
|
6.0
|
|
|
|
14.3
|
|
Previously deferred gains (5)
|
|
|
0.9
|
|
|
|
0.8
|
|
Loss on disposition of non-core
assets (6)
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
88.1
|
|
|
$
|
84.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company transferred 12 and 11
assets in 2005 and 2004, respectively. These dispositions are
not classified as discontinued operations due to the
Companys continuing involvement through its retained
ownership interest and management agreements.
|
|
(2)
|
|
The Company transferred 12 assets
in 2004. These dispositions are not classified as discontinued
operations due to the Companys continuing involvement
through its retained ownership interest and management
agreements.
|
|
(3)
|
|
The Company transferred 13 assets
in 2004. These dispositions are not classified as discontinued
operations due to the Companys continuing involvement
through its retained ownership interest and management
agreements.
|
|
(4)
|
|
These sales did not meet the
discontinued operations disclosure requirement.
|
|
(5)
|
|
These were primarily attributable
to the recognition of additional gains from the leasing of units
associated with master lease obligations and other obligations
on disposed properties.
|
|
(6)
|
|
May be recovered through an earnout
arrangement with the buyer over the next several years.
|
Net
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
$ Change
|
|
|
% Change
|
|
|
Net Income
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
|
$
|
12,881
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31
Net income increased primarily due to the acquisition of assets
and gain on disposition of real estate. A summary of the changes
from 2004 is as follows (in millions):
|
|
|
|
|
Increase in net operating revenues
(total revenues in excess of operating and maintenance expenses
and real estate taxes)
|
|
$
|
105.6
|
|
Increase in general and
administrative expense
|
|
|
(6.9
|
)
|
Increase in other expense
|
|
|
(0.8
|
)
|
Increase in depreciation expense
|
|
|
(37.9
|
)
|
Increase in interest income
|
|
|
5.8
|
|
Increase in interest expense
|
|
|
(54.8
|
)
|
Decrease in equity in net income
of joint ventures
|
|
|
(6.0
|
)
|
Increase in minority interest
expense
|
|
|
(2.8
|
)
|
Decrease in income tax expense
|
|
|
1.2
|
|
Increase in gain on disposition of
real estate
|
|
|
3.5
|
|
Increase in income from
discontinued operations
|
|
|
3.0
|
|
Decrease in cumulative effect of
adoption of a new accounting standard (FIN 46)
|
|
|
3.0
|
|
|
|
|
|
|
|
|
$
|
12.9
|
|
|
|
|
|
|
FUNDS
FROM OPERATIONS
The Company believes that Funds From Operations
(FFO), which is a non-GAAP financial measure,
provides an additional and useful means to assess the financial
performance of real estate investment trusts
(REITs). FFO is frequently used by securities
analysts, investors and other interested parties to evaluate the
performance of REITs, most of which present FFO along with net
income as calculated in accordance with GAAP.
FFO is intended to exclude GAAP historical cost depreciation and
amortization of real estate and real estate investments, which
assumes that the value of real estate assets diminishes ratably
over time. Historically, however, real estate values have risen
or fallen with market conditions, and many companies utilize
different depreciable lives and methods. Because FFO excludes
depreciation and amortization unique to real estate, gains and
losses from depreciable property dispositions and extraordinary
items, it provides a performance measure that, when compared
year over year, reflects the impact on operations from trends in
occupancy rates, rental rates, operating costs, acquisition and
development activities and interest costs. This provides a
perspective of the Companys financial performance not
immediately apparent from net income determined in accordance
with GAAP.
FFO is generally defined and calculated by the Company as net
income, adjusted to exclude: (i) preferred dividends,
(ii) gains (or losses) from disposition of depreciable real
estate property, except for those sold through the
Companys merchant building program, which are presented
net of taxes, (iii) sales of securities,
(iv) extraordinary items, (v) cumulative effect of
adoption of new accounting standards and (vi) certain
non-cash items. These non-cash items principally include real
property depreciation, equity income from joint ventures and
equity income from minority equity investments and adding the
Companys proportionate share of FFO from its
unconsolidated joint ventures and minority equity investments,
determined on a consistent basis.
For the reasons described above, management believes that FFO
provides the Company and investors with an important indicator
of the Companys operating performance. This measure of
performance is used by the Company for several business purposes
and by other REITs. It provides a recognized measure of
performance other than GAAP net income, which may include
non-cash items (often large). Other real estate companies may
calculate FFO in a different manner.
The Company uses FFO (i) in executive employment agreements
to determine incentives based on the Companys performance,
(ii) as a measure of a real estate assets
performance, (iii) to shape acquisition, disposition and
capital investment strategies and (iv) to compare the
Companys performance to that of other publicly traded
shopping center REITs.
32
Management recognizes FFOs limitations when compared to
GAAPs income from continuing operations. FFO does not
represent amounts available for needed capital replacement or
expansion, debt service obligations, or other commitments and
uncertainties. Management does not use FFO as an indicator of
the Companys cash obligations and funding requirements for
future commitments, acquisitions or development activities. FFO
does not represent cash generated from operating activities in
accordance with GAAP and is not necessarily indicative of cash
available to fund cash needs, including the payment of
dividends. FFO should not be considered an alternative to net
income (computed in accordance with GAAP) or as an alternative
to cash flow as a measure of liquidity. FFO is simply used as an
additional indicator of the Companys operating performance.
In 2006, FFO applicable to common shareholders was
$377.8 million, as compared to $355.1 million in 2005
and $292.3 million in 2004. The increase in total FFO in
2006 is principally attributable to increases in revenues from
the Core Portfolio Properties, the acquisition of assets,
developments and the gain on disposition of certain recently
developed assets. The Companys calculation of FFO is as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income applicable to common
shareholders (1)
|
|
$
|
198,095
|
|
|
$
|
227,474
|
|
|
$
|
219,056
|
|
Depreciation and amortization of
real estate investments
|
|
|
185,449
|
|
|
|
169,117
|
|
|
|
130,536
|
|
Equity in net income of joint
ventures
|
|
|
(30,337
|
)
|
|
|
(34,873
|
)
|
|
|
(40,895
|
)
|
Joint ventures FFO (2)
|
|
|
44,473
|
|
|
|
49,302
|
|
|
|
46,209
|
|
Minority equity interests (OP
Units)
|
|
|
2,116
|
|
|
|
2,916
|
|
|
|
2,607
|
|
Gain on disposition of depreciable
real estate (3)
|
|
|
(21,987
|
)
|
|
|
(58,834
|
)
|
|
|
(68,179
|
)
|
Cumulative effect of adoption of a
new accounting standard (4)
|
|
|
|
|
|
|
|
|
|
|
3,001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FFO applicable to common
shareholders
|
|
|
377,809
|
|
|
|
355,102
|
|
|
|
292,335
|
|
Preferred dividends
|
|
|
55,169
|
|
|
|
55,169
|
|
|
|
50,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total FFO
|
|
$
|
432,978
|
|
|
$
|
410,271
|
|
|
$
|
343,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes straight-line rental
revenues of approximately $16.0 million in 2006,
$14.4 million in 2005 and $7.4 million in 2004
(including discontinued operations).
|
|
(2)
|
|
Joint ventures FFO is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income (a)
|
|
$
|
92,624
|
|
|
$
|
122,586
|
|
|
$
|
118,779
|
|
Depreciation and amortization of
real estate investments
|
|
|
83,017
|
|
|
|
87,508
|
|
|
|
68,456
|
|
Gain on disposition of real estate,
net (b)
|
|
|
(22,013
|
)
|
|
|
(19,014
|
)
|
|
|
(37,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
153,628
|
|
|
$
|
191,080
|
|
|
$
|
149,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DDR Ownership interests (c)
|
|
$
|
44,473
|
|
|
$
|
49,302
|
|
|
$
|
46,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
|
Includes straight-line rental
revenue of approximately $5.1 million, $6.6 million
and $6.5 million in 2006, 2005 and 2004, respectively. The
Companys proportionate share of straight-line rental
revenues was $0.9 million, $1.1 million and
$1.4 million in 2006, 2005 and 2004, respectively. These
amounts include discontinued operations.
|
|
(b)
|
|
The gain or loss on disposition of
recently developed shopping centers, owned by the Companys
taxable REIT affiliates, is included in FFO, as the Company
considers these properties as part of the merchant building
program. These properties were either developed through the
Retail Value Investment Program with Prudential Real Estate
Investors, or were assets sold in conjunction with the formation
of the joint venture that holds the designation rights for the
Service Merchandise properties. For the year ended
December 31, 2006, a loss of $1.3 million was
recorded, of which $0.3 million was the Companys
proportionate share. These gains aggregated $30.8 million
and $6.5 million for the years ended December 31,
2005, and 2004, respectively, of which the Companys
proportionate share aggregated $7.6 million and
$1.7 million, respectively.
|
33
|
|
|
(c)
|
|
The Companys share of joint
venture net income has been increased by $1.6 million and
reduced by $2.1 million and $1.3 million for the years
ended December 31, 2006, 2005 and 2004, respectively,
related to basis differentials. At December 31, 2006, 2005
and 2004, the Company owned unconsolidated joint venture
interests relating to 117, 110 and 103 operating shopping center
properties, respectively. In addition, at December 31,
2006, the Company owned 50 shopping center sites formerly
owned by Service Merchandise through its 20% owned joint
venture. At December 31, 2005 and 2004, the Company owned
53 and 63 of these Service Merchandise sites, respectively,
through its approximate 25% owned joint venture. The Company
also owned an approximate 25% interest in the Prudential Retail
Value Fund and a 50% joint venture equity interest in a real
estate management/development company.
|
|
|
|
(3)
|
|
The amount reflected as gain on
disposition of real estate and real estate investments from
continuing operations in the consolidated statement of
operations includes residual land sales, which management
considers the disposition of non-depreciable real property and
the sale of newly developed shopping centers, for which the
Company maintained continuing involvement. These dispositions
are included in the Companys FFO and therefore are not
reflected as an adjustment to FFO. For the year ended
December 31, 2006, 2005 and 2004, net gains resulting from
residual land sales aggregated $14.8 million,
$6.0 million and $13.7 million, respectively. For the
years ended December 31, 2006, 2005 and 2004, merchant
building gains aggregated $46.3 million, $39.9 million
and $11.4 million, respectively. In 2005, these gains
included a portion of the net gain recognized of approximately
$6.6 million from the sale of a shopping center located in
Plainville, Connecticut, through the Companys taxable REIT
subsidiary, associated with its merchant building program. The
remaining $14.3 million of the gain recognized on the
disposition of the shopping center located in Plainville,
Connecticut, was not included in the computation of FFO, as the
Company believes such amount was derived primarily from the
acquisition of its partners approximate 75% interest in
the shopping center following substantial completion of
development. Additionally, during 2005, the Companys gain
on disposition of real estate was reduced by $1.9 million
relating to debt prepayment costs incurred as a result of a
sales transaction. This debt prepayment has been accounted for
as a cost of sale, and neither the gross gain on disposition nor
the related costs of the sale have been included in FFO.
|
|
(4)
|
|
The Company recorded a charge of
$3.0 million in 2004 as a cumulative effect of adoption of
a new accounting standard attributable to the consolidation of
the shopping center in Martinsville, Virginia. This amount
represents the minority partners share of cumulative
losses in the partnership.
|
34
LIQUIDITY
AND CAPITAL RESOURCES
The Company anticipates that cash flow from operating activities
will continue to provide adequate capital for all interest and
monthly principal payments on outstanding indebtedness,
recurring tenant improvements and dividend payments in
accordance with REIT requirements. Although the Company is
evaluating its financing alternatives with expected
transactions, the Company anticipates that cash on hand,
borrowings available under its existing revolving credit
facilities and other debt and equity alternatives, including the
issuance of common and preferred shares, OP Units, joint venture
capital and asset dispositions, will provide the necessary
capital to achieve continued growth. The proceeds from the sale
of assets classified as discontinued operations and other asset
dispositions are utilized to acquire and develop assets. The
Company believes that its acquisition and developments completed
in 2006, new leasing, expansion and re-tenanting of the Core
Portfolio Properties continue to add to the Companys
operating cash flow. Additionally, the Company believes that the
anticipated merger with IRRETI will contribute to the
Companys long-term growth.
Changes in cash flow from investing activities in 2006, as
compared to 2005, are primarily due to a decrease in real estate
acquired with cash and a decrease in proceeds from the
disposition of real estate as described in Acquisitions,
Developments and Expansions offset by the additional equity
contributions to joint ventures, primarily Sonae Sierra Brazil
BV Sarl. Changes in cash flow from financing activities in 2006,
as compared to 2005, primarily relate to a decrease in
acquisition activity in 2006 as compared to 2005 and the
Companys repurchase of its common shares in 2006.
The Companys cash flow activities are summarized as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flow provided by operating
activities
|
|
$
|
340,692
|
|
|
$
|
355,423
|
|
|
$
|
292,226
|
|
Cash flow used for investing
activities
|
|
|
(203,047
|
)
|
|
|
(339,443
|
)
|
|
|
(
1,134,601
|
)
|
Cash flow (used for) provided by
financing activities
|
|
|
(139,922
|
)
|
|
|
(35,196
|
)
|
|
|
880,553
|
|
The Company satisfied its REIT requirement of distributing at
least 90% of ordinary taxable income with declared common and
preferred share dividends of $313.1 million in 2006, as
compared to $290.1 million and $245.3 million in 2005
and 2004, respectively. Accordingly, federal income taxes were
not incurred at the corporate level. The Companys common
share dividend payout ratio for the year approximated 68.8% of
its 2006 FFO, as compared to 67.0% and 67.3% in 2005 and 2004,
respectively.
In December 2006, the Company announced the Board of Directors
intent to increase the 2007 quarterly dividend per common share
to $0.66 from $0.59 in 2006. The increase in the dividend
results from the anticipated merger with IRRETI. The Company
anticipates that the increased dividend level will continue to
result in a conservative payout ratio. The payout ratio is
determined based on common and preferred dividends declared as
compared to the Companys FFO. A low payout ratio enables
the Company to retain more capital that will be utilized toward
attractive investment opportunities in the development,
acquisition and expansion of portfolio properties or for debt
repayment. See Off Balance Sheet Arrangements and
Contractual Obligations and Other Commitments
sections for further discussion of capital resources.
The following is an overview of the anticipated financing
vehicles the Company expects to have in place when the IRRETI
merger closes. With these arrangements in place and a number of
alternate financial options available, the Company believes that
the financing risk associated with the transaction has been
largely eliminated. The ultimate determination of which vehicles
will be utilized depends on several variables, including market
pricing, debt maturities and the ultimate structure and timing
of expected asset sales and new joint venture(s) opportunities.
35
A summary of the initial projected financing of the IRRETI
acquisition is summarized as follows (in millions):
|
|
|
|
|
Total purchase price
|
|
$
|
6,200
|
|
Assets acquired by a joint venture
with TIAA-CREF
|
|
|
(3,000
|
)
|
|
|
|
|
|
Assets acquired directly by DDR
|
|
|
3,200
|
|
DDR equity contribution to
TIAA-CREF joint venture
|
|
|
179
|
|
|
|
|
|
|
Total DDR financing requirements
|
|
|
3,379
|
|
Less: Debt assumed
|
|
|
(489
|
)
|
|
|
|
|
|
Total cash required at closing
|
|
$
|
2,890
|
|
|
|
|
|
|
DDR initial cash sources are expected to be provided as follows
(in millions):
|
|
|
|
|
DDR common shares from forward
equity transaction
|
|
$
|
750
|
|
DDR common shares issued to IRRETI
shareholders
|
|
|
395
|
|
Increase in secured term loan
|
|
|
150
|
|
Temporary bridge financing
provided through revolving credit facilities, bridge loans
and/or preferred operating partnership units
|
|
|
1,595
|
(1)
|
|
|
|
|
|
|
|
$
|
2,890
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Amounts are expected to be repaid
through asset sales and formation of new joint venture(s).
|
36
ACQUISITIONS,
DEVELOPMENTS AND EXPANSIONS
During the three-year period ended December 31, 2006, the
Company and its consolidated and unconsolidated joint ventures
expended $5.2 billion, net, of proceeds, to acquire,
develop, expand, improve and re-tenant its properties, as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Company (Including Consolidated
Joint Ventures):
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
$
|
370.2
|
(1)
|
|
$
|
1,610.8
|
(8)
|
|
$
|
2,170.8
|
(13)
|
Completed expansions
|
|
|
73.1
|
|
|
|
41.6
|
|
|
|
25.2
|
|
Developments and construction in
progress
|
|
|
246.0
|
|
|
|
246.1
|
|
|
|
203.8
|
|
Tenant improvements and building
renovations (2)
|
|
|
11.7
|
|
|
|
7.5
|
|
|
|
6.6
|
|
Furniture and fixtures and
equipment
|
|
|
10.2
|
(3)
|
|
|
10.7
|
(9)
|
|
|
1.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
711.2
|
|
|
|
1,916.7
|
|
|
|
2,407.7
|
|
Less: Real estate dispositions and
property contributed to joint ventures
|
|
|
(289.8
|
)(4)
|
|
|
(490.8
|
)(10)
|
|
|
(689.2
|
)(14)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company total
|
|
|
421.4
|
|
|
|
1,425.9
|
|
|
|
1,718.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unconsolidated Joint
Ventures:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions/contributions
|
|
|
729.9
|
(5)
|
|
|
350.0
|
(11)
|
|
|
1,147.0
|
(15)
|
Completed expansions
|
|
|
0.0
|
|
|
|
9.3
|
|
|
|
10.3
|
|
Developments and construction in
progress
|
|
|
139.6
|
(6)
|
|
|
87.5
|
|
|
|
38.9
|
|
Tenant improvements and building
renovations (2)
|
|
|
9.1
|
|
|
|
6.8
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
878.6
|
|
|
|
453.6
|
|
|
|
1,196.8
|
|
Less: Real estate dispositions
|
|
|
(409.0
|
)(7)
|
|
|
(148.8
|
)(12)
|
|
|
(306.7
|
)(16)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint ventures total
|
|
|
469.6
|
|
|
|
304.8
|
|
|
|
890.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
891.0
|
|
|
|
1,730.7
|
|
|
|
2,608.6
|
|
Less: Proportionate joint venture
share owned by others
|
|
|
(401.0
|
)
|
|
|
(285.0
|
)
|
|
|
(807.8
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total DDR net additions
|
|
$
|
490.0
|
|
|
$
|
1,445.7
|
|
|
$
|
1,800.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes transfer to the Company
from joint ventures (KLA/SM and Salisbury, Maryland), final
earnout adjustments for acquisitions, redemption of OP units and
the consolidation of a joint venture asset pursuant to EITF
04-05,
Determining whether a General Partner, or the General
Partners as a Group Controls a Limited Partnership or
Similar Entity When the Limited Partners Have Certain
Rights.
|
|
(2)
|
|
In 2007, the Company anticipates
recurring capital expenditures, including tenant improvements of
approximately $13 million associated with its wholly-owned
and consolidated portfolio and $11 million associated with
its joint venture portfolio.
|
|
(3)
|
|
Includes certain Information
Technology (IT) projects.
|
|
(4)
|
|
Includes asset dispositions, the
sale of the KLA/SM Joint Venture to Service Holdings LLC, the
sale of properties to the MDT Joint Venture and the MDT
Preferred Joint Venture and the sale of several outparcels.
|
|
(5)
|
|
Reflects the DPG Joint Venture
acquisition and adjustments to GAAP presentation from previous
acquisitions.
|
|
(6)
|
|
Includes the acquisition of land in
Allen, Texas, and Bloomfield Hills, Michigan, for the
development of shopping centers by Coventry II joint ventures.
|
|
(7)
|
|
Includes asset dispositions, the
transfer to DDR of the KLA/SM Joint Venture, five assets located
in Pasadena, California; Phoenix, Arizona (two properties);
Salisbury, Maryland and Apex, North Carolina.
|
|
(8)
|
|
Includes the transfer to DDR from a
joint venture of a shopping center in Dublin, Ohio.
|
|
(9)
|
|
Includes the expansion of corporate
headquarters, certain IT projects and fractional ownership
interest in corporate jets.
|
|
(10)
|
|
Includes the transfer of
12 assets to the MDT Joint Venture, asset dispositions and
the disposition of several outparcels.
|
37
|
|
|
(11)
|
|
Reflects the MDT Joint Venture
acquisition and adjustments to GAAP presentation from previous
acquisitions.
|
|
(12)
|
|
Includes asset dispositions, the
disposition of several outparcels by the RVIP VII joint
venture and the transfer to DDR from a joint venture of a
shopping center in Dublin, Ohio.
|
|
(13)
|
|
In addition to the acquisition of
assets from Benderson, amount includes the consolidation of
certain joint venture assets due to FIN 46, the transfers
to DDR from joint ventures of assets in Littleton, Colorado and
Merriam, Kansas, and the purchase of DDR corporate headquarters.
|
|
(14)
|
|
Includes the transfer of
11 assets to the MDT Joint Venture, the transfer of
12 assets to the DPG Joint Venture, the transfer of 13
assets to the DDR Markaz II Joint Venture and the disposition of
several outparcels.
|
|
(15)
|
|
In addition to the acquisition of
assets discussed in (13) above, this amount included the
MDT Joint Ventures acquisition of 14 assets from
Benderson, the purchase of a joint venture partners
interest in shopping center developments in Deer Park, Illinois
and Austin, Texas, the purchase of a fee interest in several
Service Merchandise units and an earnout of two outparcels in
Kildeer, Illinois.
|
|
(16)
|
|
Includes the transfer to DDR from
joint ventures of shopping center assets in Littleton, Colorado
and Merriam, Kansas, and adjustments due to GAAP presentation
(FIN 46(R) and SFAS No. 144) and the
demolition of a portion of an asset in Lancaster, California.
|
2006
Activity
Strategic
Real Estate Transactions
Inland
Retail Real Estate Trust
In October 2006, the Company and IRRETI announced that they
entered into a definitive merger agreement. Under the terms of
the agreement, the Company will acquire all of the outstanding
shares of IRRETI for a total merger consideration of $14.00 per
share plus accrued unpaid dividends. The Company has elected to
pay IRRETI shareholders a combination of $12.50 in cash and
$1.50 in DDR common shares. The actual number of the
Companys common shares that IRRETI shareholders are
entitled to receive for each IRRETI common share held will be
determined by dividing $1.50 by the average closing price of the
Companys common shares for the 10 trading days immediately
preceding the two trading days prior to the IRRETI
shareholders meeting, scheduled for February 22, 2007.
The transaction has a total enterprise value of approximately
$6.2 billion. This amount includes approximately
$2.3 billion of existing debt, a significant portion of
which is expected to be extinguished at closing. IRRETIs
real estate portfolio aggregates over 300 community shopping
centers, neighborhood shopping centers and single tenant/net
leased retail properties, comprising approximately
43.6 million square feet of total GLA.
The Company announced the formation of a joint venture with
TIAA-CREF to purchase a portfolio of 66 community retail
centers from the IRRETI portfolio of assets for approximately
$3.0 billion of total asset value. An affiliate of
TIAA-CREF will contribute 85% of the equity in the joint
venture, and an affiliate of DDR will contribute 15% of the
equity in the joint venture. In addition to its earnings from
the joint venture, DDR will be entitled to certain fees for
asset management, leasing, property management,
development/tenant coordination and acquisitions. DDR will also
earn a promoted interest equal to 20% of the cash flow of the
joint venture after the partners have received an internal rate
of return equal to 10% on their equity investment. The joint
venture agreement is subject to certain closing conditions.
In addition to the portfolio of operating properties, DDR will
acquire a development pipeline of five projects and numerous
potential expansion and redevelopment projects. DDR plans to
generate additional value by implementing its proactive leasing,
development, redevelopment and property management systems. In
addition, DDR intends, immediately upon closing, to incorporate
the IRRETI assets into its ancillary income program, which the
Company anticipates will result in additional value creation.
The completion of the transaction, which is expected to occur in
February 2007, is subject to approval of the merger agreement by
IRRETI shareholders and other customary closing conditions
described in the merger agreement. The merger was unanimously
approved by DDRs Board of Directors. The merger was
unanimously approved by IRRETIs Board of Directors, with
two related party directors recusing themselves. There is no
assurance that the transaction will close in February 2007 as
expected.
38
Sonae
Sierra Brazil BV Sarl
In October 2006, the Company acquired a 50% joint venture
interest in Sonae Sierra Brazil, a fully integrated retail real
estate company based in Sao Paulo, Brazil for approximately
$147.5 million. Sonae Sierra Brazil is a subsidiary of
Sonae Sierra, an international owner, developer and manager of
shopping centers based in Portugal. Sonae Sierra Brazil is the
managing partner of a partnership that owns direct and indirect
interests in nine retail assets aggregating 3.5 million
square feet and a property management company in Sao Paulo,
Brazil, that oversees the leasing and management operations of
the portfolio. Sonae Sierra Brazil owns approximately 93% of the
partnership and Enplanta Engenharia owns approximately 7%.
MDT
Preferred Joint Venture
During the second quarter of 2006, the Company sold six
properties, aggregating 0.8 million owned square feet, to a
newly formed joint venture (MDT Preferred Joint
Venture) with Macquarie DDR Trust (MDT), an
Australian-based Listed Property Trust, with Macquarie Bank
Limited (ASX: MBL), an international investment
bank, advisor and manager of specialized real estate funds in
Australia, for approximately $122.7 million and recognized
gains totaling approximately $38.9 million, of which
$32.8 million represented merchant building gains from
recently developed shopping centers.
Under the terms of the new MDT Preferred Joint Venture, MDT
receives a 9% preferred return on its preferred equity
investment of approximately $12.2 million and then receives
a 10% return on its common equity investment of approximately
$20.8 million before the Company receives a 10% return on
an agreed upon common equity investment of $3.5 million,
which has not been recognized in the consolidated balance sheet
due to the terms of its subordination. The Company is then
entitled to a 20% promoted interest in any cash flow achieved
above a 10% leveraged internal rate of return on all common
equity. The Company recognizes its proportionate share of equity
in earnings of the MDT Preferred Joint Venture at an amount
equal to increases in the Companys common equity
investment based upon an assumed liquidation including
consideration of cash received from the joint venture at its
depreciated book value as of the end of each reporting period.
The Company has not recorded any equity in earnings from the MDT
Preferred Joint Venture at December 31, 2006.
The Company has been engaged to perform all
day-to-day
operations of the properties and earns and/or may be entitled to
receive ongoing fees for property management, leasing and
construction management, in addition to a promoted interest,
along with other periodic fees such as financing fees.
MDT Joint
Venture
The Company owns an interest in an additional joint venture with
MDT (MDT Joint Venture). The MDT Joint Venture
focuses on acquiring ownership interests in
institutional-quality community center properties in the United
States. The Company has been engaged to provide
day-to-day
operations of the properties and receives fees at prevailing
rates for property management, leasing, construction management,
acquisitions, due diligence, dispositions (including outparcel
dispositions) and financing. Through this joint venture, the
Company and MBL will also receive base asset management fees and
incentive fees based on the performance of MDT.
At December 31, 2006, MDT, which was listed on the
Australian Stock Exchange in November 2003, owned an approximate
83% interest in the portfolio. The Company retained an effective
14.5% ownership interest in the assets with MBL primarily owning
the remaining 2.5%. At December 31, 2006, the MDT Joint
Venture owned 48 operating shopping center properties. MDT is
governed by a board of directors that includes three members
selected by DDR, three members selected by MBL and three
independent members.
In 2006, the Company sold four additional expansion areas in
McDonough, Georgia; Coon Rapids, Minnesota; Birmingham, Alabama
and Monaca, Pennsylvania to the MDT Joint Venture for
approximately $24.7 million. These expansion areas are
adjacent to shopping centers currently owned by the MDT Joint
Venture. The Company recognized an aggregate merchant build gain
of $9.2 million and deferred gains of approximately
$1.6 million relating to the Companys effective 14.5%
ownership interest in the venture.
39
Coventry
II Joint Ventures
In 2003, the Coventry II Fund was formed with several
institutional investors and Coventry Real Estate Advisors
(CREA) as the investment manager (Coventry II
Joint Venture). Neither the Company nor any of its
officers owns a common equity interest in the Coventry II Fund
or has any incentive compensation tied to this fund. The
Coventry II Fund and the Company acquired value-added retail
properties in the United States. The Coventry II Funds
strategy is to invest in a variety of retail properties that
present opportunities for value creation, such as re-tenanting,
market repositioning, redevelopment or expansion. As further
discussed below, the Coventry II Joint Venture acquired 51
assets formerly occupied by Service Merchandise from the Company
in September 2006. At December 31, 2006, the Company will
not acquire additional assets through the Coventry II Joint
Venture, but will continue to advance funds associated with
those projects undergoing development or redevelopment
activities.
The Company is responsible for
day-to-day
management of the properties. Pursuant to the terms of the joint
venture, The Company will earn fees for property management,
leasing and construction management. The Company also will earn
a promoted interest, along with CREA, above a 10% preferred
return after return of capital to fund investors.
The assets of the Coventry II Joint Venture at December 31,
2006, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
|
DDRs
|
|
Owned
|
|
Acquisition
|
|
|
|
Effective
|
|
Square Feet
|
|
Price
|
|
Location
|
|
Interest (1)
|
|
(Thousands)
|
|
(Millions)
|
|
|
2006:
|
|
|
|
|
|
|
|
|
Orland Park, Illinois
|
|
10.0%
|
|
58
|
|
|
$12.2
|
|
Benton Harbor, Michigan (2)
|
|
20.0%
|
|
223
|
|
|
27.1
|
|
Bloomfield Hills, Michigan(3)
|
|
10.0%
|
|
Under Development
|
|
|
68.4
|
|
Cincinnati, Ohio (4)
|
|
18.0%
|
|
668
|
|
|
194.4
|
|
Allen, Texas(3)
|
|
10.0%
|
|
Under Development
|
|
|
10.9
|
|
50 retail sites in several states
formerly occupied by Service Merchandise
|
|
20.0%
|
|
2,691
|
|
|
171.6
|
|
2005:
|
|
|
|
|
|
|
|
|
Merriam, Kansas
|
|
20.0%
|
|
Under Development
|
|
|
15.7
|
|
2004:
|
|
|
|
|
|
|
|
|
Phoenix, Arizona
|
|
20.0%
|
|
391
|
|
|
45.6
|
|
Buena Park, California
|
|
20.0%
|
|
724
|
|
|
91.5
|
|
San Antonio, Texas
|
|
10.0%
|
|
188
|
|
|
8.1
|
(5)
|
Kirkland, Washington
|
|
20.0%
|
|
228
|
|
|
37.0
|
|
2003:
|
|
|
|
|
|
|
|
|
Kansas City, Missouri
|
|
20.0%
|
|
358
|
|
|
48.4
|
|
|
|
|
(1)
|
|
The Fund invested in certain assets
with development partners, as such, the Companys effective
interest may be less than 20%.
|
|
(2)
|
|
Approximately 100,000 sq. ft. under
redevelopment.
|
|
(3)
|
|
A third party developer owns 50% of
this investment.
|
|
(4)
|
|
Approximately 160,000 sq. ft. under
redevelopment.
|
|
(5)
|
|
Net of $2.5 million sale to
Target.
|
Service
Merchandise Joint Venture
In March 2002, the Company entered into a joint venture with
Lubert-Adler Real Estate Funds and Klaff Realty, L.P. that was
awarded asset designation rights for all of the retail real
estate interests of the bankrupt estate of Service Merchandise
Corporation. The Company had an approximate 25% interest in the
joint venture. In addition,
40
the Company earned fees for the management, leasing, development
and disposition of the real estate portfolio. The designation
rights enabled the joint venture to determine the ultimate use
and disposition of the real estate interests held by the
bankrupt estate.
In August 2006, the Company purchased its then partners
approximate 75% interest in the remaining 52 assets formerly
occupied by Service Merchandise owned by the KLA/SM Joint
Venture at a gross purchase price of approximately
$138 million relating to the partners ownership,
based on a total valuation of approximately $185 million
for all remaining assets, including outstanding indebtedness.
In September 2006, the Company sold 51 of the assets formerly
occupied by Service Merchandise to the Coventry II Joint
Venture. The Company retained a 20% interest in the joint
venture. The Company recorded a gain of approximately
$6.1 million of which $3.2 million is included in FFO.
In 2006, the Company earned an aggregate of $5.7 million
including disposition, development, management and leasing fees
and interest income from the KLA/SM Joint Venture investment.
Expansions
During the year ended December 31, 2006, the Company
completed eight expansions and redevelopment projects located in
Birmingham, Alabama; Lakeland, Florida; Ocala, Florida;
Stockbridge, Georgia; Rome, New York; Mooresville, North
Carolina; Bayamon, Puerto Rico (Rio Hondo) and Ft. Union, Utah,
at an aggregate gross cost of $73.4 million. The Company is
currently expanding/redeveloping eight shopping centers located
in Gadsden, Alabama; Ottumwa, Iowa; Chesterfield, Michigan;
Gaylord, Michigan; Hamilton, New Jersey; Olean, New York; Stow,
Ohio and Brookfield, Wisconsin, at a projected aggregate gross
cost of approximately $45.4 million. At December 31,
2006, approximately $12.3 million of costs had been
incurred in relation to these projects. The Company anticipates
commencing construction on twelve additional expansion and
redevelopment projects at shopping centers located in Crystal
River, Florida; Tallahassee, Florida; Louisville, Kentucky;
Gulfport, Mississippi; Amherst, New York; Fayetteville, North
Carolina; Huber Heights, Ohio; Allentown, Pennsylvania; Bayamon,
Puerto Rico (Plaza Del Sol); Hatillo, Puerto Rico; San Juan,
Puerto Rico and McKinney, Texas.
Six of the Companys joint ventures are currently
expanding/redeveloping their shopping centers located in
Phoenix, Arizona; Buena Park, California; Lancaster, California;
Benton Harbor, Michigan; Kansas City, Missouri and Cincinnati,
Ohio at a projected gross cost of approximately
$554.3 million (which includes the initial acquisition
costs for the Coventry II redevelopment projects located in
Phoenix, Arizona; Buena Park, California; Benton Harbor,
Michigan; Kansas City, Missouri and Cincinnati, Ohio). At
December 31, 2006, approximately $432.8 million of
costs had been incurred in relation to these projects. Three of
the Companys joint ventures anticipate commencing
expansion/redevelopment projects at their shopping centers
located in Deer Park, Illinois; Macedonia, Ohio and Kirkland,
Washington.
Acquisitions
In 2006, the Company acquired the following shopping center
assets:
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
Company-Owned
|
|
Purchase
|
|
|
|
Square Feet
|
|
Price
|
|
Location
|
|
(Thousands)
|
|
(Millions)
|
|
|
Phoenix, Arizona (1)
|
|
197
|
|
$
|
15.6
|
|
Pasadena, California (2)
|
|
557
|
|
|
55.9
|
|
Valencia, California (3)
|
|
76
|
|
|
12.4
|
|
Salisbury, Maryland (1)
|
|
126
|
|
|
1.5
|
|
Apex, North Carolina (4)
|
|
324
|
|
|
4.4
|
|
San Antonio, Texas (5)
|
|
Under Development
|
|
|
22.4
|
|
|
|
|
|
|
|
|
|
|
1,280
|
|
$
|
112.2
|
|
|
|
|
|
|
|
|
41
|
|
|
(1)
|
|
Reflects the Companys
purchase price, net of debt assumed, associated with the
acquisition of its partners 50% ownership interest.
|
|
(2)
|
|
Reflects the Companys
purchase price, net of prepayment of debt, associated with the
acquisition of its partners 75% ownership interest.
|
|
(3)
|
|
Mervyns asset structured as a
financing lease.
|
|
(4)
|
|
Reflects the Companys
purchase price associated with the acquisition of its
partners 80% and 20% ownership interests in separate
phases.
|
|
(5)
|
|
Reflects the Companys
purchase price associated with the acquisition of its
partners 50% ownership interest.
|
In 2006, the Companys joint ventures acquired the
following shopping center properties, excluding those assets
purchased from the Company or its joint ventures:
|
|
|
|
|
|
|
Company-
|
|
Gross
|
|
|
Owned
|
|
Purchase
|
|
|
Square Feet
|
|
Price
|
Location
|
|
(Thousands)
|
|
(Millions)
|
|
San Diego, California (1)
|
|
74
|
|
$ 11.0
|
Orland Park, Illinois (2)
|
|
58
|
|
12.2
|
Benton Harbor, Michigan (3)
|
|
223
|
|
27.1
|
Bloomfield Hills, Michigan (2)
|
|
Under Development
|
|
68.4
|
Cincinnati, Ohio (4)
|
|
668
|
|
194.4
|
Allen, Texas (2)
|
|
Under Development
|
|
10.9
|
Sonae Sierra Brazil (5)
|
|
3,469
|
|
180.3
|
|
|
|
|
|
|
|
4,492
|
|
$504.3
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company purchased a 50% equity
interest through its investment in the Mervyns Joint Venture.
|
|
(2)
|
|
The Company purchased a 10% equity
interest through its investment in the Coventry II Joint Venture.
|
|
(3)
|
|
The Company purchased a 20% equity
interest through its investment in the Coventry II Joint
Venture. Approximately 100,000 sq. ft. under redevelopment.
|
|
(4)
|
|
The Company purchased an 18% equity
interest through its investment in the Coventry II Joint
Venture. Approximately 160,000 sq. ft. under redevelopment.
|
|
(5)
|
|
The Company purchased a 50%
interest in an entity which owns a 93% interest in nine
properties located in Sao Paulo, Brazil.
|
Development
(Wholly-Owned and Consolidated Joint Ventures)
As of December 31, 2006, the Company has substantially
completed the construction of the Freehold, New Jersey; Apex,
North Carolina (Beaver Creek Crossings Phase
I) and Pittsburgh, Pennsylvania, shopping centers, at an
aggregate gross cost of $156.7 million.
The Company currently has seven shopping center projects under
construction. These projects are located in Miami, Florida;
Nampa, Idaho; McHenry, Illinois; Seabrook, New Hampshire;
Horseheads, New York; Apex, North Carolina (Beaver Creek
Crossings Phase II) and San Antonio, Texas.
These projects are scheduled for completion during 2007 through
2008 at a projected aggregate gross cost of approximately
$604.3 million and will create an additional 4 million
square feet of gross leasable retail space.
The Company anticipates commencing construction in 2007 on two
additional shopping centers located in Ukiah, California and
Homestead, Florida. These projects have an estimated aggregate
gross cost of $186.1 million and will create an additional
1.1 million square feet of gross leasable retail space.
At December 31, 2006, approximately $336.7 million of
costs were incurred in relation to the above projects under
construction and projects that will be commencing construction.
42
The wholly-owned and consolidated development estimated funding
schedule as of December 31, 2006, is as follows (in
millions):
|
|
|
|
|
Funded as of December 31, 2006
|
|
$
|
439.0
|
|
Projected net funding during 2007
|
|
|
154.8
|
|
Projected net funding thereafter
|
|
|
173.8
|
|
|
|
|
|
|
Total
|
|
$
|
767.6
|
|
|
|
|
|
|
In addition to the above developments, the Company has
identified several development sites in its development pipeline
for future development at a projected aggregate estimated cost
of over $700 million. While there are no assurances that
any of these potential projects will be developed, they provide
a source of potential development projects over the next several
years.
Development
(Joint Ventures)
Four of the Companys joint ventures have shopping center
projects under construction. These projects are located in
Merriam, Kansas; Bloomfield Hills, Michigan; Allen, Texas and
San Antonio, Texas. These four projects are being developed
through the Coventry II program. A significant portion of the
project located in San Antonio, Texas, was substantially
completed during 2005. The remaining three projects are
scheduled for completion during 2007 through 2009. These
projects have an aggregate gross projected cost of approximately
$496.5 million and a net cost of approximately
$337.4 million. At December 31, 2006, approximately
$147.7 million of costs had been incurred in relation to
these development projects.
The joint venture development estimated funding schedule as of
December 31, 2006, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anticipated
|
|
|
|
|
|
|
DDRs
|
|
|
JV Partners
|
|
|
Proceeds from
|
|
|
|
|
|
|
Proportionate
|
|
|
Proportionate
|
|
|
Construction
|
|
|
|
|
|
|
Share
|
|
|
Share
|
|
|
Loans
|
|
|
Total
|
|
|
Funded as of December 31, 2006
|
|
$
|
12.6
|
|
|
$
|
50.3
|
|
|
$
|
84.9
|
|
|
$
|
147.8
|
|
Projected net funding during 2007
|
|
|
1.5
|
|
|
|
6.0
|
|
|
|
80.4
|
|
|
|
87.9
|
|
Projected net funding thereafter
|
|
|
1.9
|
|
|
|
7.7
|
|
|
|
92.1
|
|
|
|
101.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
16.0
|
|
|
$
|
64.0
|
|
|
$
|
257.4
|
|
|
$
|
337.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dispositions
In 2006, the Company sold the following properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-Owned
|
|
|
|
|
|
|
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
Gain
|
|
Location
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
Shopping Center
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Portfolio Properties
(1)
|
|
|
822
|
|
|
$
|
54.8
|
|
|
$
|
11.1
|
|
Transfers to Joint Ventures
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
Parker, Colorado; Lithonia,
Georgia; Overland Park, Kansas; Frisco, Texas; McKinney, Texas
and Mesquite, Texas (2)
|
|
|
644
|
|
|
|
122.7
|
|
|
|
38.9
|
|
Birmingham, Alabama; McDonough,
Georgia; Coon Rapids, Minnesota and Monaca, Pennsylvania (3)
|
|
|
1,024
|
|
|
|
24.7
|
|
|
|
9.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,490
|
|
|
$
|
202.2
|
|
|
$
|
59.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Properties located in Canton,
Georgia; Cartersville, Georgia; Fort Olgethorpe, Georgia;
Harrisburg, Illinois; Amherst, New York and Waynesville, North
Carolina.
|
43
|
|
|
(2)
|
|
The Company contributed six
wholly-owned assets of the Company to the MDT Preferred Joint
Venture. The Company did not retain an ownership interest in the
joint venture, but maintained a promoted interest. The amount
includes 100% of the selling price (see 2006 Strategic Real
Estate Transactions).
|
|
(3)
|
|
The Company contributed four newly
developed expansion areas adjacent to shopping centers currently
owned by the MDT Joint Venture. The Company retained a 14.5%
effective interest in these assets. The amount includes 100% of
the selling price; the Company eliminated that portion of the
gain associated with its 14.5% ownership interest (see 2006
Strategic Real Estate Transactions).
|
In 2006, the Companys joint ventures sold the following
shopping center properties, excluding the properties purchased
by the Company as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys
|
|
|
|
Companys
|
|
|
|
|
|
|
|
|
Proportionate
|
|
|
|
Effective
|
|
|
Company-Owned
|
|
|
|
|
|
Share of
|
|
|
|
Ownership
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
Gain (Loss)
|
|
Location
|
|
Percentage
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
Olathe, Kansas; Shawnee, Kansas
and Kansas City, Missouri
|
|
|
25.50
|
%
|
|
|
432
|
|
|
$
|
20.0
|
|
|
$
|
(0.5
|
)
|
Fort Worth, Texas
|
|
|
50.00
|
%
|
|
|
235
|
|
|
|
22.0
|
|
|
|
0.2
|
|
Everett, Washington
|
|
|
20.75
|
%
|
|
|
41
|
|
|
|
8.1
|
|
|
|
1.2
|
|
Kildeer, Illinois
|
|
|
10.00
|
%
|
|
|
162
|
|
|
|
47.3
|
|
|
|
7.3
|
(1)
|
Service Merchandise Site
|
|
|
24.63
|
%
|
|
|
52
|
|
|
|
3.2
|
|
|
|
|
(2)
|
Service Merchandise Site
|
|
|
20.00
|
%
|
|
|
|
|
|
|
1.4
|
|
|
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
922
|
|
|
$
|
102.0
|
|
|
$
|
8.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes promoted income.
|
|
(2)
|
|
Less than $0.1 million.
|
2005
Activity
Strategic
Real Estate Transactions
Caribbean
Properties Group
In January 2005, the Company completed the acquisition of 15
retail real estate assets located in Puerto Rico, totaling
nearly 5.0 million square feet of total GLA, from CPG at an
aggregate cost of approximately $1.2 billion. The financing
for the transaction was provided by the assumption of
approximately $660 million of existing debt and line of
credit borrowings of approximately $449.5 million on the
Companys $1.0 billion senior unsecured credit
facility and the application of a $30 million deposit
funded in 2004.
Mervyns
Joint Venture
In 2005, the Company formed the Mervyns Joint Venture, a
consolidated joint venture, with MDT, owned approximately 50% by
the Company and 50% by MDT, that acquired the underlying real
estate of 36 operating Mervyns stores for approximately
$396.2 million. The Company is responsible for the
day-to-day
management of the assets and receives fees for property
management in accordance with the same fee schedule as the
Companys MDT Joint Venture.
During 2005, the Company received approximately
$2.5 million of acquisition and financing fees in
connection with the acquisition of the Mervyns assets. Pursuant
to FIN 46(R), the Company is required to consolidate the
Mervyns Joint Venture and, therefore, the $2.5 million of
fees has been eliminated in consolidation and reflected as an
adjustment in basis and is not reflected in net income.
The Company also purchased an additional Mervyns site at one of
the Companys wholly-owned shopping centers in Salt Lake
City, Utah, for $14.4 million.
44
MDT Joint
Venture
The MDT Joint Venture purchased 12 properties from DDR in 2005
with an aggregate purchase price of approximately
$348.0 million. DDR recognized gains of approximately
$81.2 million and deferred gains of approximately
$13.8 million relating to the Companys effective
14.5% ownership interest in the venture.
MDT is governed by a board of directors that includes three
members selected by DDR, three members selected by MBL and three
independent members.
Service
Merchandise Joint Venture
During 2005, the KLA/SM Joint Venture sold eight sites and
received gross proceeds of approximately $19.4 million and
recorded an aggregate gain of $7.6 million, of which the
Companys proportionate share was approximately
$1.9 million. In 2005, the Company earned fees aggregating
$6.4 million including disposition, development, management
and leasing fees and interest income relating to this
investment. In 2005, the Company advanced funds to this joint
venture to repay mortgage debt. This advance was applied as
consideration in the acquisition of the assets from the joint
venture in 2006 (see 2006 Strategic Transactions).
Disposition
of Office and Industrial Assets
In September 2005, the Company sold 25 office and industrial
buildings acquired through the AIP merger, aggregating
approximately 3.2 million square feet, for approximately
$177.0 million that included a contingent purchase price of
approximately $7.0 million in subordinated equity, based on
the portfolios subsequent performance, including proceeds
from a potential disposition. The Company recorded a gain of
approximately $5.3 million that does not include any
contingent purchase price. The Company has included the
historical operations and disposition of these real estate
assets as discontinued operations in its consolidated statements
of operations as the contingent consideration that may be
received from the subordinated equity is not a direct cash flow
of the properties pursuant to the terms of the transaction.
Expansions
During the year ended December 31, 2005, the Company
completed nine expansions and redevelopment projects located in
Hoover, Alabama; Tallahassee, Florida; Suwanee, Georgia;
Princeton, New Jersey; Hendersonville, North Carolina;
Allentown, Pennsylvania; Erie, Pennsylvania; Bayamon, Puerto
Rico and Johnson City, Tennessee, at an aggregate cost of
$41.6 million.
During the year ended December 31, 2005, two of the
Companys joint ventures completed expansion/redevelopment
projects at their shopping centers located in St. Petersburg,
Florida and Merriam, Kansas, at an aggregate cost of
$9.3 million.
Acquisitions
In 2005, the Company acquired the following shopping center
assets:
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
Gross
|
|
|
|
Owned
|
|
|
Purchase
|
|
|
|
Square Feet
|
|
|
Price
|
|
Location
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Caribbean Property Group (see 2005
Strategic Real Estate Transactions)
|
|
|
3,967
|
|
|
$
|
1,173.8
|
|
Mervyns (see 2005 Strategic Real
Estate transactions) (1)
|
|
|
2,823
|
|
|
|
410.6
|
|
Columbus, Ohio (2)
|
|
|
162
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,952
|
|
|
$
|
1,587.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Includes 36 assets consolidated by
the Company and one wholly-owned asset of the Company.
|
|
(2)
|
|
Reflects the Companys
purchase price, associated with the acquisition of its
partners 20% ownership interest.
|
45
In 2005, the Coventry II Joint Venture, in which the Company has
a 20% equity interest, purchased land for the development of a
shopping center in Merriam, Kansas, for approximately
$15.7 million.
Development
In 2005, the Company substantially completed the construction of
four shopping center projects located in Overland Park, Kansas;
Lansing, Michigan; Freehold, New Jersey and Mt. Laurel, New
Jersey. In 2005, the Companys joint venture development
project located in San Antonio, Texas was substantially
completed and a portion of the joint venture development project
located in Jefferson County (St. Louis), Missouri, was
substantially completed.
Dispositions
In 2005, the Company sold the following properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
Gain
|
|
Location
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
Shopping Center
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Portfolio
Properties (1)
|
|
|
637
|
|
|
$
|
35.7
|
|
|
$
|
10.7
|
|
Transfers to Joint Venture
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
Aurora, Colorado; Parker,
Colorado; Plainville, Connecticut; Brandon, Florida
(2 properties); McDonough, Georgia; Grandville, Michigan;
Brentwood, Tennessee; Irving, Texas; Brookfield, Wisconsin and
Brown Deer Wisconsin (2 properties) (2)
|
|
|
2,097
|
|
|
|
348.0
|
|
|
|
81.2
|
|
Business Center Properties
(3)
|
|
|
3,183
|
|
|
|
177.0
|
|
|
|
5.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,917
|
|
|
$
|
560.7
|
|
|
$
|
97.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Properties located in Fern Park,
Florida; Melbourne, Florida; Connersville, Indiana; Grand Forks,
North Dakota; Ashland, Ohio; Cleveland (W 65th), Ohio;
Hillsboro, Ohio; Wilmington, Ohio; Memphis, Tennessee and
Fort Worth, Texas. The property in Grand Forks, North
Dakota, represents the disposition of an asset through the
merchant building program. This property was consolidated into
the Company with the adoption of FIN 46 in 2004.
|
|
(2)
|
|
The Company transferred 12
wholly-owned assets of the Company to the MDT Joint Venture. The
Company retained an effective 14.5% equity ownership interest in
the joint venture. The amount includes 100% of the selling
price; the Company eliminated that portion of the gain
associated with its 14.5% ownership interest (see 2005 Strategic
Real Estate Transactions).
|
|
(3)
|
|
Represents the disposition of 25
assets (see 2005 Strategic Real Estate Transactions).
|
In 2005, the Companys joint ventures sold the following
shopping center properties, excluding the one property purchased
by the Company as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys
|
|
|
|
Companys
|
|
|
Company-
|
|
|
|
|
|
Proportionate
|
|
|
|
Effective
|
|
|
Owned
|
|
|
|
|
|
Share
|
|
|
|
Ownership
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
of Gain
|
|
Location
|
|
Percentage
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
City of Industry, California (1);
Richmond, California and San Ysidro, California
|
|
|
20.75
|
%
|
|
|
416
|
|
|
$
|
73.3
|
|
|
$
|
6.7
|
|
Long Beach, California (1)
|
|
|
25.50
|
%
|
|
|
343
|
|
|
|
75.6
|
|
|
|
4.4
|
|
Service Merchandise Sites
|
|
|
24.63
|
%
|
|
|
409
|
|
|
|
19.4
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,168
|
|
|
$
|
168.3
|
|
|
$
|
13.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The joint venture sold the
remaining portion of the shopping center.
|
46
2004
Activity
Strategic
Real Estate Transactions
Benderson
Transaction
In 2004, the Company completed the purchase of 107 properties
(of which 93 were purchased by the Company and 14 were purchased
directly by the MDT Joint Venture) aggregating approximately
15.0 million square feet of GLA from Benderson. The
purchase price of the assets, including associated expenses, was
approximately $2.3 billion, including assumed debt and the
value of a 2% equity interest in certain assets valued at
approximately $16.2 million that Benderson retained in the
form of operating partnership units. In 2006, this interest was
converted into approximately 0.4 million DDR common shares.
The Company funded the transaction through a combination of new
debt financing, the issuance of cumulative preferred shares and
common shares, asset transfers to the MDT Joint Venture (see
2004 MDT Joint Venture), line of credit borrowings and assumed
debt. With respect to assumed debt, the fair value of
indebtedness assumed upon closing was approximately
$400 million, which included an adjustment of approximately
$30.0 million to fair value, based on rates for debt with
similar terms and remaining maturities as of the closing date.
Benderson entered into a five-year master lease for certain
vacant space that was either covered by a letter of intent as of
the closing date or a new lease with respect to which the tenant
was not obligated to pay rent as of the closing date. During the
five-year master lease, Benderson agreed to pay the rent for
such vacant space until each applicable tenants rent
commencement date. The Company recorded the master lease
receivable as part of the purchase price allocation.
MDT Joint
Venture
In May 2004, the MDT Joint Venture acquired an indirect
ownership interest in 23 retail properties that consisted of
over 4.0 million square feet of Company-owned GLA. The
aggregate purchase price of the properties was approximately
$538.0 million. Eight of the properties acquired by the MDT
Joint Venture were owned by the Company and one of the
properties was held by the Company through a joint venture with
an aggregate purchase price of approximately $239 million.
Fourteen of the properties acquired by the MDT Joint Venture
were owned by Benderson and valued at approximately
$299 million. In December 2004, the Company transferred
three operating properties to the MDT Joint Venture for
approximately $96.6 million. These transactions aggregating
$634.3 million were funded by approximately
$321.4 million of equity and $312.9 million of debt
and assets and liabilities assumed. The Company recognized a
gain of approximately $65.4 million relating to the sale of
the effective 85.5% interest in these properties and deferred a
gain of approximately $11.1 million relating to the
Companys effective 14.5% ownership interest in the venture.
Coventry
II
In 2004, the Coventry II Joint Venture acquired operating
shopping centers in Phoenix, Arizona; Buena Park, California and
Seattle, Washington, and a project under development in San
Antonio, Texas, for an aggregate initial purchase price of
approximately $182.2 million.
Prudential
Joint Venture
In October 2004, the Company completed a $128 million joint
venture transaction (DPG Joint Venture) with
Prudential Real Estate Investors (PREI). The Company
contributed 12 neighborhood grocery-anchored retail properties
to the joint venture, eight of which were acquired by the
Company from Benderson and four of which were acquired from JDN.
The joint venture assumed approximately $12.0 million of
secured, non-recourse financing associated with two properties.
The Company maintains a 10% ownership in the joint venture and
continues
day-to-day
management of the assets. The Company earns fees for property
management, leasing and development. The Company recognized a
gain of approximately $4.2 million relating to the sale of
the 90% interest in these properties and deferred a gain of
approximately $0.5 million relating to the Companys
10% interest.
47
Kuwait
Financial Centre Joint Venture II
In November 2004, the Company completed a $204 million
joint venture transaction (DDR Markaz II) with an
investor group led by Kuwait Financial Centre-Markaz (a Kuwaiti
publicly traded company). The Company contributed 13
neighborhood grocery-anchored retail properties to the joint
venture, nine of which were acquired by the Company from
Benderson, three of which were acquired from JDN and one that
was owned by the Company. DDR Markaz II obtained approximately
$150 million of seven-year secured non-recourse financing
at a fixed rate of approximately 5.1%. The Company maintains a
20% equity ownership in the joint venture and continues
day-to-day
management of the assets. The Company earns fees at prevailing
rates for property management, leasing and development. The
Company recognized a gain of approximately $2.5 million
relating to the sale of the 80% interest in these properties and
deferred a gain of approximately $0.7 million relating to
the Companys 20% ownership interest in the venture.
Service
Merchandise Joint Venture
During 2004, the KLA/SM Joint Venture sold ten sites and
received gross proceeds of approximately $20.7 million and
recorded an aggregate gain of $2.0 million, of which the
Companys proportionate share was approximately
$0.5 million. In 2004, the Company earned an aggregate of
$1.4 million including disposition, development, management
and leasing fees and interest income of $1.2 million
relating to this investment.
Expansions
In 2004, the Company completed seven expansion and redevelopment
projects located in North Little Rock, Arkansas; Brandon,
Florida; Starkville, Mississippi; Aurora, Ohio; Tiffin, Ohio;
Monaca, Pennsylvania and Chattanooga, Tennessee, at an aggregate
cost of approximately $25.2 million.
Acquisitions
In 2004, the Company acquired the following shopping center
assets:
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
Gross
|
|
|
|
Owned
|
|
|
Purchase
|
|
|
|
Square Feet
|
|
|
Price
|
|
Location
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
Benderson Development Company (see
2004 Strategic Real Estate Transactions)
|
|
|
12,501
|
|
|
$
|
2,014.4
|
|
Littleton, Colorado (1)
|
|
|
228
|
|
|
|
6.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,729
|
|
|
$
|
2,020.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Reflects the Companys
purchase price, net of debt assumed, associated with the
acquisition of its partners 50% ownership interest.
|
In 2004, the Companys joint ventures acquired the
following shopping center properties, excluding those assets
purchased from the Company or its joint ventures:
|
|
|
|
|
|
|
|
|
Company-
|
|
Gross
|
|
|
|
Owned
|
|
Purchase
|
|
|
|
Square Feet
|
|
Price
|
|
Location
|
|
(Thousands)
|
|
(Millions)
|
|
|
Phoenix, Arizona (1)
|
|
1,134
|
|
$
|
45.6
|
|
Buena Park, California (1)
|
|
738
|
|
|
91.5
|
|
San Antonio, Texas (2)
|
|
Under Development
|
|
|
8.1
|
|
Kirkland, Washington (1)
|
|
291
|
|
|
37.0
|
|
Benderson Development Company (3)
|
|
2,497
|
|
|
299.0
|
|
|
|
|
|
|
|
|
|
|
4,660
|
|
$
|
481.2
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company purchased a 20% equity
interest through its investment in the Coventry II Joint Venture.
|
48
|
|
|
(2)
|
|
The Company purchased a 10% equity
interest through its investment in the Coventry II Joint
Venture. Approximately 16 acres of land were sold to Target
for $2.5 million subsequent to the purchase. This project
was substantially completed in 2006.
|
|
(3)
|
|
The MDT Joint Venture acquired an
indirect ownership interest in 23 retail properties. Eight of
the properties acquired by the MDT Joint Venture were owned by
the Company and one of the properties was held by the Company
through a joint venture. These nine properties were valued at
approximately $239 million. Of the properties acquired by
the MDT Joint Venture, 14 were owned by Benderson and valued at
approximately $299 million. The Company owns a 14.5% equity
interest in the MDT Joint Venture.
|
Development
In 2004, the Company substantially completed the construction of
seven shopping centers located in Long Beach, California;
Fort Collins, Colorado; St. Louis, Missouri; Hamilton, New
Jersey; Apex, North Carolina; Irving, Texas and Mesquite, Texas.
In 2004, the Companys joint ventures substantially
completed the construction of a shopping center in Jefferson
County (St. Louis), Missouri.
Dispositions
In 2004, the Company sold the following properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
|
|
|
|
|
Owned
|
|
|
|
|
|
|
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
Gain
|
|
Location
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
Shopping Center
Properties
|
|
|
|
|
|
|
|
|
|
|
|
|
Core Portfolio Properties
(1)
|
|
|
684
|
|
|
$
|
56.7
|
|
|
$
|
6.1
|
|
Transfers to Joint Ventures
Interests
|
|
|
|
|
|
|
|
|
|
|
|
|
Birmingham, Alabama; Fayetteville,
Arkansas (2 properties); Coon Rapids, Minnesota; Asheville,
North Carolina; Erie, Pennsylvania; Monaca, Pennsylvania;
Columbia, South Carolina; Murfreesboro, Tennessee; Nashville,
Tennessee and Lewisville, Texas (2)
|
|
|
2,321
|
|
|
|
285.3
|
|
|
|
65.4
|
|
Lawrenceville, Georgia; Lilburn,
Georgia; Arcade, New York; Avon, New York; Elmira, New York;
Hamburg, New York; Hamlin, New York; Norwich, New York;
Tonawanda, New York (2 properties); Columbia, Tennessee and
Farragut, Tennessee (3)
|
|
|
1,168
|
|
|
|
128.6
|
|
|
|
4.2
|
|
Loganville, Georgia; Oxford,
Mississippi; Amherst, New York; Cheektowaga, New York;
Irondequoit, New York; Jamestown, New York; Leroy, New York;
Ontario, New York; Orchard Park, New York; Rochester, New York;
Warsaw, New York; Chillicothe, Ohio and Goodlettsville,
Tennessee (4)
|
|
|
1,577
|
|
|
|
203.8
|
|
|
|
2.5
|
|
Business Center Properties
(5)
|
|
|
94
|
|
|
|
8.3
|
|
|
|
1.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,844
|
|
|
$
|
682.7
|
|
|
$
|
80.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Properties located in Trinidad,
Colorado; Waterbury, Connecticut; Canton, Georgia; Cumming,
Georgia; Marietta, Georgia; Peachtree City, Georgia; Suwanee,
Georgia; Hazard, Kentucky; Las Vegas, Nevada; North Olmsted,
Ohio; Sumter, South Carolina; Franklin, Tennessee and Milwaukee,
Wisconsin. The property in North Olmsted, Ohio, represents the
disposition of an asset through the merchant building program.
This property was consolidated by the Company with the adoption
of FIN 46 in 2004.
|
|
(2)
|
|
The Company transferred eleven
wholly-owned assets of the Company to the MDT Joint Venture. The
Company retained an effective 14.5% equity ownership interest in
the joint venture. The amount includes 100% of the selling
price; the Company eliminated that portion of the gain
associated with its 14.5% ownership interest (see 2004 Strategic
Real Estate Transactions).
|
49
|
|
|
(3)
|
|
The Company formed the DPG Joint
Venture with PREI in 2004 and contributed 12 neighborhood
grocery-anchored retail properties of the Company. The Company
retained a 10% equity ownership interest in the joint venture.
The amount includes 100% of the selling price; the Company
eliminated that portion of the gain associated with its 10%
ownership interest (see 2004 Strategic Real Estate Transactions).
|
|
(4)
|
|
The Company formed DDR Markaz II in
2004 and contributed 13 neighborhood grocery-anchored retail
properties of the Company. The Company retained a 20% equity
ownership interest in the joint venture. The amount includes
100% of the selling price; the Company eliminated that portion
of the gain associated with its 20% ownership interest (see 2004
Strategic Real Estate Transactions).
|
|
(5)
|
|
Properties located in Sorrento,
California and Mentor, Ohio.
|
In 2004, the Companys joint ventures sold the following
shopping center properties, excluding the one property purchased
by the Company as described above:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys
|
|
|
|
Companys
|
|
|
Company-
|
|
|
|
|
|
Proportionate
|
|
|
|
Effective
|
|
|
Owned
|
|
|
|
|
|
Share of
|
|
|
|
Ownership
|
|
|
Square Feet
|
|
|
Sale Price
|
|
|
Gain
|
|
Location
|
|
Percentage
|
|
|
(Thousands)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
Long Beach, California (1)
|
|
|
25.50
|
%
|
|
|
85
|
|
|
$
|
16.6
|
|
|
$
|
1.3
|
|
Mission Viejo, California
|
|
|
20.75
|
%
|
|
|
46
|
|
|
|
18.0
|
|
|
|
2.0
|
|
Puente Hills, California (1)
|
|
|
20.75
|
%
|
|
|
519
|
|
|
|
66.2
|
|
|
|
4.0
|
|
San Antonio, Texas
|
|
|
35.00
|
%
|
|
|
320
|
|
|
|
59.1
|
|
|
|
6.7
|
|
Service Merchandise sites
|
|
|
24.63
|
%
|
|
|
692
|
|
|
|
20.7
|
|
|
|
0.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,662
|
|
|
$
|
180.6
|
|
|
$
|
14.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The joint venture sold a portion of
the shopping center.
|
OFF
BALANCE SHEET ARRANGEMENTS
The Company has a number of off balance sheet joint ventures and
other unconsolidated entities with varying economic structures.
Through these interests, the Company has investments in
operating properties, development properties and a management
and development company. Such arrangements are generally with
institutional investors and various developers located
throughout the United States.
In connection with the development of shopping centers owned by
certain of these affiliates, the Company and/or its equity
affiliates have agreed to fund the required capital associated
with approved development projects aggregating approximately
$6.8 million at December 31, 2006. These obligations,
comprised principally of construction contracts, are generally
due in 12 to 18 months as the related construction costs
are incurred and are expected to be financed through new or
existing construction loans.
The Company has provided loans and advances to certain
unconsolidated entities and/or related partners in the amount of
$3.2 million at December 31, 2006, for which the
Companys joint venture partners have not funded their
proportionate share. These entities are current on all debt
service owed to DDR. The Company guaranteed base rental income
from one to three years at certain centers held through the
Service Holdings LLC Joint Venture, aggregating
$2.8 million at December 31, 2006. The Company has not
recorded a liability for the guarantee, as the subtenants of the
Service Holdings LLC Joint Venture affiliates are paying rent as
due. The Company has recourse against the other parties in the
partnership for their pro rata share of any liability under this
guarantee.
The Company is involved with overseeing the development
activities for several of its joint ventures that are
constructing, redeveloping or expanding shopping centers. The
Company earns a fee for its services commensurate with the level
of oversight provided. The Company generally provides a
completion guarantee to the third party lending institution(s)
providing construction financing.
The Companys joint ventures have aggregate outstanding
indebtedness to third parties of approximately $2.5 billion
and $2.2 billion at December 31, 2006 and 2005,
respectively. Such mortgages and construction loans are
generally non-recourse to the Company and its partners. Certain
mortgages may have recourse to the
50
Companys partners in certain limited situations, such as
misuse of funds and material misrepresentations. In connection
with certain of the Companys joint ventures, the Company
agreed to fund any amounts due the joint ventures lender
if such amounts are not paid by the joint venture based on the
Companys pro rata share of such amount aggregating
$61.1 million at December 31, 2006. The Company and
its joint venture partner provided a $33.0 million payment
and performance guaranty on behalf of the Mervyns Joint Venture
to the joint ventures lender in certain events such as the
bankruptcy of Mervyns. The Companys maximum obligation is
equal to its approximate 50% ownership percentage, or
$16.5 million.
In October 2006, the Company entered into a joint venture that
owns real estate assets in Brazil. The Company has chosen not to
mitigate any of the foreign currency risk through the use of
hedging instruments. The Company will continue to monitor and
evaluate this risk and may enter into hedging agreements at a
later date.
FINANCING
ACTIVITIES
The Company has historically accessed capital sources through
both the public and private markets. The Companys
acquisitions, developments and expansions are generally financed
through cash provided from operating activities, revolving
credit facilities, mortgages assumed, construction loans,
secured debt, unsecured public debt, common and preferred equity
offerings, joint venture capital, OP Units and asset sales.
Total debt outstanding at December 31, 2006, was
approximately $4.2 billion, as compared to approximately
$3.9 billion and $2.7 billion at December 31,
2005 and 2004, respectively.
The aggregate financings through the issuance of common shares,
preferred shares, construction loans, medium term notes, term
loans and OP Units (units issued by the Companys
partnerships) aggregates $4.7 billion during the three-year
period ended December 31, 2006, is summarized as follows
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common shares
|
|
$
|
|
(1)
|
|
$
|
|
|
|
$
|
737.4
|
(5)
|
Preferred shares
|
|
|
|
|
|
|
|
|
|
|
170.0
|
(6)
|
OP Units
|
|
|
|
|
|
|
|
|
|
|
16.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity
|
|
|
|
|
|
|
|
|
|
|
923.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction
|
|
|
11.1
|
|
|
|
14.6
|
|
|
|
55.4
|
|
Permanent financing
|
|
|
|
|
|
|
327.1
|
|
|
|
|
|
Mortgage debt assumed
|
|
|
132.3
|
|
|
|
661.5
|
|
|
|
420.2
|
|
Tax increment financing
|
|
|
|
|
|
|
|
|
|
|
8.6
|
|
Medium term notes
|
|
|
|
|
|
|
750.0
|
(4)
|
|
|
525.0
|
(7)
|
Convertible notes
|
|
|
250.0
|
(2)
|
|
|
|
|
|
|
|
|
Unsecured term loan
|
|
|
|
|
|
|
|
|
|
|
200.0
|
(8)
|
Secured term loan
|
|
|
180.0
|
(3)
|
|
|
220.0
|
(3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
573.4
|
|
|
|
1,973.2
|
|
|
|
1,209.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
573.4
|
|
|
$
|
1,973.2
|
|
|
$
|
2,132.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Forward sale agreements to sell an
aggregate of 11.6 million common shares were executed in
December 2006. The proceeds are expected to be funded in
February 2007 as a source of funding for the merger with IRRETI.
|
|
(2)
|
|
Issuance of 3.50% convertible
senior unsecured notes due 2011. The notes have an initial
conversion rate of approximately 15.3589 common shares per
$1,000 principal amount of the notes, which represents a
conversion price of approximately $65.11 per common share and a
conversion premium of approximately 22.5% based on the last
reported sale price of $53.15 per common share on
August 22, 2006. The initial conversion rate is subject to
adjustment under certain circumstances. Upon closing of the sale
of the notes, the Company repurchased $48.3 million of its
common shares. In connection with the offering, the Company
entered into an option arrangement, settled in shares of the
Companys
|
51
|
|
|
|
|
common stock, with an investment
bank that had the economic impact of effectively increasing the
conversion price of the notes to $74.41 per common share, which
represents a 40.0% premium based on the August 22, 2006,
closing price of $53.15 per common share. The cost of this
arrangement was approximately $10.3 million and has been
recorded as an equity transaction in the Companys
condensed consolidated balance sheet.
|
|
(3)
|
|
This facility bears interest at
LIBOR plus 0.85% and matures in June 2008. This facility has two
one-year extension options to 2010.
|
|
(4)
|
|
Includes $200 million of
five-year senior unsecured notes and $200 million of
ten-year senior unsecured notes. The five-year notes have an
interest coupon rate of 5.0%, are due on May 3, 2010, and
were offered at 99.806% of par. The ten-year notes have an
interest coupon rate of 5.5%, are due on May 1, 2015, and
were offered at 99.642% of par. Also includes $350 million
of seven-year senior unsecured notes. The seven-year notes have
an interest coupon rate of 5.375%, are due on October 15,
2012, and were offered at 99.52% of par.
|
|
(5)
|
|
15.0 million shares issued in
May 2004 and 5.45 million shares in December 2004.
|
|
(6)
|
|
Issuance of Class I 7.5%
Preferred Shares.
|
|
(7)
|
|
Includes $275 million
five-year senior unsecured notes with a coupon rate of 3.875%.
These notes are due January 30, 2009, and were offered at
99.584% of par. Also includes $250 million seven-year
senior unsecured notes with a coupon rate of 5.25%. These notes
are due April 15, 2011, and were offered at 99.574% of par.
|
|
(8)
|
|
This facility bore interest at
LIBOR plus 0.75% and was repaid in 2006.
|
CAPITALIZATION
At December 31, 2006, the Companys capitalization
consisted of $4.2 billion of debt, $705 million of
preferred shares and $6.9 billion of market equity (market
equity is defined as common shares and OP Units outstanding
multiplied by $62.95, the closing price of the common shares on
the New York Stock Exchange at December 31, 2006),
resulting in a debt to total market capitalization ratio of 0.36
to 1.0, as compared to the ratios of 0.40 to 1.0 and 0.33 to
1.0, at December 31, 2005 and 2004, respectively. The
closing price of the common shares on the New York Stock
Exchange was $47.02 and $44.37 at December 31, 2005 and
2004, respectively. At December 31, 2006, the
Companys total debt consisted of $3.8 billion of
fixed-rate debt and $0.4 billion of variable-rate debt,
including $60 million of fixed-rate debt that has been
effectively swapped to a variable rate and $500 million of
variable-rate debt that had been effectively swapped to a fixed
rate. At December 31, 2005, the Companys total debt
consisted of $3.1 billion of fixed-rate debt and
$0.8 billion of variable-rate debt, including
$60 million of fixed-rate debt that was effectively swapped
to a variable rate.
It is managements strategy to have access to the capital
resources necessary to expand and develop its business.
Accordingly, the Company may seek to obtain funds through
additional equity offerings, debt financings or joint venture
capital in a manner consistent with its intention to operate
with a conservative debt capitalization policy and maintain its
investment grade ratings with Moodys Investors Service and
Standard and Poors. The security rating is not a
recommendation to buy, sell or hold securities, as it may be
subject to revision or withdrawal at any time by the rating
organization. Each rating should be evaluated independently of
any other rating.
The Companys credit facilities and the indentures under
which the Companys senior and subordinated unsecured
indebtedness is, or may be, issued contain certain financial and
operating covenants, including, among other things, debt service
coverage and fixed charge coverage ratios, as well as
limitations on the Companys ability to incur secured and
unsecured indebtedness, sell all or substantially all of the
Companys assets and engage in mergers and certain
acquisitions. Although the Company intends to operate in
compliance with these covenants, if the Company were to violate
those covenants, the Company may be subject to higher finance
costs and fees. Foreclosure on mortgaged properties or an
inability to refinance existing indebtedness would likely have a
negative impact on the Companys financial condition and
results of operations.
As of December 31, 2006, the Company had $1.0 billion
available under its $1.3 billion revolving credit
facilities and cash of $28.4 million. As of
December 31, 2006, the Company also had 212 unencumbered
operating properties generating $444.4 million, or 54.3% of
the total revenue of the Company for the year ended
December 31, 2006, thereby providing a potential collateral
base for future borrowings, subject to consideration of the
financial covenants on unsecured borrowings.
52
In anticipation of the joint venture with TIAA-CREF, expected to
close in the first quarter of 2007, an affiliate of the Company
purchased two interest rate swaption agreements during 2006 that
limits the benchmark interest rate component of future interest
rates on $500 million of forecasted five-year borrowings
and $750 million of forecasted ten-year borrowings. As
these swaption agreements were not designated for hedge
accounting, the Company recorded a charge to interest expense of
approximately $1.2 million for the year ended
December 31, 2006, relating to the
mark-to-market
adjustments.
CONTRACTUAL
OBLIGATIONS AND OTHER COMMITMENTS
The Company has debt obligations relating to its revolving
credit facilities, term loan, fixed-rate senior notes and
mortgages payable (excluding the effect of the fair value hedge)
with maturities ranging from 1 to 25 years. In addition,
the Company has capital and non-cancelable operating leases,
principally for office space and ground leases.
These obligations are summarized as follows for the subsequent
five years ending December 31 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
Year
|
|
Debt
|
|
|
Leases
|
|
|
Leases
|
|
|
2007
|
|
$
|
428,609
|
|
|
$
|
5,320
|
|
|
$
|
305
|
|
2008
|
|
|
664,517
|
|
|
|
5,232
|
|
|
|
315
|
|
2009
|
|
|
391,870
|
|
|
|
4,970
|
|
|
|
315
|
|
2010
|
|
|
1,059,147
|
|
|
|
4,882
|
|
|
|
315
|
|
2011
|
|
|
704,340
|
|
|
|
4,879
|
|
|
|
315
|
|
Thereafter
|
|
|
1,000,329
|
|
|
|
204,465
|
|
|
|
12,283
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,248,812
|
|
|
$
|
229,748
|
|
|
$
|
13,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2007, debt maturities are anticipated to be repaid through
several sources. The $168.4 million in mortgage loans will
be refinanced or paid from operating cash flow. Construction
loans of $63.6 million are anticipated to be refinanced or
extended on similar terms. The unsecured notes aggregating
$196.7 million are expected to be repaid from operating
cash flow, revolving credit facilities and/or other unsecured
debt or equity financings and asset dispositions. No assurance
can be provided that the aforementioned obligations will be
refinanced or repaid as anticipated.
In 2008, the Company has mortgage and unsecured obligations of
$164.5 million and $100.0 million, respectively, that
are anticipated to be refinanced or paid from operating cash
flow, asset dispositions and/or other unsecured debt or equity
financings or refinanced or extended on similar terms. The
$400 million of term loan is expected to be extended on
similar terms. These obligations generally have monthly payments
of principal and/or interest over the term of the obligation.
The interest payable over the term of the credit facilities and
construction loans is determined based on the amount
outstanding. The Company continually changes its asset base and
borrowing base, so that the amount of interest payable on the
mortgages over its life cannot be easily determined and is
therefore excluded from the table above.
At December 31, 2006, the Company had letters of credit
outstanding of approximately $20.6 million. The Company has
not recorded any obligation associated with these letters of
credit. The majority of letters of credit are collateral for
existing indebtedness and other obligations of the Company.
In conjunction with the development of shopping centers, the
Company has entered into commitments aggregating approximately
$63.7 million with general contractors for its wholly-owned
properties at December 31, 2006. These obligations,
comprised principally of construction contracts, are generally
due in 12 to 18 months as the related construction costs
are incurred and are expected to be financed through operating
cash flow and/or new or existing construction loans or revolving
credit facilities.
53
In 2003, the Company entered into an agreement with DRA
Advisors, one of its joint venture partners, to pay an
$0.8 million annual consulting fee for 10 years for
services relating to the assessment of financing and strategic
investment alternatives.
In connection with the transfer of one of the properties to the
MDT Joint Venture, the Company deferred the recognition of
approximately $2.8 million, $2.9 million and
$3.6 million at December 31, 2006, 2005 and 2004,
respectively, of the gain on disposition of real estate related
to a shortfall agreement guarantee maintained by the Company.
The MDT Joint Venture is obligated to fund any shortfall amount
caused by the failure of the landlord or tenant to pay taxes on
the shopping center when due and payable. The Company is
obligated to pay any shortfall to the extent that it is not
caused by the failure of the landlord or tenant to pay taxes on
the shopping center when due and payable. No shortfall payments
have been made on this property since the completion of
construction in 1997.
The Company entered into master lease agreements during 2003
through 2006 with the transfer of properties to certain joint
ventures that are recorded as a liability and reduction of its
related gain. The Company is responsible for the monthly base
rent, all operating and maintenance expenses and certain tenant
improvements and leasing commissions for units not yet leased at
closing for a three-year period. At December 31, 2006, the
Companys material master lease obligations, included in
accounts payable and other expenses, in the following amounts,
were incurred with the properties transferred to the following
joint ventures (in millions):
|
|
|
|
|
MDT Joint Venture
|
|
$
|
2.1
|
|
MDT Preferred Joint Venture
|
|
|
3.3
|
|
DDR Markaz II
|
|
|
0.6
|
|
|
|
|
|
|
|
|
$
|
6.0
|
|
|
|
|
|
|
Related to one of the Companys developments in Long Beach,
California, the Company guaranteed the payment of any special
taxes levied on the property within the City of Long Beach
Community Facilities District No. 6 and attributable to the
payment of debt service on the bonds for periods prior to the
completion of certain improvements related to this project. In
addition, an affiliate of the Company has agreed to make an
annual payment of approximately $0.6 million to defray a
portion of the operating expenses of a parking garage through
the earlier of October 2032 or until the citys parking
garage bonds are repaid. There are no assets held as collateral
or liabilities recorded related to these obligations.
Related to the development of a shopping center in San Antonio,
Texas, the Company guaranteed the payment of certain road
improvements expected to be funded by the City of San Antonio,
Texas, of approximately $1.5 million. These road
improvements are expected to be completed in 2007. There are no
assets held as collateral or liabilities recorded related to
this guarantee.
The Company routinely enters into contracts for the maintenance
of its properties which typically can be cancelled upon 30-60
days notice without penalty. At December 31, 2006, the
Company had purchase order obligations, typically payable within
one year, aggregating approximately $4.3 million related to
the maintenance of its properties and general and administrative
expenses.
The Company has entered into employment contracts with certain
executive officers. These contracts provide for base pay,
bonuses based on the results of operations of the Company,
option and restricted stock grants and reimbursement of various
expenses (health insurance, life insurance, automobile expenses,
country club expenses and financial planning expenses). These
contracts are renewable for one-year terms and subject to
cancellation without cause upon one year notice with respect to
the Chairman and Chief Executive Officer and 90 days notice
with respect to the other officers.
The Company continually monitors its obligations and
commitments. There have been no other material items entered
into by the Company since December 31, 2003, through
December 31, 2006, other than as described above. See
discussion of commitments relating to the Companys joint
ventures and other unconsolidated arrangements in Off
Balance Sheet Arrangements.
54
INFLATION
Substantially all of the Companys long-term leases contain
provisions designed to mitigate the adverse impact of inflation.
Such provisions include clauses enabling the Company to receive
additional rental income from escalation clauses that generally
increase rental rates during the terms of the leases and/or
percentage rentals based on tenants gross sales. Such
escalations are determined by negotiation, increases in the
consumer price index or similar inflation indices. In addition,
many of the Companys leases are for terms of less than ten
years, permitting the Company to seek increased rents upon
renewal at market rates. Most of the Companys leases
require the tenants to pay their share of operating expenses,
including common area maintenance, real estate taxes, insurance
and utilities, thereby reducing the Companys exposure to
increases in costs and operating expenses resulting from
inflation.
ECONOMIC
CONDITIONS
Historically, real estate has been subject to a wide range of
cyclical economic conditions that affect various real estate
markets and geographic regions with differing intensities and at
different times. Different regions of the United States have
been experiencing varying degrees of economic growth. Adverse
changes in general or local economic conditions could result in
the inability of some tenants of the Company to meet their lease
obligations and could otherwise adversely affect the
Companys ability to attract or retain tenants. The
Companys shopping centers are typically anchored by two or
more national tenants (Wal-Mart and Target), home improvement
stores (Home Depot, Lowes Home Improvement) and two or
more junior tenants (Bed Bath & Beyond, Kohls,
Circuit City, T.J. Maxx or PETsMART), which generally offer
day-to-day
necessities, rather than high-priced luxury items. In addition,
the Company seeks to reduce its operating and leasing risks
through ownership of a portfolio of properties with a diverse
geographic and tenant base.
The retail shopping sector has been affected by the competitive
nature of the retail business and the competition for market
share where stronger retailers have out-positioned some of the
weaker retailers. These shifts have forced some market share
away from weaker retailers and required them, in some cases, to
declare bankruptcy and/or close stores. Certain retailers have
announced store closings even though they have not filed for
bankruptcy protection. Notwithstanding any store closures, the
Company does not expect to have any significant losses
associated with these tenants. Overall, the Companys
portfolio remains stable. While negative news relating to
troubled retail tenants tends to attract attention, the
vacancies created by unsuccessful tenants may also create
opportunities to increase rent.
Although certain individual tenants within the Companys
portfolio have filed for bankruptcy protection, the Company
believes that several of its major tenants, including Wal-Mart,
Home Depot, Kohls, Target, Lowes Home Improvement,
T.J. Maxx and Bed Bath & Beyond, are financially secure
retailers based upon their credit quality. This stability is
further evidenced by the tenants relatively constant same
store tenant sales growth in this economic environment. In
addition, the Company believes that the quality of its shopping
center portfolio is strong, as evidenced by the high historical
occupancy rates, which have ranged from 92% to 96% since 1993.
Also, average base rental rates have increased from $5.48 to
$11.56 since the Companys public offering in 1993.
LEGAL
MATTERS
The Company and its subsidiaries are subject to various legal
proceedings, which, taken together, are not expected to have a
material adverse effect on the Company. The Company is also
subject to a variety of legal actions for personal injury or
property damage arising in the ordinary course of its business,
most of which are covered by insurance. While the resolution of
all matters cannot be predicted with certainty, management
believes that the final outcome of such legal proceedings and
claims will not have a material adverse effect on the
Companys liquidity, financial position or results of
operations.
55
NEW
ACCOUNTING STANDARDS
Investors
Accounting for an Investment in a Limited Partnership When the
Investor is the Sole General Partner and the Limited Partners
Have Certain Rights EITF
04-05
In June 2005, the FASB ratified the consensus reached by the
EITF regarding EITF
04-05,
Investors Accounting for an Investment in a Limited
Partnership When the Investor is the Sole General Partner and
the Limited Partners Have Certain Rights. The conclusion
provides a framework for addressing the question of when a sole
general partner, as defined in EITF
04-05,
should consolidate a limited partnership. The EITF has concluded
that the general partner of a limited partnership should
consolidate a limited partnership unless the limited partners
have the substantive right to remove the general partner,
liquidate the limited partnership or substantive participating
rights (veto rights decisions made in the ordinary course of
business). This EITF is effective for all new limited
partnerships formed and, for existing limited partnerships for
which the partnership agreements are modified after
June 29, 2005 and, as of January 1, 2006, for existing
limited partnership agreements. As a result of the adoption of
this EITF, the Company consolidated one limited partnership with
total assets and liabilities of $24.4 million and
$17.7 million, respectively, which were consolidated into
the Companys financial statements at January 1, 2006.
Accounting
Changes and Error Corrections
SFAS 154
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), which replaces APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements An Amendment of APB
Opinion No. 28. SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, on the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS 154 was effective for the Company in the
first quarter of 2006. The adoption of this standard did not
have a material impact on the Companys financial position,
results of operations or cash flows.
Accounting
for Uncertainty in Income Taxes
FIN 48
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of SFAS No. 109
(FIN 48). FIN 48 prescribes a
comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return (including a decision whether to file or not to file a
return in a particular jurisdiction). Under FIN 48, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. FIN 48
also revises disclosure requirements and introduces a
prescriptive, annual, tabular roll-forward of the unrecognized
tax benefits. FIN 48 is effective for fiscal years
beginning after December 15, 2006 (i.e., fiscal year ending
December 31, 2007 for the Company). The Company is
currently evaluating the impact that FIN 48 will have on
its financial statements.
Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
SAB 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements, to address the observed
diversity in quantification practices with respect to annual
financial statements. This bulletin was adopted by the Company
in the fourth quarter of 2006. This bulletin did not have a
material impact on the Companys results of operations,
cash flows or financial position.
Fair
Value Measurements SFAS 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value and establishes a framework for measuring fair value in
generally accepted accounting principles. The key
56
changes to current practice are (1) the definition of fair
value, which focuses on an exit price rather than an entry
price; (2) the methods used to measure fair value, such as
emphasis that fair value is a market-based measurement, not an
entity-specific measurement, as well as the inclusion of an
adjustment for risk, restrictions and credit standing and
(3) the expanded disclosures about fair value measurements.
This Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is required to
adopt SFAS 157 in the first quarter of 2008. The Company is
currently evaluating the impact that this Statement will have on
its financial statements.
Item
15(a)(1) Financial Statements
DEVELOPERS
DIVERSIFIED REALTY CORPORATION
INDEX TO
FINANCIAL STATEMENTS
|
|
|
|
|
Page
|
|
Financial Statements:
|
|
|
|
|
F-2
|
|
|
F-4
|
|
|
F-5
|
|
|
F-6
|
|
|
F-7
|
|
|
F-8
|
EX-23
|
Financial statements of the Companys unconsolidated joint
venture companies, except for DDR Macquarie LLC, have been omitted because they do not meet the
significant subsidiary definition of S-X 210.1-02(w).
F-1
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
Developers Diversified Realty Corporation:
We have completed integrated audits of Developers Diversified Realty Corporations
consolidated financial statements and of its internal control over financial reporting as of
December 31, 2006 in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Our opinions, based on our audits, are presented below.
|
Consolidated financial statements and financial statement schedules
|
In our opinion, the consolidated financial statements listed in the accompanying index
appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of
Developers Diversified Realty Corporation and its subsidiaries (the Company) at December 31, 2006
and 2005, and the results of their operations and their cash flows for each of the three years in
the period ended December 31, 2006 in conformity with accounting principles generally accepted in
the United States of America. In addition, in our opinion, the financial statement schedules (not
presented herein) listed in the index appearing under Item 15(a)(2) of the 2006 Annual Report on
Form 10-K present fairly, in all material respects, the information set forth therein
when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedules are the responsibility of the Companys management.
Our responsibility is to express an opinion on these financial statements and financial statement
schedules based on our audits. We conducted our audits of these statements 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 of financial statements includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Notes 1 and 2 to the consolidated financial statements, the Company, on April
1, 2004, adopted FIN 46R, Consolidation of Variable Interest Entities an interpretation of ARB
51, as interpreted.
|
Internal control over financial reporting
|
Also, in our opinion, managements assessment, included Managements Report on Internal
Control over Financial Reporting (not presented herein) appearing under Item 9A of the 2006
Annual Report on Form 10-K, that the Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria established in
Internal Control
Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
is fairly stated, in all material
F-2
respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of December 31, 2006, based on
criteria established in
Internal Control Integrated Framework
issued by the COSO. The
Companys management is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over financial
reporting. Our responsibility is to express opinions on managements assessment and on the
effectiveness of the Companys internal control over financial reporting based on our audit. We
conducted our audit of internal control over financial reporting in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating managements assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A companys internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting
principles. A companys internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately
and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the companys 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.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
February 21, 2007, except with respect to our opinion on the consolidated financial statements in
so far as they relate to the effects of the discontinued operations as discussed in Note 24, as to
which the date is November 9, 2007.
F-3
CONSOLIDATED
BALANCE SHEETS
(In thousands, except share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
1,768,702
|
|
|
$
|
1,721,321
|
|
Buildings
|
|
|
5,023,665
|
|
|
|
4,806,373
|
|
Fixtures and tenant improvements
|
|
|
196,275
|
|
|
|
152,958
|
|
Construction in progress and land
under development
|
|
|
453,493
|
|
|
|
348,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,442,135
|
|
|
|
7,029,337
|
|
Less: Accumulated depreciation
|
|
|
(861,266
|
)
|
|
|
(692,823
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
|
6,580,869
|
|
|
|
6,336,514
|
|
Cash and cash equivalents
|
|
|
28,378
|
|
|
|
30,655
|
|
Accounts receivable, net
|
|
|
152,161
|
|
|
|
112,464
|
|
Notes receivable
|
|
|
18,161
|
|
|
|
24,996
|
|
Investments in and advances to
joint ventures
|
|
|
291,685
|
|
|
|
275,136
|
|
Deferred charges, net
|
|
|
23,708
|
|
|
|
21,157
|
|
Other assets
|
|
|
79,467
|
|
|
|
62,055
|
|
Real estate held for sale
|
|
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,179,753
|
|
|
$
|
6,862,977
|
|
|
|
|
|
|
|
|
|
|
Liabilities and
Shareholders Equity
|
|
|
|
|
|
|
|
|
Unsecured indebtedness:
|
|
|
|
|
|
|
|
|
Senior notes
|
|
$
|
2,218,020
|
|
|
$
|
1,966,268
|
|
Term debt
|
|
|
|
|
|
|
200,000
|
|
Revolving credit facility
|
|
|
297,500
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,515,520
|
|
|
|
2,316,268
|
|
Secured indebtedness:
|
|
|
|
|
|
|
|
|
Term debt
|
|
|
400,000
|
|
|
|
220,000
|
|
Mortgage and other secured
indebtedness
|
|
|
1,333,292
|
|
|
|
1,354,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,733,292
|
|
|
|
1,574,733
|
|
|
|
|
|
|
|
|
|
|
Total indebtedness
|
|
|
4,248,812
|
|
|
|
3,891,001
|
|
Accounts payable and accrued
expenses
|
|
|
134,781
|
|
|
|
111,186
|
|
Dividends payable
|
|
|
71,269
|
|
|
|
65,799
|
|
Other liabilities
|
|
|
106,775
|
|
|
|
93,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,561,637
|
|
|
|
4,161,247
|
|
|
|
|
|
|
|
|
|
|
Minority equity interests
|
|
|
104,596
|
|
|
|
99,181
|
|
Operating partnership minority
interests
|
|
|
17,337
|
|
|
|
32,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,683,570
|
|
|
|
4,292,696
|
|
Commitments and contingencies
(Note 12)
|
|
|
|
|
|
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Preferred shares (Note 13)
|
|
|
705,000
|
|
|
|
705,000
|
|
Common shares, without par value,
$.10 stated value; 200,000,000 shares authorized;
109,739,262 and 108,947,748 shares issued at
December 31, 2006 and 2005, respectively
|
|
|
10,974
|
|
|
|
10,895
|
|
Paid-in-capital
|
|
|
1,959,629
|
|
|
|
1,945,245
|
|
Accumulated distributions in
excess of net income
|
|
|
(159,615
|
)
|
|
|
(99,756
|
)
|
Deferred obligation
|
|
|
12,386
|
|
|
|
11,616
|
|
Accumulated other comprehensive
income
|
|
|
7,829
|
|
|
|
10,425
|
|
Less: Unearned
compensation-restricted stock
|
|
|
|
|
|
|
(13,144
|
)
|
Common
shares in treasury at cost: 752,975 shares at
December 31, 2006
|
|
|
(40,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,496,183
|
|
|
|
2,570,281
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
7,179,753
|
|
|
$
|
6,862,977
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues from operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minimum rents
|
|
$
|
534,333
|
|
|
$
|
478,231
|
|
|
$
|
381,470
|
|
Percentage and overage rents
|
|
|
10,793
|
|
|
|
9,417
|
|
|
|
6,901
|
|
Recoveries from tenants
|
|
|
170,323
|
|
|
|
149,553
|
|
|
|
111,271
|
|
Ancillary and other property income
|
|
|
19,584
|
|
|
|
14,237
|
|
|
|
6,972
|
|
Management, development and other
fee income
|
|
|
30,294
|
|
|
|
22,859
|
|
|
|
16,937
|
|
Other
|
|
|
14,857
|
|
|
|
8,551
|
|
|
|
11,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
780,184
|
|
|
|
682,848
|
|
|
|
534,981
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating and maintenance
|
|
|
108,013
|
|
|
|
92,575
|
|
|
|
60,717
|
|
Real estate taxes
|
|
|
91,076
|
|
|
|
80,428
|
|
|
|
70,038
|
|
General and administrative
|
|
|
60,679
|
|
|
|
54,048
|
|
|
|
47,126
|
|
Depreciation and amortization
|
|
|
183,171
|
|
|
|
154,704
|
|
|
|
116,804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
442,939
|
|
|
|
381,755
|
|
|
|
294,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
337,245
|
|
|
|
301,093
|
|
|
|
240,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
|
9,053
|
|
|
|
10,004
|
|
|
|
4,205
|
|
Interest expense
|
|
|
(211,132
|
)
|
|
|
(173,537
|
)
|
|
|
(118,749
|
)
|
Other expense, net
|
|
|
(446
|
)
|
|
|
(2,532
|
)
|
|
|
(1,779
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(202,525
|
)
|
|
|
(166,065
|
)
|
|
|
(116,323
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in net income
of joint ventures, minority interests, tax benefit (expense) of
taxable REIT subsidiaries and franchise taxes, discontinued
operations, gain on disposition of real estate and cumulative
effect of adoption of a new accounting standard
|
|
|
134,720
|
|
|
|
135,028
|
|
|
|
123,973
|
|
Equity in net income of joint
ventures
|
|
|
30,337
|
|
|
|
34,873
|
|
|
|
40,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before minority interests,
tax benefit (expense) of taxable REIT subsidiaries and franchise
taxes, discontinued operations, gain on disposition of real
estate and cumulative effect of adoption of a new accounting
standard
|
|
|
165,057
|
|
|
|
169,901
|
|
|
|
164,868
|
|
Minority interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Minority equity interests
|
|
|
(6,337
|
)
|
|
|
(4,965
|
)
|
|
|
(2,457
|
)
|
Operating partnership minority
interests
|
|
|
(2,116
|
)
|
|
|
(2,916
|
)
|
|
|
(2,607
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,453
|
)
|
|
|
(7,881
|
)
|
|
|
(5,064
|
)
|
Tax benefit (expense) of taxable
REIT subsidiaries and franchise taxes
|
|
|
2,497
|
|
|
|
(277
|
)
|
|
|
(1,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
159,101
|
|
|
|
161,743
|
|
|
|
158,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
11,089
|
|
|
|
16,093
|
|
|
|
21,223
|
|
Gain on disposition of real estate,
net of tax
|
|
|
11,051
|
|
|
|
16,667
|
|
|
|
8,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,140
|
|
|
|
32,760
|
|
|
|
29,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on disposition
of real estate and cumulative effect of adoption of a new
accounting standard
|
|
|
181,241
|
|
|
|
194,503
|
|
|
|
188,121
|
|
Gain on disposition of real estate
|
|
|
72,023
|
|
|
|
88,140
|
|
|
|
84,642
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before cumulative effect of
adoption of a new accounting standard
|
|
|
253,264
|
|
|
|
282,643
|
|
|
|
272,763
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(3,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred dividends
|
|
|
55,169
|
|
|
|
55,169
|
|
|
|
50,706
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
198,095
|
|
|
$
|
227,474
|
|
|
$
|
219,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.62
|
|
|
$
|
1.80
|
|
|
$
|
1.99
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.30
|
|
|
|
0.31
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
1.82
|
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.61
|
|
|
$
|
1.78
|
|
|
$
|
1.97
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.30
|
|
|
|
0.30
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
1.81
|
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS EQUITY
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Accumulated
|
|
|
Unearned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions in
|
|
|
|
|
|
Other
|
|
|
Compensation -
|
|
|
Treasury
|
|
|
|
|
|
|
Preferred
|
|
|
Common
|
|
|
Paid in
|
|
|
Excess of
|
|
|
Deferred
|
|
|
Comprehensive
|
|
|
Restricted
|
|
|
Stock at
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Capital
|
|
|
Net Income
|
|
|
Obligation
|
|
|
Income/(Loss)
|
|
|
Stock
|
|
|
Cost
|
|
|
Total
|
|
|
Balance, December 31, 2003
|
|
$
|
535,000
|
|
|
$
|
9,379
|
|
|
$
|
1,301,232
|
|
|
$
|
(116,737
|
)
|
|
$
|
8,336
|
|
|
$
|
(541
|
)
|
|
$
|
(3,892
|
)
|
|
$
|
(118,707
|
)
|
|
$
|
1,614,070
|
|
Issuance of 457,378 common shares
for cash related to exercise of stock options and dividend
reinvestment plan
|
|
|
|
|
|
|
(27
|
)
|
|
|
(1,390
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,323
|
|
|
|
4,906
|
|
Issuance of 105,974 common shares
related to restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,956
|
)
|
|
|
1,861
|
|
|
|
(1,095
|
)
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,929
|
|
|
|
|
|
|
|
1,433
|
|
|
|
|
|
|
|
3,362
|
|
Issuance of 20,450,000 common
shares for cash underwritten offerings
|
|
|
|
|
|
|
1,500
|
|
|
|
637,662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97,587
|
|
|
|
736,749
|
|
Redemption of 284,304 operating
partnership units in exchange for common shares
|
|
|
|
|
|
|
|
|
|
|
1,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,084
|
|
|
|
6,800
|
|
Issuance of Class I preferred
shares for cash underwritten offerings
|
|
|
170,000
|
|
|
|
|
|
|
|
(5,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
164,213
|
|
Dividends declared
common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,078
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(194,078
|
)
|
Dividends declared
preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51,237
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
269,762
|
|
|
|
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
270,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2004
|
|
|
705,000
|
|
|
|
10,852
|
|
|
|
1,933,433
|
|
|
|
(92,290
|
)
|
|
|
10,265
|
|
|
|
326
|
|
|
|
(5,415
|
)
|
|
|
(7,852
|
)
|
|
|
2,554,319
|
|
Issuance of 425,985 common shares
for cash related to exercise of stock options, dividend
reinvestment plan and performance unit plan
|
|
|
|
|
|
|
43
|
|
|
|
10,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,740
|
)
|
|
|
6,206
|
|
|
|
10,366
|
|
Issuance of 88,360 common shares
related to restricted stock plan
|
|
|
|
|
|
|
|
|
|
|
2,306
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,905
|
)
|
|
|
1,646
|
|
|
|
1,047
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
(1,351
|
)
|
|
|
|
|
|
|
1,351
|
|
|
|
|
|
|
|
1,916
|
|
|
|
|
|
|
|
1,916
|
|
Dividends declared
common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,940
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,940
|
)
|
Dividends declared
preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,619
|
|
|
|
|
|
|
|
|
|
|
|
10,619
|
|
Amortization of interest rate
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
(520
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
282,643
|
|
|
|
|
|
|
|
10,099
|
|
|
|
|
|
|
|
|
|
|
|
292,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2005
|
|
|
705,000
|
|
|
|
10,895
|
|
|
|
1,945,245
|
|
|
|
(99,756
|
)
|
|
|
11,616
|
|
|
|
10,425
|
|
|
|
(13,144
|
)
|
|
|
|
|
|
|
2,570,281
|
|
Issuance of 726,574 common shares
for cash related to exercise of stock options, dividend
reinvestment plan and director compensation
|
|
|
|
|
|
|
28
|
|
|
|
(1,819
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,028
|
|
|
|
8,237
|
|
Redemption of operating partnership
units in exchange for common shares
|
|
|
|
|
|
|
45
|
|
|
|
22,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,416
|
|
Repurchase of 909,000 common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,313
|
)
|
|
|
(48,313
|
)
|
Issuance of 64,940 common shares
related to restricted stock plan
|
|
|
|
|
|
|
6
|
|
|
|
653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150
|
)
|
|
|
509
|
|
Vesting of restricted stock
|
|
|
|
|
|
|
|
|
|
|
1,628
|
|
|
|
|
|
|
|
770
|
|
|
|
|
|
|
|
|
|
|
|
(1,585
|
)
|
|
|
813
|
|
Purchased option arrangement on
common shares
|
|
|
|
|
|
|
|
|
|
|
(10,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,337
|
)
|
Adoption of SFAS 123(R)
|
|
|
|
|
|
|
|
|
|
|
(1,558
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,144
|
|
|
|
|
|
|
|
11,586
|
|
Stock-based compensation
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,446
|
|
Dividends declared
common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,954
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257,954
|
)
|
Dividends declared
preferred shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55,169
|
)
|
Comprehensive income (Note 15):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,729
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,729
|
)
|
Amortization of interest rate
contracts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,454
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,454
|
)
|
Foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
253,264
|
|
|
|
|
|
|
|
(2,596
|
)
|
|
|
|
|
|
|
|
|
|
|
250,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2006
|
|
$
|
705,000
|
|
|
$
|
10,974
|
|
|
$
|
1,959,629
|
|
|
$
|
(159,615
|
)
|
|
$
|
12,386
|
|
|
$
|
7,829
|
|
|
$
|
|
|
|
$
|
(40,020
|
)
|
|
$
|
2,496,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Adjustments to reconcile net income
to net cash flow provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
193,527
|
|
|
|
170,701
|
|
|
|
132,647
|
|
Stock-based compensation
|
|
|
3,446
|
|
|
|
|
|
|
|
|
|
Amortization of deferred finance
costs and settled interest rate protection agreements
|
|
|
7,756
|
|
|
|
7,433
|
|
|
|
7,300
|
|
Net cash received from interest
rate hedging contracts
|
|
|
|
|
|
|
10,645
|
|
|
|
|
|
Ineffective portion of derivative
financing investments
|
|
|
1,157
|
|
|
|
|
|
|
|
|
|
Equity in net income of joint
ventures
|
|
|
(30,337
|
)
|
|
|
(34,873
|
)
|
|
|
(40,895
|
)
|
Cash distributions from joint
ventures
|
|
|
23,304
|
|
|
|
39,477
|
|
|
|
38,724
|
|
Operating partnership minority
interest expense
|
|
|
2,116
|
|
|
|
2,916
|
|
|
|
2,607
|
|
Gain on disposition of real estate
and impairment charge, net
|
|
|
(83,074
|
)
|
|
|
(104,165
|
)
|
|
|
(92,616
|
)
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
3,001
|
|
Net change in accounts receivable
|
|
|
(38,013
|
)
|
|
|
(32,207
|
)
|
|
|
(6,611
|
)
|
Net change in accounts payable and
accrued expenses
|
|
|
9,875
|
|
|
|
11,146
|
|
|
|
(15,048
|
)
|
Net change in other operating
assets and liabilities
|
|
|
(2,329
|
)
|
|
|
1,707
|
|
|
|
(6,645
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total adjustments
|
|
|
87,428
|
|
|
|
72,780
|
|
|
|
22,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow provided by operating
activities
|
|
|
340,692
|
|
|
|
355,423
|
|
|
|
292,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate developed or acquired,
net of liabilities assumed
|
|
|
(454,357
|
)
|
|
|
(863,795
|
)
|
|
|
(1,907,683
|
)
|
Decrease in restricted cash
|
|
|
|
|
|
|
|
|
|
|
99,340
|
|
Equity contributions to joint
ventures
|
|
|
(206,645
|
)
|
|
|
(28,244
|
)
|
|
|
(11,433
|
)
|
Repayment (advances) to joint
ventures, net
|
|
|
622
|
|
|
|
(83,476
|
)
|
|
|
(7,355
|
)
|
Repayment (issuance) of notes
receivable, net
|
|
|
6,834
|
|
|
|
(7,172
|
)
|
|
|
2,228
|
|
Proceeds resulting from
contribution of properties to joint ventures and repayments of
advances from affiliates
|
|
|
298,059
|
|
|
|
344,292
|
|
|
|
635,445
|
|
Return of investments in joint
ventures
|
|
|
50,862
|
|
|
|
87,349
|
|
|
|
39,342
|
|
Proceeds from disposition of real
estate
|
|
|
101,578
|
|
|
|
211,603
|
|
|
|
15,515
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flow used for investing
activities
|
|
|
(203,047
|
)
|
|
|
(339,443
|
)
|
|
|
(1,134,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from (repayment of)
revolving credit facilities, net
|
|
|
147,500
|
|
|
|
90,000
|
|
|
|
(126,500
|
)
|
Proceeds from borrowings from term
debt, net
|
|
|
(20,000
|
)
|
|
|
70,000
|
|
|
|
50,000
|
|
Proceeds from mortgage and other
secured debt
|
|
|
11,093
|
|
|
|
158,218
|
|
|
|
105,394
|
|
Principal payments on rental
property debt
|
|
|
(153,732
|
)
|
|
|
(809,396
|
)
|
|
|
(203,255
|
)
|
Repayment of senior notes
|
|
|
|
|
|
|
(1,000
|
)
|
|
|
(140,000
|
)
|
Proceeds from issuance of
convertible senior notes, net of underwriting commissions and
offering expenses of $5,550 in 2006
|
|
|
244,450
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of medium
term notes, net of underwriting commissions and $1,390 and $421
of offering expenses paid in 2005 and 2004, respectively
|
|
|
|
|
|
|
741,139
|
|
|
|
520,003
|
|
Payment of deferred financing costs
(bank borrowings)
|
|
|
(4,047
|
)
|
|
|
(6,994
|
)
|
|
|
(4,120
|
)
|
Payment of underwriting commissions
for forward equity contract
|
|
|
(4,000
|
)
|
|
|
|
|
|
|
|
|
Purchased option arrangement on
common shares
|
|
|
(10,337
|
)
|
|
|
|
|
|
|
|
|
Purchase of operating partnership
minority interests
|
|
|
(2,097
|
)
|
|
|
|
|
|
|
|
|
Proceeds from the issuance of
common shares, net of underwriting commissions and $609 of
offering expenses paid in 2004
|
|
|
|
|
|
|
|
|
|
|
736,749
|
|
Proceeds from the issuance of
preferred shares, net of underwriting commissions and $432 of
offering expenses paid in 2004
|
|
|
|
|
|
|
|
|
|
|
164,213
|
|
Proceeds from the issuance of
common shares in conjunction with exercise of stock options,
401(k) plan and dividend reinvestment plan
|
|
|
9,560
|
|
|
|
12,139
|
|
|
|
7,170
|
|
Distributions to operating
partnership minority interests
|
|
|
(2,347
|
)
|
|
|
(2,902
|
)
|
|
|
(2,354
|
)
|
Repurchase of common shares
|
|
|
(48,313
|
)
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
(307,652
|
)
|
|
|
(286,400
|
)
|
|
|
(226,747
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used for) provided by
financing activities
|
|
|
(139,922
|
)
|
|
|
(35,196
|
)
|
|
|
880,553
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and
cash equivalents
|
|
|
(2,277
|
)
|
|
|
(19,216
|
)
|
|
|
38,178
|
|
Cash and cash equivalents,
beginning of year
|
|
|
30,655
|
|
|
|
49,871
|
|
|
|
11,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of
year
|
|
$
|
28,378
|
|
|
$
|
30,655
|
|
|
$
|
49,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
1. Summary
of Significant Accounting Policies
Nature of
Business
Developers Diversified Realty Corporation and its subsidiaries
(the Company or DDR) are primarily
engaged in the business of acquiring, expanding, owning,
developing, managing and operating shopping centers and enclosed
malls. The Companys shopping centers are typically
anchored by two or more national tenant anchors (Wal-Mart and
Target), home improvement stores (Home Depot, Lowes Home
Improvement) and two or more junior tenants (Bed Bath &
Beyond, Kohls, Circuit City, T.J. Maxx or PETsMART). At
December 31, 2006, the Company owned or had interests in
467 shopping centers in 44 states plus Puerto Rico and Brazil
and seven business centers in five states. The Company has an
interest in 206 of these shopping centers through equity method
investments. The tenant base primarily includes national and
regional retail chains and local retailers. Consequently, the
Companys credit risk is concentrated in the retail
industry.
Consolidated revenues derived from the Companys largest
tenant, Wal-Mart, aggregated 4.6%, 5.1% and 4.0% of total
revenues for the years ended December 31, 2006, 2005 and
2004, respectively. The total percentage of Company-owned gross
leasable area (GLA unaudited) attributed to Wal-Mart
was 8.7% at December 31, 2006. The Companys ten
largest tenants comprised 16.8%, 20.0% and 19.4% of total
revenues for the years ended December 31, 2006, 2005 and
2004, respectively, including revenues reported within
discontinued operations. Management believes the Companys
portfolio is diversified in terms of the location of its
shopping centers and its tenant profile. Adverse changes in
general or local economic conditions could result in the
inability of some existing tenants to meet their lease
obligations and could otherwise adversely affect the
Companys ability to attract or retain tenants. During the
three-year period ended December 31, 2006, 2005 and 2004,
certain national and regional retailers experienced financial
difficulties, and several filed for protection under bankruptcy
laws. The Company does not believe that these bankruptcies will
have a material impact on the Companys financial position,
results of operations or cash flows.
Principles
of Consolidation
The Company consolidates certain entities if it is deemed to be
the primary beneficiary in a variable interest entity
(VIE), as defined in FIN No. 46(R),
Consolidation of Variable Interest Entities
(FIN 46). For those entities that are not VIEs,
the Company also consolidates entities in which it has financial
and operating control. All significant inter-company balances
and transactions have been eliminated in consolidation.
Investments in real estate joint ventures and companies in which
the Company has the ability to exercise significant influence,
but does not have financial or operating control, are accounted
for using the equity method of accounting. Accordingly, the
Companys share of the earnings (or loss) of these joint
ventures and companies is included in consolidated net income.
In 2005, the Company formed a joint venture (the Mervyns
Joint Venture) with an Australia-based Listed Property
Trust, MDT, that acquired the underlying real estate of 36
operating Mervyns stores. The Company holds a 50% economic
interest in the Mervyns Joint Venture, which is considered a
VIE, and the Company was determined to be the primary
beneficiary. The Company earns property management, acquisition
and financing fees from this VIE, which are eliminated in
consolidation. The VIE has total real estate assets and total
non-recourse mortgage debt of approximately $405.8 million
and $258.5 million, respectively, at December 31,
2006, and is consolidated in the results of the Company.
In 2003, the Company formed a joint venture (the MDT Joint
Venture) with Macquarie Bank Limited, that focuses on
acquiring community center properties in the United States. The
Company maintains an interest in the MDT Joint Venture, a VIE in
which the Company has an approximate 12% economic interest. The
Company was not determined to be the primary beneficiary. The
Company earns asset management and performance fees from a joint
venture that serves as the manager of the MDT Joint Venture
(MDT Manager). The Company has a 50% ownership and
serves as the managing member, accounted for under the equity
method of accounting. The MDT Joint Venture has total real
estate assets and total non-recourse mortgage debt of
approximately $1.7 billion and $1.1 billion and
$1.7 billion and $1.0 billion, respectively, at
December 31, 2006 and 2005, respectively. The
Companys maximum exposure to loss associated with this
joint venture is primarily limited to the Companys
aggregate capital investment, which was approximately
$63.6 million at December 31, 2006. The financial
F-8
statements of the MDT Joint Venture are included as part of the
combined joint ventures financial statements in Note 2.
Statement
of Cash Flows and Supplemental Disclosure of Non-Cash Investing
and Financing Information
Non-cash investing and financing activities are summarized as
follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Contribution of net assets to
joint ventures
|
|
$
|
2.9
|
|
|
$
|
13.6
|
|
|
$
|
70.7
|
|
Consolidation of the net assets
(excluding mortgages as disclosed below) of joint ventures
|
|
|
368.9
|
|
|
|
|
|
|
|
10.2
|
|
Mortgages assumed, shopping center
acquisitions and consolidation of joint ventures
|
|
|
132.9
|
|
|
|
661.5
|
|
|
|
458.7
|
|
Liabilities assumed with the
acquisition of shopping centers
|
|
|
|
|
|
|
|
|
|
|
46.9
|
|
Consolidation of net assets from
adoption of EITF 04-05
|
|
|
43.0
|
|
|
|
|
|
|
|
|
|
Mortgages assumed, adoption of
EITF 04-05
|
|
|
17.1
|
|
|
|
|
|
|
|
|
|
Dividends declared, not paid
|
|
|
71.3
|
|
|
|
65.8
|
|
|
|
62.1
|
|
Fair value of interest rate swaps
|
|
|
1.1
|
|
|
|
0.3
|
|
|
|
2.6
|
|
Deferred payment of swaption
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
Share issuance for operating
partnership unit redemption
|
|
|
14.9
|
|
|
|
|
|
|
|
6.8
|
|
The transactions above did not provide or use cash in the years
presented and, accordingly, are not reflected in the
consolidated statements of cash flows.
Real
Estate
Real estate assets held for investment are stated at cost less
accumulated depreciation, which, in the opinion of management,
is not in excess of the individual propertys estimated
undiscounted future cash flows, including estimated proceeds
from disposition.
Depreciation and amortization are provided on a straight-line
basis over the estimated useful lives of the assets as follows:
|
|
|
Buildings
|
|
Useful lives, ranging from 30 to
40 years
|
Furniture/fixtures and tenant
improvements
|
|
Useful lives, which approximate
lease terms, where applicable
|
Expenditures for maintenance and repairs are charged to
operations as incurred. Significant renovations that improve or
extend the life of the assets are capitalized. Included in land
at December 31, 2006, was undeveloped real estate,
generally outlots or expansion pads adjacent to shopping centers
owned by the Company (excluding shopping centers owned through
joint ventures) and excess land of approximately 1,000 acres.
Construction in progress includes shopping center developments
and significant expansions and redevelopments. The Company
capitalizes interest on funds used for the construction,
expansion or redevelopment of shopping centers, including funds
invested in or advanced to joint ventures with qualifying
development activities. Capitalization of interest ceases when
construction activities are substantially completed and the
property is available for occupancy by tenants. In addition, the
Company capitalized certain direct and incremental internal
construction and software development and implementation costs
of $10.0 million, $6.2 million and $5.7 million
in 2006, 2005 and 2004, respectively.
Purchase
Price Accounting
Upon acquisition of properties, the Company estimates the fair
value of acquired tangible assets, consisting of land, building
and improvements, and, if determined to be material, identifies
intangible assets generally consisting
F-9
of the fair value of (i) above- and below-market leases,
(ii) in-place leases and (iii) tenant relationships.
The Company allocates the purchase price to assets acquired and
liabilities assumed based on their relative fair values at the
date of acquisition pursuant to the provisions of Statement of
Financial Accounting Standards (SFAS) No. 141,
Business Combinations. In estimating the fair value
of the tangible and intangible assets acquired, the Company
considers information obtained about each property as a result
of its due diligence, marketing and leasing activities, and
utilizes various valuation methods, such as estimated cash flow
projections using appropriate discount and capitalization rates,
estimates of replacement costs net of depreciation, and
available market information. Depending upon the size of the
acquisition, the Company may engage an outside appraiser to
perform a valuation of the tangible and intangible assets
acquired. The fair value of the tangible assets of an acquired
property considers the value of the property as if it were
vacant.
Above- and below-market lease values for acquired properties are
recorded based on the present value (using a discount rate that
reflects the risks associated with the leases acquired) of the
difference between (i) the contractual amounts to be paid
pursuant to each in-place lease and (ii) managements
estimate of fair market lease rates for each corresponding
in-place lease, measured over a period equal to the remaining
term of the lease for above-market leases and the initial term
plus the term of any below-market fixed-rate renewal options for
below-market leases. The capitalized above-market lease values
are amortized as a reduction of base rental revenue over the
remaining term of the respective leases, and the capitalized
below-market lease values are amortized as an increase to base
rental revenue over the remaining initial terms plus the terms
of any below-market fixed-rate renewal options of the respective
leases. At December 31, 2006 and 2005, the below-market
leases aggregated $22.9 million and $11.5 million,
respectively. At December 31, 2006 and 2005, the
above-market leases aggregated $2.3 million and
$1.4 million, respectively.
The total amount allocated to in-place lease values and tenant
relationship values is based upon managements evaluation
of the specific characteristics of the acquired lease portfolio
and the Companys overall relationship with anchor tenants.
Factors considered in the allocation of these values include the
nature of the existing relationship with the tenant, the
expectation of lease renewals, the estimated carrying costs of
the property during a hypothetical, expected
lease-up
period, current market conditions and costs to execute similar
leases. Estimated carrying costs include real estate taxes,
insurance, other property operating costs and estimates of lost
rentals at market rates during the hypothetical, expected
lease-up
periods, based upon managements assessment of specific
market conditions.
The value of in-place leases including origination costs is
amortized to expense over the estimated weighted average
remaining initial term of the acquired lease portfolio. The
value of tenant relationship intangibles is amortized to expense
over the estimated initial and renewal terms of the lease
portfolio; however, no amortization period for intangible assets
will exceed the remaining depreciable life of the building.
Intangible assets associated with property acquisitions are
included in other assets and other liabilities, with respect to
the below-market leases, in the Companys consolidated
balance sheets.
Impairment
of Long-Lived Assets
The Company follows the provisions of SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived
Assets (SFAS 144). If an asset is held
for sale, it is stated at the lower of its carrying value or
fair value, less cost to sell. The determination of undiscounted
cash flows requires significant estimates made by management and
considers the expected course of action at the balance sheet
date. Subsequent changes in estimated undiscounted cash flows
arising from changes in anticipated actions could affect the
determination of whether an impairment exists.
The Company reviews its long-lived assets used in operations for
impairment when there is an event or change in circumstances
that indicates an impairment in value. An asset is considered
impaired when the undiscounted future cash flows are not
sufficient to recover the assets carrying value. If such
impairment is present, an impairment loss is recognized based on
the excess of the carrying amount of the asset over its fair
value. The Company records impairment losses and reduces the
carrying amounts of assets held for sale when the carrying
amounts exceed the estimated selling proceeds, less the costs to
sell.
F-10
Deferred
Charges
Costs incurred in obtaining indebtedness are included in
deferred charges in the accompanying consolidated balance sheets
and are amortized on a straight-line basis over the terms of the
related debt agreements, which approximates the effective
interest method. Such amortization is reflected as interest
expense in the consolidated statements of operations.
Revenue
Recognition
Minimum rents from tenants are recognized using the
straight-line method over the lease term of the respective
leases. Percentage and overage rents are recognized after a
tenants reported sales have exceeded the applicable sales
breakpoint set forth in the applicable lease. Revenues
associated with tenant reimbursements are recognized in the
period that the expenses are incurred based upon the tenant
lease provision. Management fees are recorded in the period
earned based on a percentage of collected rent at the properties
under management. Ancillary and other property-related income,
which includes the leasing of vacant space to temporary tenants,
is recognized in the period earned. Lease termination fees are
included in other income and recognized upon the effective
termination of a tenants lease when the Company has no
further obligations with the lease. Fee income derived from the
Companys joint venture investments is recognized to the
extent attributable to the unaffiliated ownership interest.
Accounts
Receivable
The Company makes estimates of the uncollectability of its
accounts receivable related to base rents, expense
reimbursements and other revenues. The Company analyzes accounts
receivable and historical bad debt levels, customer credit
worthiness and current economic trends when evaluating the
adequacy of the allowance for doubtful accounts. In addition,
tenants in bankruptcy are analyzed and estimates are made in
connection with the expected recovery of pre-petition and
post-petition claims. The Companys reported net income is
directly affected by managements estimate of the
collectability of accounts receivable.
Accounts receivable, other than straight-line rents receivable,
are expected to be collected within one year and are net of
estimated unrecoverable amounts of approximately
$14.5 million and $19.0 million at December 31,
2006 and 2005, respectively. At December 31, 2006 and 2005,
straight-line rents receivable, net of a provision for
uncollectable amounts of $3.5 million and
$2.4 million, aggregated $54.7 million and
$38.5 million, respectively.
Disposition
of Real Estate and Real Estate Investments
Disposition of real estate relates to the sale of outlots and
land adjacent to existing shopping centers, shopping center
properties and real estate investments. Gains from dispositions
are recognized using the full accrual or partial sale methods,
as applicable, in accordance with the provisions of
SFAS No. 66, Accounting for Real Estate
Sales, (SFAS 66) provided that various
criteria relating to the terms of sale and any subsequent
involvement by the Company with the properties sold are met.
SFAS 144 retains the basic provisions for presenting
discontinued operations in the income statement but broadens the
scope to include a component of an entity rather than a segment
of a business. Pursuant to the definition of a component of an
entity in SFAS 144, assuming no significant continuing
involvement, the sale of a retail or industrial operating
property is considered discontinued operations. In addition,
properties classified as held for sale are also considered a
discontinued operation. Accordingly, the results of operations
of properties disposed of, or classified as held for sale, for
which the Company has no significant continuing involvement, are
reflected as discontinued operations. Interest expense, which is
specifically identifiable to the property, is used in the
computation of interest expense attributable to discontinued
operations. Consolidated interest at the corporate level is
allocated to discontinued operations pursuant to the methods
prescribed under Emerging Issues Task Force (EITF)
87-24,
Allocation of Interest to Discontinued Operations,
based on the proportion of net assets disposed.
Real
Estate Held for Sale
The Company generally considers assets to be held for sale when
the transaction has been approved by the appropriate level of
management and there are no known significant contingencies
relating to the sale such that the
F-11
property sale within one year is considered probable. The
Company evaluates the held for sale classification of its owned
real estate each quarter. Assets that are classified as held for
sale are recorded at the lower of their carrying amount or fair
value less cost to sell. The results of operations of these
shopping centers are reflected as discontinued operations in all
periods presented.
On occasion, the Company will receive unsolicited offers from
third parties to buy individual shopping centers. The Company
will generally classify the properties as held for sale when a
sales contract is executed with no contingencies and the
prospective buyer has significant funds at risk to ensure
performance.
General
and Administrative Expenses
General and administrative expenses include certain internal
leasing and legal salaries and related expenses directly
associated with the re-leasing of existing space, which are
charged to operations as incurred.
Stock
Option and Other Equity-Based Plans
Prior to January 1, 2006, the Company followed Accounting
Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees.
Accordingly, the Company did not recognize compensation cost for
stock options when the option exercise price equaled or exceeded
the market value on the date of the grant. Prior to
January 1, 2006, no stock-based employee compensation cost
for stock options was reflected in net income, as all options
granted under those plans had an exercise price equal to or in
excess of the market value of the underlying common stock on the
date of grant. The Company recorded compensation expense related
to its restricted stock plan and its performance unit awards.
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123(R),
Share-Based Payment (SFAS 123(R)).
SFAS 123(R) is an amendment of SFAS 123 and requires
that the compensation cost relating to share-based payment
transactions be recognized in the financial statements based
upon the grant date fair value. The grant date fair value of the
portion of the restricted stock and performance unit awards
issued prior to the adoption of SFAS 123(R) that is
ultimately expected to vest is recognized as expense on a
straight-line attribution basis over the requisite service
periods in the Companys consolidated financial statements.
SFAS 123(R) requires forfeitures to be estimated at the
time of grant in order to estimate the amount of share-based
awards that will ultimately vest. The forfeiture rate is based
on historical rates.
The Company adopted SFAS 123(R) as required on
January 1, 2006, using the modified prospective method. The
Companys consolidated financial statements as of and for
the year ended December 31, 2006, reflect the impact of
SFAS 123(R). In accordance with the modified prospective
method, the Companys consolidated financial statements for
prior periods have not been restated to reflect the impact of
SFAS 123(R). Share-based compensation expense recognized in
the Companys consolidated financial statements for the
year ended December 31, 2006, includes
(i) compensation expense for share-based payment awards
granted prior to, but not yet vested, as of December 31,
2005, based on the grant-date fair value and
(ii) compensation expense for the share-based payment
awards granted subsequent to December 31, 2005, based on
the grant date fair value estimated in accordance with the
provisions of SFAS 123(R).
The adoption of this standard changed the balance sheet and
resulted in decreasing other liabilities and increasing
shareholders equity by $11.6 million. In addition,
unearned compensation restricted stock (included in
shareholders equity) of $13.1 million was eliminated
and reclassed to paid in capital. These balance sheet changes
relate to deferred compensation under the performance unit plans
and unvested restricted stock awards. Under SFAS 123(R),
deferred compensation is no longer recorded at the time unvested
shares are issued. Share-based compensation expense is
recognized over the requisite service period with an offsetting
credit to equity.
F-12
The compensation cost recognized under SFAS 123(R) was
$8.3 million for the year ended December 31, 2006.
There were no significant capitalized stock-based compensation
costs at December 31, 2006. The following table illustrates
the effect on net income and earnings per share if the Company
had applied the fair value recognition provisions of
SFAS 148, Accounting for Stock-Based
Compensation Transition and Disclosure an amendment
of SFAS No. 123, for the years ended
December 31, 2005 and 2004 (in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
Net income, as reported
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Add: Stock-based employee
compensation included in reported net income
|
|
|
5,652
|
|
|
|
6,308
|
|
Deduct: Total stock-based employee
compensation expense determined under fair value-based method
for all awards
|
|
|
(5,319
|
)
|
|
|
(5,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
282,976
|
|
|
$
|
271,008
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
Basic pro forma
|
|
$
|
2.10
|
|
|
$
|
2.28
|
|
|
|
|
|
|
|
|
|
|
Diluted as reported
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
Diluted pro forma
|
|
$
|
2.09
|
|
|
$
|
2.25
|
|
|
|
|
|
|
|
|
|
|
See Note 18, Benefit Plans, for additional
information.
Interest
and Real Estate Taxes
Interest and real estate taxes incurred during the development
and significant expansion of real estate assets are capitalized
and depreciated over the estimated useful life of the building.
Interest paid during the years ended December 31, 2006,
2005 and 2004, aggregated $239.3 million,
$190.0 million and $133.8 million, respectively, of
which $20.0 million, $12.7 million and
$9.9 million, respectively, was capitalized.
Goodwill
SFAS 142, Goodwill and Other Intangible Assets,
requires that intangible assets not subject to amortization and
goodwill be tested for impairment annually, or more frequently
if events or changes in circumstances indicate that the carrying
value may not be recoverable. Amortization of goodwill,
including such assets associated with joint ventures acquired in
past business combinations, ceased upon adoption of
SFAS 142. Goodwill is included in the balance sheet caption
Investments in and Advances to Joint Ventures in the amount of
$5.4 million as of December 31, 2006 and 2005. The
Company evaluated the goodwill related to its joint venture
investments for impairment and determined that it was not
impaired as of December 31, 2006 and 2005.
Intangible
Assets
In addition to the intangibles discussed above in purchase price
accounting, the Company has finite-lived intangible assets,
comprised of management contracts associated with the
Companys acquisition of a joint venture, stated at cost
less amortization calculated on a straight-line basis over
15 years. Intangible assets, net, are included in the
balance sheet caption Investments in and Advances to Joint
Ventures in the amount of $4.3 million and
$4.4 million as of December 31, 2006 and 2005,
respectively. The
15-year
life
approximates the expected turnover rate of the original
management contracts acquired. The estimated amortization
expense associated with this intangible asset for each of the
five succeeding fiscal years is approximately $0.3 million
per year.
F-13
Investments
in and Advances to Joint Ventures
To the extent that the Company contributes assets to a joint
venture, the Companys investment in the joint venture is
recorded at the Companys cost basis in the assets that
were contributed to the joint venture. To the extent that the
Companys cost basis is different from the basis reflected
at the joint venture level, the basis difference is amortized
over the life of the related assets and included in the
Companys share of equity in net income of the joint
venture. In accordance with the provisions of
SFAS No. 66 and Statement of Position
78-9,
Accounting for Investments in Real Estate Ventures,
paragraph 30, the Company recognizes gains on the
contribution of real estate to joint ventures, relating solely
to the outside partners interest, to the extent the
economic substance of the transaction is a sale. The Company
continually evaluates its investments in and advances to joint
ventures for other than temporary declines in market value. The
Company records impairment charges based on these evaluations.
The Company has determined that these investments are not
impaired as of December 31, 2006.
Foreign
Currency Translation
The financial statements of Sonae Sierra Brazil, an equity
method investment, are translated into U.S. dollars using
the exchange rate at each balance sheet date for assets and
liabilities and a weighted average exchange rate for each period
for revenues, expenses, gains and losses, with the
Companys proportionate share of the resulting translation
adjustments recorded as Accumulated Other Comprehensive Income
(Loss). Foreign currency gains or losses from changes in
exchange rates are not material to the consolidated operating
results.
Cash and
Cash Equivalents
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash
equivalents. The Company maintains cash deposits with a major
financial institution, which from time to time may exceed
federally insured limits. The Company periodically assesses the
financial condition of the institution and believes that the
risk of loss is minimal. Cash flows associated with items
intended as hedges of identifiable transactions or events are
classified in the same category as the cash flows from the items
being hedged.
Income
Taxes
The Company has made an election to qualify, and believes it is
operating so as to qualify, as a REIT for federal income tax
purposes. Accordingly, the Company generally will not be subject
to federal income tax, provided that distributions to its
stockholders equal at least the amount of its REIT taxable
income as defined under Section 856 through 860 of the Code.
In connection with the REIT Modernization Act, which became
effective January 1, 2001, the Company is now permitted to
participate in certain activities which it was previously
precluded from in order to maintain its qualification as a REIT,
so long as these activities are conducted in entities which
elect to be treated as taxable subsidiaries under the Code. As
such, the Company is subject to federal and state income taxes
on the income from these activities.
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for
the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases
and operating loss and tax credit carry-forwards. Deferred tax
assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are
expected to be recovered or settled.
Treasury
Stock
The Companys share repurchases are reflected as treasury
stock utilizing the cost method of accounting and are presented
as a reduction to consolidated shareholders equity.
Use of
Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount
of assets and liabilities, the
F-14
disclosure of contingent assets and liabilities and the reported
amounts of revenues and expenses during the year. Actual results
could differ from those estimates.
New
Accounting Standards
Investors
Accounting for an Investment in a Limited Partnership When the
Investor is the Sole General Partner and the Limited Partners
Have Certain Rights EITF 04-05
In June 2005, the FASB ratified the consensus reached by the
EITF regarding EITF 04-05, Investors Accounting for
an Investment in a Limited Partnership When the Investor is the
Sole General Partner and the Limited Partners Have Certain
Rights. The conclusion provides a framework for addressing
the question of when a sole general partner, as defined in EITF
04-05, should consolidate a limited partnership. The EITF has
concluded that the general partner of a limited partnership
should consolidate a limited partnership unless the limited
partners have the substantive right to remove the general
partner, liquidate the limited partnership or substantive
participating rights (veto rights decisions made in the ordinary
course of business). This EITF is effective for all new limited
partnerships formed and, for existing limited partnerships for
which the partnership agreements are modified after June 29,
2005 and, as of January 1, 2006, for existing limited
partnership agreements. As a result of the adoption of this
EITF, the Company consolidated one limited partnership with
total assets and liabilities of $24.4 million and $17.7 million,
respectively, which were consolidated into the Companys
financial statements at January 1, 2006.
Accounting
Changes and Error Corrections
SFAS 154
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections
(SFAS 154), which replaces APB Opinion
No. 20, Accounting Changes, and
SFAS No. 3, Reporting Accounting Changes in
Interim Financial Statements An Amendment of APB
Opinion No. 28. SFAS 154 provides guidance on
the accounting for and reporting of accounting changes and error
corrections. It establishes retrospective application, on the
latest practicable date, as the required method for reporting a
change in accounting principle and the reporting of a correction
of an error. SFAS 154 was effective for the Company in the
first quarter of 2006. The adoption of this standard did not
have a material impact on the Companys financial position,
results of operations or cash flows.
Accounting
for Uncertainty in Income Taxes
FIN 48
In July 2006, the FASB issued Interpretation No. 48,
Accounting for Uncertainty in Income Taxes An
Interpretation of SFAS No. 109
(FIN 48). FIN 48 prescribes a
comprehensive model for how a company should recognize, measure,
present and disclose in its financial statements uncertain tax
positions that a company has taken or expects to take on a tax
return (including a decision whether to file or not to file a
return in a particular jurisdiction). Under FIN 48, the
financial statements will reflect expected future tax
consequences of such positions presuming the taxing
authorities full knowledge of the position and all
relevant facts, but without considering time values. FIN 48
also revises disclosure requirements and introduces a
prescriptive, annual, tabular roll-forward of the unrecognized
tax benefits. FIN 48 is effective for fiscal years
beginning after December 15, 2006 (i.e., fiscal year ending
December 31, 2007 for the Company). The Company is
currently evaluating the impact that FIN 48 will have on
its financial statements.
Considering
the Effects of Prior Year Misstatements When Quantifying
Misstatements in Current Year Financial Statements
SAB 108
In September 2006, the SEC staff issued Staff Accounting
Bulletin No. 108, Considering the Effects of
Prior Year Misstatements When Quantifying Misstatements in
Current Year Financial Statements, to address the observed
diversity in quantification practices with respect to annual
financial statements. This bulletin was adopted by the Company
in the fourth quarter of 2006. This bulletin did not have a
material impact on the Companys results of operations,
cash flows or financial position.
F-15
Fair
Value Measurements SFAS 157
In September 2006, the FASB issued SFAS No. 157,
Fair Value Measurements. This Statement defines fair
value and establishes a framework for measuring fair value in
generally accepted accounting principles. The key changes to
current practice are (1) the definition of fair value,
which focuses on an exit price rather than an entry price;
(2) the methods used to measure fair value, such as
emphasis that fair value is a market-based measurement, not an
entity-specific measurement, as well as the inclusion of an
adjustment for risk, restrictions and credit standing and
(3) the expanded disclosures about fair value measurements.
This Statement does not require any new fair value measurements.
This Statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007, and interim
periods within those fiscal years. The Company is required to
adopt SFAS 157 in the first quarter of 2008. The Company is
currently evaluating the impact that this Statement will have on
its financial statements.
F-16
2. Investments
in and Advances to Joint Ventures
The Companys substantial unconsolidated joint ventures at
December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
Effective
|
|
|
|
|
Ownership
|
|
|
Unconsolidated Real Estate Ventures
|
|
Percentage (1)
|
|
Assets Owned
|
|
Sun Center Limited
|
|
|
79.45
|
%
|
|
A shopping center in Columbus, Ohio
|
Continental Sawmill LLC
|
|
|
63.4
|
|
|
Land
|
DDR Aspen Grove Office Parcel LLC
|
|
|
50.0
|
|
|
Land
|
DDRA Community Centers Five, LP
|
|
|
50.0
|
|
|
Six shopping centers in several
states
|
DOTRS LLC
|
|
|
50.0
|
|
|
A shopping center in Macedonia,
Ohio
|
Jefferson County Plaza LLC
|
|
|
50.0
|
|
|
A shopping center in St. Louis
(Arnold), Missouri
|
Lennox Town Center Limited
|
|
|
50.0
|
|
|
A shopping center in Columbus, Ohio
|
Sansone Group/DDRC LLC
|
|
|
50.0
|
|
|
A management and development
company
|
Sonae Sierra Brazil BV Sarl
|
|
|
47.0
|
|
|
Nine shopping centers and a
management company in Sao Paulo, Brazil
|
Retail Value Investment Program
IIIB LP
|
|
|
25.5
|
|
|
A shopping center in Deer Park,
Illinois
|
Retail Value Investment Program VI
LP
|
|
|
25.5
|
|
|
A shopping center in Overland
Park, Kansas
|
Retail Value Investment Program
VIII LP
|
|
|
25.5
|
|
|
A shopping center in Austin, Texas
|
Retail Value Investment Program
VII LLC
|
|
|
20.75
|
|
|
Two shopping centers in California
|
Coventry II DDR Buena Park LLC
|
|
|
20.0
|
|
|
A shopping center in Buena Park,
California
|
Coventry II DDR Fairplain LLC
|
|
|
20.0
|
|
|
A shopping center in Benton
Harbor, Michigan
|
Coventry II DDR Merriam Village LLC
|
|
|
20.0
|
|
|
A shopping center under
development in Merriam, Kansas
|
Coventry II DDR Phoenix Spectrum
LLC
|
|
|
20.0
|
|
|
A shopping center in Phoenix,
Arizona
|
Coventry II DDR Totem Lakes LLC
|
|
|
20.0
|
|
|
A shopping center in Kirkland,
Washington
|
Coventry II DDR Ward Parkway LLC
|
|
|
20.0
|
|
|
A shopping center in Kansas City,
Missouri
|
DDR Markaz LLC
|
|
|
20.0
|
|
|
Seven shopping centers in several
states
|
DDR Markaz II LLC
|
|
|
20.0
|
|
|
13 neighborhood grocery-anchored
retail properties in several states
|
Service Holdings LLC
|
|
|
20.0
|
|
|
50 retail sites in several states
|
Coventry II DDR Tri-County LLC
|
|
|
18.0
|
|
|
A shopping center in Cincinnati,
Ohio
|
DDR Macquarie LLC
|
|
|
14.5
|
|
|
48 shopping centers in several
states
|
Coventry II DDR Bloomfield LLC
|
|
|
10.0
|
|
|
A shopping center under
development in Bloomfield Hills, Michigan
|
Coventry II DDR Marley Creek
Square LLC
|
|
|
10.0
|
|
|
A shopping center in Orland Park,
Illinois
|
Coventry II DDR Montgomery Farm LLC
|
|
|
10.0
|
|
|
A shopping center under
development in Allen, Texas
|
Coventry II DDR Westover LLC
|
|
|
10.0
|
|
|
A shopping center under
development in San Antonio (Westover), Texas
|
DPG Realty Holdings LLC
|
|
|
10.0
|
|
|
12 neighborhood grocery-anchored
retail properties in several states
|
DDR MDT PS LLC
|
|
|
0.00
|
(2)
|
|
Seven shopping centers in several
states
|
|
|
|
(1)
|
|
Ownership may be held through
different investment structures. Percentage ownerships are
subject to change as certain investments contain promoted
structures.
|
|
(2)
|
|
See MDT Preferred Joint Venture
discussed below.
|
F-17
Combined condensed unconsolidated financial information of the
Companys unconsolidated joint venture investments is
summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Combined balance
sheets
|
|
|
|
|
|
|
|
|
Land
|
|
$
|
902,486
|
|
|
$
|
894,477
|
|
Buildings
|
|
|
2,703,711
|
|
|
|
2,480,025
|
|
Fixtures and tenant improvements
|
|
|
57,989
|
|
|
|
58,060
|
|
Construction in progress
|
|
|
157,750
|
|
|
|
37,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,821,936
|
|
|
|
3,470,112
|
|
Less: Accumulated depreciation
|
|
|
(245,674
|
)
|
|
|
(195,708
|
)
|
|
|
|
|
|
|
|
|
|
Real estate, net
|
|
|
3,576,262
|
|
|
|
3,274,404
|
|
Receivables, net
|
|
|
70,903
|
|
|
|
76,744
|
|
Leasehold interests
|
|
|
15,195
|
|
|
|
23,297
|
|
Other assets
|
|
|
129,914
|
|
|
|
109,490
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,792,274
|
|
|
$
|
3,483,935
|
|
|
|
|
|
|
|
|
|
|
Mortgage debt
|
|
$
|
2,409,080
|
|
|
$
|
2,173,401
|
|
Amounts payable to DDR
|
|
|
4,930
|
|
|
|
108,020
|
|
Other liabilities
|
|
|
92,904
|
|
|
|
78,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,506,914
|
|
|
|
2,359,827
|
|
Accumulated equity
|
|
|
1,285,360
|
|
|
|
1,124,108
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,792,274
|
|
|
$
|
3,483,935
|
|
|
|
|
|
|
|
|
|
|
Companys share of
accumulated equity(1)
|
|
$
|
252,937
|
|
|
$
|
178,908
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Combined statements of
operations
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from operations
|
|
$
|
423,051
|
|
|
$
|
416,468
|
|
|
$
|
312,504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental operation expenses
|
|
|
143,573
|
|
|
|
147,617
|
|
|
|
106,144
|
|
Depreciation and amortization
expense
|
|
|
79,713
|
|
|
|
82,516
|
|
|
|
61,853
|
|
Interest expense
|
|
|
125,995
|
|
|
|
113,231
|
|
|
|
73,252
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,281
|
|
|
|
343,364
|
|
|
|
241,249
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before gain on disposition
of real estate and discontinued operations
|
|
|
73,770
|
|
|
|
73,104
|
|
|
|
71,255
|
|
Tax expense
|
|
|
(1,176
|
)
|
|
|
|
|
|
|
|
|
Gain on disposition of real estate
|
|
|
398
|
|
|
|
858
|
|
|
|
4,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
72,992
|
|
|
|
73,962
|
|
|
|
76,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations, net of tax
|
|
|
101
|
|
|
|
(358
|
)
|
|
|
3,125
|
|
Gain on disposition of real
estate, net of tax
|
|
|
20,343
|
|
|
|
48,982
|
|
|
|
39,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,444
|
|
|
|
48,624
|
|
|
|
42,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
93,436
|
|
|
$
|
122,586
|
|
|
$
|
118,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys share of net income
(2)
|
|
$
|
28,530
|
|
|
$
|
36,828
|
|
|
$
|
42,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
Investments in and advances to joint ventures include the
following items, which represent the difference between the
Companys investment and its proportionate share of all of the
joint ventures underlying net assets (in millions):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31.
|
|
|
|
2006
|
|
|
2005
|
|
|
Companys proportionate share
of accumulated equity
|
|
$
|
252.9
|
|
|
$
|
178.9
|
|
Basis differentials (2)
|
|
|
92.3
|
|
|
|
46.3
|
|
Deferred development fees, net of
portion relating to the Companys interest
|
|
|
(3.0
|
)
|
|
|
(3.0
|
)
|
Basis differential upon transfer
of assets (2)
|
|
|
(74.3
|
)
|
|
|
(74.9
|
)
|
Notes receivable from investments
|
|
|
18.8
|
|
|
|
19.8
|
|
Amounts payable to DDR (3)
|
|
|
5.0
|
|
|
|
108.0
|
|
|
|
|
|
|
|
|
|
|
Investments in and advances to
joint ventures (1)
|
|
$
|
291.7
|
|
|
$
|
275.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The difference between the
Companys share of accumulated equity and the investments
in and advances to joint ventures recorded on the Companys
consolidated balance sheets primarily results from the basis
differentials, as described below, deferred development fees,
net of the portion relating to the Companys interest,
notes and amounts receivable from the joint ventures
investments.
|
|
(2)
|
|
Basis differentials occur primarily
when the Company has purchased interests in existing joint
ventures at fair market values, which differ from their
proportionate share of the historical net assets of the joint
ventures. In addition, certain acquisition, transaction and
other costs, including capitalized interest, may not be
reflected in the net assets at the joint venture level. Basis
differentials upon transfer of assets are primarily associated
with assets previously owned by the Company that have been
transferred into a joint venture at fair value. This amount
represents the aggregate difference between the Companys
historical cost basis and the basis reflected at the joint
venture level. Certain basis differentials indicated above are
amortized over the life of the related assets. Differences in
income also occur when the Company acquires assets from joint
ventures. The difference between the Companys share of net
income, as reported above, and the amounts included in the
consolidated statements of operations is attributable to the
amortization of such basis differentials, deferred gains and
differences in gain (loss) on sale of certain assets due to the
basis differentials. The Companys share of joint venture
net income has been increased by $1.6 million and reduced
by $2.1 million and $1.3 million for the years ended
December 31, 2006, 2005 and 2004, respectively, to reflect
additional basis depreciation and basis differences in assets
sold.
|
|
(3)
|
|
In 2005, the Company advanced
$101.4 million to the KLA/SM LLC joint venture. This
advance was repaid when the Company acquired its partners
interests in the joint venture and subsequently sold these
assets to the Service Holdings LLC joint venture, and the
Company did not advance funds to this partnership to fund the
acquisition.
|
The Company has made advances to several partnerships in the
form of notes receivable and fixed-rate loans that accrue
interest at rates ranging from 6.3% to 12%. Maturity dates range
from payment on demand to June 2020. Included in the
Companys accounts receivable is approximately
$1.1 million and $1.2 million at December 31,
2006 and 2005, respectively, due from affiliates related to
construction receivables.
Service fees earned by the Company through management, leasing,
development and financing activities performed related to all of the
Companys joint ventures are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Management and other fees
|
|
$
|
23.7
|
|
|
$
|
16.7
|
|
|
$
|
11.4
|
|
Acquisition, financing and
guarantee fees
|
|
|
0.5
|
|
|
|
2.4
|
|
|
|
3.0
|
|
Development fees and leasing
commissions
|
|
|
6.1
|
|
|
|
5.6
|
|
|
|
3.8
|
|
Interest income
|
|
|
5.4
|
|
|
|
6.8
|
|
|
|
1.9
|
|
Disposition fees
|
|
|
|
|
|
|
0.2
|
|
|
|
0.2
|
|
The Companys joint venture agreements generally include
provisions whereby each partner has the right to trigger a
purchase or sale of its interest in the joint venture
(Reciprocal Purchase Rights), to initiate a purchase or
F-19
sale of the properties (Property Purchase Rights) after a
certain number of years, or if either party is in default of the
joint venture agreements. Under these provisions, the Company is
not obligated to purchase the interest of its outside joint
venture partners.
Joint
Venture Interests
Macquarie
DDR Trust
The Company owns an interest in Macquarie DDR Trust, an
Australia-based Listed Property Trust (MDT), with
Macquarie Bank Limited (ASX: MBL), an international investment
bank, advisor and manager of specialized real estate funds in
Australia (MDT Joint Venture). MDT focuses on
acquiring ownership interests in institutional-quality community
center properties in the United States.
At December 31, 2006, MDT, which listed on the Australian
Stock Exchange in November 2003, owns an approximate 83%
interest in the portfolio of assets. The Company retained an
effective 14.5% ownership interest in the assets, with MBL
primarily owning the remaining 2.5%. The Company has been
engaged to provide
day-to-day
operations of the properties and will receive fees at prevailing
rates for property management, leasing, construction management,
acquisitions, due diligence, dispositions (including outparcel
sales) and financing. Through their joint venture, the Company
and MBL receives base asset management fees and incentive fees
based on the performance of MDT. The Company recorded fees
aggregating $0.4 million, $2.4 million and
$3.0 million in 2006, 2005 and 2004, respectively, in
connection with the acquisition, structuring, formation and
operation of the MDT Joint Venture.
In 2006, the Company sold four additional expansion areas in
Birmingham, Alabama; McDonough, Georgia; Coon Rapids, Minnesota
and Monaca, Pennsylvania to the MDT Joint Venture for
approximately $24.7 million. These expansion areas are
adjacent to shopping centers currently owned by the MDT Joint
Venture. The Company recognized an aggregate merchant build gain
of $9.2 million, and deferred gains of approximately
$1.6 million relating to the Companys effective 14.5%
ownership interest in the venture.
Sonae
Sierra Brazil BV Sarl
In October 2006, the Company acquired a 50% joint venture
interest in Sonae Sierra Brazil, a fully integrated retail real
estate company based in Sao Paulo, Brazil, for approximately
$147.5 million. Sonae Sierra Brazil is a subsidiary of
Sonae Sierra, an international owner, developer and manager of
shopping centers based in Portugal. Sonae Sierra Brazil is the
managing partner of a partnership that owns direct and indirect
interests in nine retail assets aggregating 3.5 million
square feet and a property management company in Sao Paulo,
Brazil that oversees
F-20
the leasing and management operations of the portfolio. Sonae
Sierra Brazil owns approximately 93% of the joint venture and
Enplanta Engenharia, a third party, owns approximately 7%.
Coventry
II
In 2003, the Company and Coventry Real Estate Advisors
(CREA) announced the formation of Coventry Real
Estate Fund II (the Fund). The Fund was formed
with several institutional investors and CREA as the investment
manager. Neither the Company nor any of its officers owns a
common equity interest in this Fund or has any incentive
compensation tied to this Fund. The Fund and the Company have
agreed to jointly acquire value-added retail properties in the
United States. The Funds strategy is to invest in a
variety of retail properties that present opportunities for
value creation, such as retenanting, market repositioning,
redevelopment or expansion.
The Company co-invested 20% in each joint venture and is
responsible for
day-to-day
management of the properties. Pursuant to the terms of the joint
venture, the Company will earn fees for property management,
leasing and construction management. The Company also will earn
a promoted interest, along with CREA, above a 10% preferred
return after return of capital, to fund investors. The retail
properties at December 31, 2006, are as follows:
|
|
|
|
|
|
|
|
|
DDR
|
|
|
|
|
|
Effective
|
|
|
Owned
|
|
|
Ownership
|
|
|
Square Feet
|
Location
|
|
Interest(1)
|
|
|
(Thousands)
|
|
Phoenix, Arizona
|
|
|
20
|
%
|
|
391
|
Buena Park, California
|
|
|
20
|
%
|
|
724
|
Orland Park, Illinois
|
|
|
10
|
%
|
|
58
|
Merriam, Kansas
|
|
|
20
|
%
|
|
Under Development
|
Benton Harbor, Michigan
|
|
|
20
|
%
|
|
223
|
Bloomfield Hills, Michigan
|
|
|
10
|
%
|
|
Under Development
|
Kansas City, Missouri
|
|
|
20
|
%
|
|
358
|
Cincinnati, Ohio
|
|
|
18
|
%
|
|
668
|
Allen, Texas
|
|
|
10
|
%
|
|
Under Development
|
San Antonio (Westover), Texas
|
|
|
10
|
%
|
|
188
|
Kirkland, Washington
|
|
|
20
|
%
|
|
228
|
50 retail sites in several states
formerly occupied by Service Merchandise
|
|
|
20
|
%
|
|
2,691
|
|
|
(1)
|
The Fund invested in certain assets with development partners,
as such, the Companys effective interest may be less than
20%.
|
Retail
Value Fund
In February 1998, the Company and an equity affiliate of the
Company entered into an agreement with Prudential Real Estate
Investors (PREI) and formed the Retail Value Fund
(the PREI Fund). The PREI Funds ownership
interests in each of the projects, unless discussed otherwise,
are generally structured with the Company owning (directly or
through its interest in the management service company) a 24.75%
limited partnership interest, PREI owning a 74.25% limited
partnership interest and Coventry Real Estate Partners
(Coventry), which was 75% owned by a consolidated
entity of the Company, owning (directly or through its interest
in the management service company) (Note 22) a 1%
general partnership interest. The PREI Fund invests in retail
properties within the United States that are in need of
substantial re-tenanting and market repositioning and may also
make equity and debt investments in companies owning or managing
retail properties as well as in third party development projects
that provide significant growth opportunities. The retail
property investments may include enclosed malls, neighborhood
and community centers or other potential retail commercial
development and redevelopment opportunities.
F-21
The PREI Fund owned the following shopping center investments at
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
DDR
|
|
|
|
|
|
|
Effective
|
|
|
Company-Owned
|
|
|
|
Ownership
|
|
|
Square Feet
|
|
Location
|
|
Interest
|
|
|
(Thousands)
|
|
|
Deer Park, Illinois
|
|
|
25.5
|
%
|
|
|
287
|
|
Kansas City, Kansas
|
|
|
25.5
|
%
|
|
|
61
|
|
Austin, Texas
|
|
|
25.5
|
%
|
|
|
283
|
|
In 2006, four shopping centers in Kansas City, Kansas, and
Kansas City, Missouri, aggregating 0.4 million square feet,
were sold for approximately $20.0 million. The joint
venture recognized a loss of approximately $1.8 million, of
which the Companys proportionate share was approximately
$0.5 million.
In addition, in 2000 the PREI Fund entered into an agreement to
acquire ten properties located in western states from Burnham
Pacific Properties, Inc. (Burnham), with PREI owning
a 79% interest, the Company owning a 20% interest and Coventry
owning a 1% interest. The Company earns fees for managing and
leasing the properties. At December 31, 2006, the joint
venture owned two of these properties. The properties sold in
2006, 2005 and 2004 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
|
|
|
Companys
|
|
|
|
Number of
|
|
Sale
|
|
|
Venture
|
|
|
Proportionate
|
|
|
|
Properties
|
|
Price
|
|
|
Gain
|
|
|
Share of Gain
|
|
Year
|
|
Sold
|
|
(Millions)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
2006
|
|
One
|
|
$
|
8.1
|
|
|
$
|
3.7
|
|
|
$
|
1.2
|
|
2005
|
|
Three (1)
|
|
|
73.3
|
|
|
|
21.1
|
|
|
|
6.7
|
|
2004
|
|
One (1)
|
|
|
84.2
|
|
|
|
18.6
|
|
|
|
6.0
|
|
|
|
|
(1)
|
|
One of the properties was sold over
a two-year period. A majority of the shopping center was sold in
2004 and the outparcels were sold in 2005.
|
As discussed above, Coventry generally owns a 1% interest in
each of the PREI Funds investments. Coventry is entitled
to receive an annual asset management fee equal to 0.5% of total
assets for the Kansas City properties and the property in Deer
Park, Illinois. Except for the PREI Funds investment
associated with properties acquired from Burnham, Coventry is
entitled to one-third of all profits (as defined), after the
limited partners have received a 10% preferred return and
previously advanced capital. The remaining two-thirds of the
profits (as defined) in excess of the 10% preferred return are
split proportionately among the limited partners.
With regard to the PREI Funds investment associated with
the acquisition of shopping centers from Burnham, Coventry has a
1% general partnership interest. Coventry also receives annual
asset management fees equal to 0.8% of total revenue collected
from these assets, plus a minimum of 25% of all amounts in
excess of an 11% annual preferred return to the limited
partners, that could increase to 35% if returns to the limited
partners exceed 20%.
Management
Service Companies
The Company owns a 50% equity ownership interest in a management
and development company in St. Louis, Missouri.
KLA/SM
Joint Venture
The Company entered into a joint venture in 2002 with
Lubert-Adler Real Estate Funds and Klaff Realty, L.P.
(Note 17), that was awarded asset designation rights for
all of the retail real estate interests of the bankrupt estate
of Service Merchandise Corporation for approximately
$242 million. The Company had an approximate 25% interest
in the joint venture (KLA/SM). In addition, the
Company earned fees for the management, leasing, development and
disposition of the real estate portfolio. The designation rights
enabled the joint venture to determine the ultimate disposition
of the real estate interests held by the bankrupt estate.
In August 2006, the Company purchased its then partners
approximately 75% interest in the remaining 52 assets formerly
occupied by Service Merchandise owned by the KLA/SM Joint
Venture at a gross purchase price of
F-22
approximately $138 million relating to the partners
approximate 75% ownership interest, based on a total valuation
of approximately $185 million for all remaining assets,
including outstanding indebtedness.
In September 2006, the Company sold 51 of these assets to the
Service Holdings LLC at a gross purchase price of approximately
$185 million and assumed debt of approximately
$29 million. The Company has a 20% interest in the newly
formed joint venture. The Company recorded a gain of
approximately $6.1 million.
The Service Merchandise site dispositions by the KLA/SM Joint
Venture are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Joint
|
|
|
Companys
|
|
|
|
Number of
|
|
Sales
|
|
|
Venture
|
|
|
Proportionate
|
|
|
|
Properties
|
|
Price
|
|
|
Gain
|
|
|
Share of Gain
|
|
Year
|
|
Sold
|
|
(Millions)
|
|
|
(Millions)
|
|
|
(Millions)
|
|
|
2006
|
|
One
|
|
$
|
3.2
|
|
|
$
|
0.2
|
(1)
|
|
$
|
|
(1)
|
2005
|
|
Eight
|
|
|
19.4
|
|
|
|
7.6
|
|
|
|
1.9
|
|
2004
|
|
Ten
|
|
|
20.7
|
|
|
|
2.0
|
|
|
|
0.5
|
|
|
|
|
(1)
|
|
Less than $0.1 million.
|
The Company also earned disposition, development, management,
leasing fees and interest income aggregating $5.7 million,
$6.4 million and $2.6 million in 2006, 2005 and 2004,
respectively, relating to this investment.
Adoption
of FIN 46 (Note 1) and EITF
04-05
In 2006, as a result of the adoption of EITF
04-5,
the
Company consolidated one limited partnership with total assets
and liabilities of $24.4 million and $17.7 million,
respectively, which were consolidated into the Companys
financial statements.
In 2004, the Company recorded a charge of $3.0 million as a
cumulative effect of adoption of a new accounting standard
attributable to the consolidation of a 50% owned shopping center
in Martinsville, Virginia. This amount represents the minority
partners share of cumulative losses in excess of its cost
basis in the partnership.
Acquisitions
of Joint Venture Interests by the Company
The Company purchased its joint venture partners interest
in the following shopping centers in 2006, 2005 and 2004:
|
|
|
|
|
A 20% interest in a shopping center in Columbus, Ohio, purchased
in 2005;
|
|
|
|
A 20% interest in a shopping center development in Apex, North
Carolina, purchased in 2006;
|
|
|
|
A 50% interest in a shopping center in Phoenix, Arizona,
purchased in 2006;
|
|
|
|
A 50% interest in a shopping center in Littleton, Colorado,
purchased in 2004;
|
|
|
|
A 50% interest in a shopping center in Salisbury, Maryland,
purchased in 2006 and
|
|
|
|
A 75% interest in a shopping center in Pasadena, California,
purchased in 2006.
|
The MDT Joint Venture acquired the interest in one shopping
center owned through other joint venture interests in 2004.
Discontinued
Operations
Included in discontinued operations in the combined statements
of operations for the joint ventures are the following
properties sold subsequent to December 31, 2003:
|
|
|
|
|
A 10% interest in a shopping center in Kildeer, Illinois, sold
in 2006;
|
|
|
|
A 20.75% interest in five properties held in the PREI Fund
originally acquired from Burnham. The shopping center in
Everett, Washington, was sold in 2006. The shopping centers in
City of Industry,
|
F-23
|
|
|
|
|
California; Richmond, California and San Ysidro, California,
were sold in 2005. The shopping center Mission Viejo,
California, was sold in 2004;
|
|
|
|
|
|
A 24.75% interest in a property held in the PREI Fund in Long
Beach, California, sold in 2005;
|
|
|
|
A 24.75% interest in four properties held in the PREI Fund in
Kansas City, Kansas and Kansas City, Missouri, sold in 2006;
|
|
|
|
An approximate 25% interest in one, eight and ten Service
Merchandise sites sold in 2006, 2005 and 2004, respectively;
|
|
|
|
A 20% interest in a Service Merchandise site sold in 2006;
|
|
|
|
A 35% interest in a shopping center in San Antonio, Texas, sold
in 2004 and
|
|
|
|
A 50% interest in a property held in Community Centers Five in
Fort Worth, Texas, sold in 2006.
|
The following properties were sold for the period January 1, 2007 through June 30, 2007:
|
|
|
|
|
A 20% interest in four Service Merchandise sites and
|
|
|
|
A 25.5% effectively-owned shopping center.
|
3. DDR MDT PS LLC
During the second quarter of 2006, the Company sold six properties, aggregating 0.8 million
owned square feet, to a newly formed joint venture with MDT (MDT Preferred Joint Venture or DDR
MDT PS LLC), for approximately $122.7 million and recognized gains of approximately $38.9 million.
Under the terms of the new MDT Preferred Joint Venture, MDT receives a 9% preferred return on
its preferred equity investment of approximately $12.2 million and then receives a 10% return on
its common equity investment of approximately $20.8 million before the Company receives a 10%
return on an agreed upon common equity investment of $3.5 million that has not been recognized in
the consolidated balance sheet due to the terms of its subordination. The Company is then entitled
to a 20% promoted interest in any cash flow achieved above a 10% leveraged internal rate of return
on all common equity. The Company recognizes its proportionate share of equity in earnings of the
MDT Preferred Joint Venture at an amount equal to increases in its common equity investment, based
upon an assumed liquidation, including consideration of cash received, of the joint venture at its
depreciated book value as of the end of each reporting period. The Company has not recorded any
equity in earnings from the MDT Preferred Joint Venture as of December 31, 2006.
The Company has been engaged to perform all day-to-day operations of the properties and earns
and/or may be entitled to receive ongoing fees for property management, leasing and construction
management, in addition to a promoted interest, along with other periodic fees such as financing
fees.
At December 31, 2006, the Companys investment in DDR MDT PS LLC was considered a significant
subsidiary pursuant to the applicable Regulation S-X rules.
During the year ended December 31, 2006, the Company recognized a gain, of
approximately $38.9 million relating to the contribution of the assets to the joint venture.
Condensed financial information of DDR MDT PS LLC is as follows (in thousands):
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
Balance sheet
|
|
|
|
|
Land
|
|
$
|
31,430
|
|
Buildings
|
|
|
85,152
|
|
Fixtures and tenant improvements
|
|
|
1,177
|
|
Construction in progress
|
|
|
12
|
|
|
|
|
|
|
|
|
117,771
|
|
Less: Accumulated depreciation
|
|
|
(1,338
|
)
|
|
|
|
|
Real estate, net
|
|
|
116,433
|
|
Receivables, net
|
|
|
4,121
|
|
Other assets
|
|
|
3,070
|
|
|
|
|
|
|
|
$
|
123,624
|
|
|
|
|
|
Mortgage debt
|
|
$
|
86,000
|
|
Amounts payable to DDR
|
|
|
30
|
|
Other liabilities
|
|
|
1,744
|
|
|
|
|
|
|
|
|
87,774
|
|
Accumulated equity
|
|
|
35,850
|
|
|
|
|
|
|
|
$
|
123,624
|
|
|
|
|
|
Companys share of accumulated equity
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year
|
|
|
|
Ended
|
|
|
|
December 31, 2006
|
|
Statements of operations
|
|
|
|
|
Revenues from operations
|
|
$
|
6,255
|
|
|
|
|
|
Rental operation expenses
|
|
|
2,481
|
|
Depreciation and amortization expense
|
|
|
1,556
|
|
Interest expense
|
|
|
3,030
|
|
|
|
|
|
|
|
|
7,067
|
|
|
|
|
|
Net loss
|
|
$
|
(812
|
)
|
|
|
|
|
Companys share of equity in net loss of joint
ventures
|
|
$
|
|
|
|
|
|
|
4. Acquisitions
and Pro Forma Financial Information
Acquisitions
In 2005, the Mervyns Joint Venture acquired the underlying real
estate of 36 operating Mervyns stores for approximately
$396.2 million. The assets were acquired from several
funds, one of which was managed by Lubert-Adler Real Estate
Funds (Note 17). The Mervyns Joint Venture, owned
approximately 50% by the Company and 50% by MDT, obtained
approximately $258.5 million of debt, of which
$212.6 million is a five-year secured non-recourse
financing at a fixed rate of approximately 5.2%, and
$45.9 million is at LIBOR plus 72 basis points for two
years. In 2006, the Mervyns Joint Venture purchased one
additional site for approximately $11.0 million and the
Company purchased one additional site for approximately
$12.4 million. The Company is responsible for the
day-to-day
management of the assets and receives fees in accordance with
the same fee schedule as the MDT Joint Venture for property
management services.
During 2005, the Company received approximately
$2.5 million of acquisition and financing fees in
connection with the acquisition of the Mervyns assets. Pursuant
to FIN 46(R), the Company is required to consolidate the
Mervyns Joint Venture and, therefore, the $2.5 million of
fees has been eliminated in consolidation and has been reflected
as an adjustment in basis and is not reflected in net income.
In 2005, the Company completed the acquisition of 15 retail real
estate assets located in Puerto Rico from Caribbean Property
Group, LLC and related entities (CPG) for
approximately $1.2 billion (CPG Properties).
The financing for the transaction was provided by the assumption
of approximately $660 million of existing debt and line of
credit borrowings on the Companys senior unsecured credit
facility and the application of a $30 million deposit
funded in 2004. Included in the assets acquired are the land,
building and tenant improvements associated with the underlying
real estate. The other assets allocation of $12.6 million
relates primarily to in-place leases, leasing commissions,
tenant relationships and tenant improvements of the properties
(Note 7). There was a separate allocation in the purchase
price of $8.1 million for above-market leases and
$1.4 million for below-market leases. The Company entered
into this transaction to obtain a shopping center portfolio in
Puerto Rico, a market where the Company previously did not have
any assets.
In 2004, the Company entered into an agreement to purchase
interests in 110 retail real estate assets, with approximately
18.8 million square feet of GLA, from Benderson Development
Company and related entities (Benderson). The
purchase price of the assets, including associated expenses, was
approximately $2.3 billion, less assumed debt and the value
of a 2% equity interest in certain assets valued at
approximately $16.2 million at December 31, 2005, that
Benderson converted its interest into the Companys common
shares in 2006 (Note 13). Benderson transferred a 100%
ownership in certain assets or entities owning certain assets.
The remaining assets were held by a joint venture in which the
Company held a 98.0% interest and Benderson held a 2.0%
interest. Bendersons minority interest was classified as
operating partnership minority interests on the Companys
consolidated balance sheet at December 31, 2005.
F-24
The Company completed the purchase of 107 properties from
Benderson, including 14 purchased directly by the MDT Joint
Venture (Note 2) and 52 held by a consolidated joint
venture with Benderson at various dates commencing May 14,
2004, through December 21, 2004. The remaining three
properties were not acquired.
The Company funded the transaction through a combination of new
debt financing of approximately $450 million, net proceeds
of approximately $164.2 million from the issuance of
6.8 million cumulative preferred shares, net proceeds of
approximately $491 million from the issuance of
15.0 million common shares, asset transfers to the MDT
Joint Venture that generated net proceeds of approximately
$194.3 million (Note 2), line of credit borrowings and
assumed debt. With respect to the assumed debt, the fair value
was approximately $400 million, which included an
adjustment of approximately $30 million to increase its
stated principal balance, based on rates for debt with similar
terms and remaining maturities as of May 2004. Included in the
assets acquired were the land, building and tenant improvements
associated with the underlying real estate. The other assets
allocation of $30.9 million relates primarily to in-place
leases, leasing commissions, tenant relationships and tenant
improvements of the properties (Note 7). There was a
separate allocation in the purchase price of $4.7 million
for certain below-market leases. The Company entered into this
transaction to acquire the largest privately owned retail
shopping center portfolio in markets where the Company
previously did not have a strong presence.
Pro Forma
Financial Information
The following unaudited supplemental pro forma operating data is
presented for the year ended December 31, 2005, as if the
acquisition of the CPG Properties were completed on
January 1, 2005. The following unaudited supplemental pro
forma operating data is presented for the year ended
December 31, 2004, as if the acquisition of the CPG
Properties, the common share offering completed in December 2004
and the acquisition of the properties from Benderson and related
financing activity, including the sale of eight wholly-owned
assets to the MDT Joint Venture, were completed on
January 1, 2004.
These acquisitions were accounted for using the purchase method
of accounting. The revenues and expenses related to assets and
interests acquired are included in the Companys historical
results of operations from the date of purchase.
F-25
The pro forma financial information is presented for
informational purposes only and may not be indicative of what
actual results of operations would have been had the
acquisitions occurred as indicated, nor does it purport to
represent the results of the operations for future periods (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended
|
|
|
|
December 31,
|
|
|
|
(Unaudited)
|
|
|
|
2005
|
|
|
2004
|
|
|
Pro forma revenues
|
|
$
|
690,793
|
|
|
$
|
704,865
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from continuing
operations
|
|
$
|
163,294
|
|
|
$
|
197,364
|
|
|
|
|
|
|
|
|
|
|
Pro forma income from discontinued
operations
|
|
$
|
32,760
|
|
|
$
|
29,784
|
|
|
|
|
|
|
|
|
|
|
Pro forma income before cumulative
effect of adoption of a new accounting standard
|
|
$
|
284,194
|
|
|
$
|
311,790
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income applicable to
common shareholders
|
|
$
|
229,025
|
|
|
$
|
253,620
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders
|
|
$
|
1.81
|
|
|
$
|
2.11
|
|
Income from discontinued operations
|
|
|
0.30
|
|
|
|
0.28
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
2.11
|
|
|
$
|
2.36
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders
|
|
$
|
1.80
|
|
|
$
|
2.09
|
|
Income from discontinued operations
|
|
|
0.30
|
|
|
|
0.28
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
2.10
|
|
|
$
|
2.34
|
|
|
|
|
|
|
|
|
|
|
The supplemental pro forma financial information does not
present the acquisitions described below or the disposition of
real estate assets.
During the year ended December 31, 2006, the Company
acquired its partners interests, at an initial aggregate
investment of approximately $94.1 million, net of mortgages
assumed, in the following joint venture properties:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company-
|
|
|
|
|
|
|
Owned
|
|
|
|
Interest
|
|
|
Square Feet
|
|
|
|
Acquired
|
|
|
(Thousands)_
|
|
|
Phoenix, Arizona
|
|
|
50%
|
|
|
|
197
|
|
Pasadena, California
|
|
|
75%
|
|
|
|
557
|
|
Salisbury, Maryland
|
|
|
50%
|
|
|
|
126
|
|
Apex, North Carolina
|
|
|
80%/20%
|
|
|
|
324
|
|
San Antonio, Texas
|
|
|
50%
|
|
|
|
Under Development
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,204
|
|
|
|
|
|
|
|
|
|
|
Additionally, the Company acquired one Mervyns site for
approximately $12.4 million (Note 17).
During the year ended December 31, 2005, the Company
acquired its partners 20% interest in one joint venture.
This property aggregates approximately 0.4 million square
feet of Company-owned GLA at an initial aggregate investment of
approximately $3.2 million. Additionally, the Company
acquired one Mervyns site for approximately $14.4 million
(Note 17).
F-26
During the year ended December 31, 2004, the Company
acquired a 20% interest in two shopping centers and an effective
10% interest in a shopping center and its partners 50%
interest in a joint venture. These four properties aggregate
approximately 2.4 million square feet of Company-owned GLA
at an initial aggregate investment of approximately
$180 million.
5. Notes Receivable
The Company owns notes receivables aggregating
$18.2 million and $25.0 million, including accrued
interest, at December 31, 2006 and 2005, respectively,
which are classified as held to maturity. The notes are secured
by certain rights in future development projects and partnership
interests. The notes bear interest ranging from 6.9% to 12.0%
with maturity dates ranging from payment on demand through July
2026.
Included in notes receivable are $16.5 million and
$23.2 million of tax incremental financing bonds or notes
(TIF Bonds), plus accrued interest at
December 31, 2006 and 2005, respectively, from the Town of
Plainville, Connecticut (the Plainville Bonds), the
City of Merriam, Kansas (the Merriam Bonds), and the
City of St. Louis, Missouri (the Southtown Notes).
The Plainville Bonds, with a principal balance of
$7.1 million and $7.2 million at December 31,
2006 and 2005, respectively, mature in April 2021 and bear
interest at 7.125%. The Merriam Bonds, with a principal balance
of $7.1 million and $8.0 million at December 31,
2006 and 2005, respectively, mature in February 2016 and bear
interest at 6.9%. The Southtown Notes, with a principal balance
of $2.3 million and $8.0 million at December 31,
2006 and 2005, respectively, mature in July 2026 and bear
interest ranging from 7.13% to 8.50%. Interest and principal are
payable solely from the incremental real estate taxes, if any,
generated by the respective shopping center and development
project pursuant to the terms of the financing agreement.
6. Deferred
Charges
Deferred charges consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Deferred financing costs
|
|
$
|
39,748
|
|
|
$
|
31,681
|
|
Less: Accumulated amortization
|
|
|
(16,040
|
)
|
|
|
(10,524
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,708
|
|
|
$
|
21,157
|
|
|
|
|
|
|
|
|
|
|
The Company incurred deferred financing costs aggregating
$9.6 million and $13.1 million in 2006 and 2005,
respectively. Deferred financing costs paid in 2006 primarily
relate to the modification of the Companys unsecured
credit agreements and expansion of term loans
(Note 8) and issuance of convertible notes
(Note 9). Deferred financing costs paid in 2005 primarily
relate to the modification of the Companys unsecured
revolving credit agreements and term loan (Note 8),
issuance of medium term notes (Note 9) and mortgages
payable (Note 10) obtained in connection with the
Mervyns Joint Venture. Amortization of deferred charges was
$7.1 million, $6.1 million and $5.6 million for
the years ended December 2006, 2005 and 2004, respectively.
F-27
7. Other
Assets
Other assets consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
In-place leases (including lease
origination costs and fair market value of leases), net
|
|
$
|
1,485
|
|
|
$
|
2,568
|
|
Tenant relations, net
|
|
|
12,969
|
|
|
|
14,538
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets
|
|
|
14,454
|
|
|
|
17,106
|
|
Other assets:
|
|
|
|
|
|
|
|
|
Fair value hedge
|
|
|
|
|
|
|
292
|
|
Prepaids, deposits and other assets
|
|
|
65,013
|
|
|
|
44,657
|
|
|
|
|
|
|
|
|
|
|
Total other assets
|
|
$
|
79,467
|
|
|
$
|
62,055
|
|
|
|
|
|
|
|
|
|
|
The amortization period of the in-place leases and tenant
relations is approximately two to 31 years and ten years,
respectively. The Company recorded amortization expense of
approximately $5.5 million, $6.1 million and
$4.0 million for the years ended December 31, 2006,
2005 and 2004, respectively. The estimated amortization expense
associated with the Companys intangible assets is
$3.0 million, $2.9 million, $2.9 million,
$2.9 million and $2.0 million for the years ending
December 31, 2007, 2008, 2009, 2010 and 2011, respectively.
Other assets consist primarily of deposits, land options and
other prepaid expenses.
8. Revolving
Credit Facilities and Term Loans
The Company maintains its primary unsecured revolving credit
facility with a syndicate of financial institutions, for which
JP Morgan serves as the administrative agent (the
Unsecured Credit Facility). The Unsecured Credit
Facility was amended in June 2006. As a result of the amendment,
the borrowing capacity on the Unsecured Credit Facility
increased from $1.0 billion to $1.2 billion, provided
for an accordion feature of a future expansion to
$1.4 billion, extended the maturity date to June 2010, with
a one-year extension option, and amended the pricing. The
Unsecured Credit Facility includes a competitive bid option on
periodic interest rates for up to 50% of the facility. The
Companys borrowings under the Unsecured Credit Facility
bear interest at variable rates at the Companys election,
based on the prime rate as defined in the facility or LIBOR,
plus a specified spread (0.60% at December 31, 2006). The
specified spread over LIBOR varies depending on the
Companys long-term senior unsecured debt rating from
Standard and Poors and Moodys Investors Service. The
Company is required to comply with certain covenants relating to
total outstanding indebtedness, secured indebtedness,
maintenance of unencumbered real estate assets and fixed charge
coverage. The Unsecured Credit Facility is used to finance the
acquisition, development and expansion of shopping center
properties, to provide working capital and for general corporate
purposes. At December 31, 2006 and 2005, total borrowings
under the Unsecured Credit Facility aggregated
$297.5 million and $150.0 million, respectively, with
a weighted average interest rate of 5.6% and 4.6%, respectively.
The Company also maintains a $60 million unsecured
revolving credit facility with National City Bank (together with
the $1.2 billion Unsecured Credit Facility, the
Revolving Credit Facilities). This facility was also
amended in June 2006 to extend the maturity date to June 2010
and to reflect terms consistent with those contained in the
Unsecured Credit Facility. Borrowings under the facility bear
interest at variable rates based on the prime rate as defined in
the facility or LIBOR plus a specified spread (0.60% at
December 31, 2006). The specified spread over LIBOR is
dependent on the Companys long-term senior unsecured debt
rating from Standard and Poors and Moodys Investors
Service. The Company is required to comply with certain
covenants relating to total outstanding indebtedness, secured
indebtedness, maintenance of unencumbered real estate assets and
fixed charge coverage. At December 31, 2006 and 2005, there
were no borrowings outstanding.
F-28
The Company also maintains term loan facilities (collectively
the Term Loans) with various lenders. These loans
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings
|
|
|
Weighted
|
|
|
|
Spread
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
|
Over
|
|
|
|
|
|
(Millions)
|
|
|
Interest Rate
|
|
|
|
LIBOR
|
|
|
Maturity
|
|
|
December 31
|
|
|
December 31
|
|
Financial Institution
|
|
12/31/06
|
|
|
Date
|
|
|
2006
|
|
|
2005
|
|
|
2006
|
|
|
2005
|
|
|
Key Bank Capital Markets and Banc
of America Securities LLC (1)
|
|
|
0.85
|
%
|
|
|
June 2008
|
|
|
$
|
400.0
|
|
|
$
|
220.0
|
|
|
|
5.9
|
%
|
|
|
5.1
|
%
|
JP Morgan and several other
lenders (2)
|
|
|
0.75
|
%
|
|
|
May 2007
|
|
|
|
|
|
|
$
|
200.0
|
|
|
|
|
|
|
|
5.1
|
%
|
|
|
|
(1)
|
|
Facility allows for two one-year
extension options. In 2006, the facility was amended to add an
accordion feature to increase the loan, at the Companys
option, up to $500 million and covenant modifications. The
Term Loan is secured by the equity in certain assets that are
already encumbered by first mortgages. The weighted average
interest rate at December 31, 2006 reflects the effect of
$400 million of interest rate swaps (Note 11).
|
|
(2)
|
|
This facility was repaid in 2006.
|
For each of the Term Loans, the spread is dependent on the
Companys corporate credit ratings from Standard &
Poors and Moodys Investors Service. The Term Loans
are subject to the same covenants associated with the Unsecured
Credit Facility.
Total fees paid by the Company on its Revolving Credit
Facilities and Term Loans in 2006, 2005 and 2004 aggregated
approximately $1.7 million, $2.0 million and
$1.7 million, respectively. At December 31, 2006 and
2005, the Company was in compliance with all of the financial
and other covenant requirements.
9. Fixed-Rate
Notes
The Company had outstanding unsecured notes of approximately
$2.2 billion and $2.0 billion at December 31,
2006 and 2005, respectively. Several of the notes were issued at
a discount aggregating $3.9 million and $6.0 million
at December 31, 2006 and 2005, respectively. The effective
interest rates of the unsecured notes range from 3.9% to 8.4%
per annum.
In August 2006, the Company issued $250 million of Senior
Convertible Notes due 2011 (the Senior Convertible
Notes). The Senior Convertible Notes have an initial
conversion price of $65.11 per share into the Companys
common shares or cash, at the option of the Company. In
connection with the issuance of these notes, the Company entered
into a registration rights agreement for the common shares that
may be issuable upon conversion of the Senior Convertible Notes.
Concurrent with the issuance of the Senior Convertible Notes,
the Company purchased an option on its common stock in a private
transaction, effectively increasing the conversion price of the
notes to $74.41 per common share. This option allows the Company
to receive shares of the Companys common stock (up to a
maximum of approximately 480,000 shares) from
counterparties equal to the amounts of common stock and/or cash
related to the excess conversion value that the Company would
pay to the holders of the Senior Convertible Notes upon
conversion. The option will terminate upon the earlier of the
maturity dates of the related Senior Convertible Notes or the
first day all of the related Senior Convertible Notes are no
longer outstanding due to conversion or otherwise. The option,
which cost $10.3 million, was recorded as a reduction of
shareholders equity.
The fixed-rate notes have maturities ranging from March 2007 to
July 2018. Interest coupon rates ranged from approximately 3.5%
to 7.5% (averaging 5.1% and 5.3% at December 31, 2006 and
2005, respectively). Notes issued prior to December 31,
2001, aggregating $212.0 million, may not be redeemed by
the Company prior to maturity and will not be subject to any
sinking fund requirements. Notes issued subsequent to 2001 and
the notes assumed with the JDN merger, aggregating
$1.4 billion at December 31, 2006, may be redeemed
based upon a yield maintenance calculation. The notes issued in
October 2005 (aggregating $348.6 million) are redeemable
prior to maturity at par value plus a make-whole premium. If the
notes issued in October 2005 are redeemed within 90 days of
the maturity date, no make-whole premium will be paid. The
Senior Convertible Notes aggregating $250 million may be
converted prior to maturity into cash equal to the lesser of the
principal amount of the note or the conversion value and, to the
extent the conversion value exceeds the principal amount of the
note, shares of the Companys
F-29
common stock. The fixed-rate senior notes and Senior Convertible
Notes were issued pursuant to an indenture dated May 1,
1994, as amended, which contains certain covenants including
limitation on incurrence of debt, maintenance of unencumbered
real estate assets and debt service coverage. Interest is paid
semi-annually in arrears.
10. Mortgages
Payable and Scheduled Principal Repayments
At December 31, 2006, mortgages payable, collateralized by
investments and real estate with a net book value of
approximately $2.5 billion and related tenant leases, are
generally due in monthly installments of principal and/or
interest and mature at various dates through 2028. Fixed-rate
debt obligations included in mortgages payable at
December 31, 2006 and 2005, aggregated approximately
$1,140.9 million and $1,173.3 million, respectively.
Fixed interest rates ranged from approximately 4.4% to 10.2%
(averaging 6.6% at both December 31, 2006 and 2005).
Variable- rate debt obligations totaled approximately
$192.4 million and $181.4 million at December 31,
2006 and 2005, respectively. Interest rates on the variable-rate
debt averaged 6.2% and 5.3% at December 31, 2006 and 2005,
respectively.
Included in mortgage debt are $14.1 million and
$15.1 million of tax-exempt certificates with a weighted
average fixed interest rate of 7.0% at December 31, 2006
and 2005, respectively. As of December 31, 2006, the
scheduled principal payments of the Revolving Credit Facilities,
Term Loans, fixed-rate senior notes and mortgages payable for
the next five years and thereafter are as follows (in thousands):
|
|
|
|
|
Year
|
|
Amount
|
|
|
2007
|
|
$
|
428,609
|
|
2008
|
|
|
664,517
|
|
2009
|
|
|
391,870
|
|
2010
|
|
|
1,059,147
|
|
2011
|
|
|
704,340
|
|
Thereafter
|
|
|
1,000,329
|
|
|
|
|
|
|
|
|
$
|
4,248,812
|
|
|
|
|
|
|
Included in principal payments are $400 million in the year
2008 and $297.5 million in the year 2010, associated with
the maturing of the Term Loans and the Revolving Credit
Facilities, respectively.
11. Financial
Instruments
The following methods and assumptions were used by the Company
in estimating fair value disclosures of financial instruments:
Cash and
cash equivalents, accounts receivable, accounts payable,
accruals and other liabilities
The carrying amounts reported in the balance sheet for these
financial instruments approximated fair value because of their
short-term maturities. The carrying amount of straight-line
rents receivable does not materially differ from its fair market
value.
Notes
receivable and advances to affiliates
The fair value is estimated by discounting the current rates at
which management believes similar loans would be made. The fair
value of these notes was approximately $29.0 million and
$129.9 million at December 31, 2006 and 2005,
respectively, as compared to the carrying amounts of
$28.4 million and $127.7 million, respectively. The
carrying value of the TIF Bonds (Note 5) approximated
its fair value at December 31, 2006 and 2005. The fair
value of loans to affiliates is not readily determinable and has
been estimated by management based upon its assessment of the
interest rate and credit risk.
F-30
Debt
The carrying amounts of the Companys borrowings under its
Revolving Credit Facilities and Term Loans approximate fair
value because such borrowings are at variable rates and the
spreads are typically adjusted to reflect changes in the
Companys credit rating. The fair value of the fixed-rate
senior notes is based on borrowings with a similar remaining
maturity based on the Companys estimated interest rate
spread over the applicable treasury rate or quoted market price.
Fair value of the mortgages payable is estimated using a
discounted cash flow analysis, based on the Companys
incremental borrowing rates for similar types of borrowing
arrangements with the same remaining maturities.
Considerable judgment is necessary to develop estimated fair
values of financial instruments. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
the Company could realize on disposition of the financial
instruments.
Financial instruments at December 31, 2006 and 2005, with
carrying values that are different than estimated fair values,
are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
Senior notes
|
|
$
|
2,218,020
|
|
|
$
|
2,221,553
|
|
|
$
|
1,966,268
|
|
|
$
|
1,960,210
|
|
Term Loans
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
420,000
|
|
|
|
420,000
|
|
Mortgages payable
|
|
|
1,333,292
|
|
|
|
1,347,501
|
|
|
|
1,354,733
|
|
|
|
1,387,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,951,312
|
|
|
$
|
3,969,054
|
|
|
$
|
3,741,001
|
|
|
$
|
3,767,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounting
Policy for Derivative and Hedging Activities
All derivatives are recognized on the balance sheet at their
fair value. On the date that the Company enters into a
derivative, it designates the derivative as a hedge against the
variability of cash flows that are to be paid in connection with
a recognized liability or forecasted transaction. Subsequent
changes in the fair value of a derivative designated as a cash
flow hedge that is determined to be highly effective are
recorded in other comprehensive income (loss), until earnings
are affected by the variability of cash flows of the hedged
transaction. Any hedge ineffectiveness is reported in current
earnings.
From time to time, the Company enters into interest rate swaps
to convert certain fixed-rate debt obligations to a floating
rate (a fair value hedge). This is consistent with
the Companys overall interest rate risk management
strategy to maintain an appropriate balance of fixed-rate and
variable-rate borrowings. Changes in the fair value of
derivatives that are highly effective and that are designated
and qualify as a fair value hedge, along with changes in the
fair value of the hedged liability that are attributable to the
hedged risk, are recorded in current-period earnings. If hedge
accounting is discontinued due to the Companys
determination that the relationship no longer qualified as an
effective fair value hedge, the Company will continue to carry
the derivative on the balance sheet at its fair value but cease
to adjust the hedged liability for changes in fair value.
The Company formally documents all relationships between hedging
instruments and hedged items, as well as its risk management
objective and strategy for undertaking various hedge
transactions. The Company formally assesses (both at the
hedges inception and on an ongoing basis) whether the
derivatives that are used in hedging transactions have been
highly effective in offsetting changes in the cash flows of the
hedged items and whether those derivatives may be expected to
remain highly effective in future periods. Should it be
determined that a derivative is not (or has ceased to be) highly
effective as a hedge, the Company will discontinue hedge
accounting on a prospective basis.
Risk
Management
The Company enters into derivative contracts to minimize
significant unplanned fluctuations in earnings that are caused
by interest rate volatility or in the case of a fair value hedge
to minimize the impacts of changes in the fair value of the
debt. The Company does not typically utilize these arrangements
for trading or speculative purposes.
F-31
The principal risk to the Company through its interest rate
hedging strategy is the potential inability of the financial
institutions, from which the interest rate swaps were purchased,
to cover all of their obligations. To mitigate this exposure,
the Company purchases its interest rate swaps from major
financial institutions.
Cash Flow
Hedges
In 2006, the Company entered into five interest rate swaps with
notional amounts aggregating $500 million
($200 million for a three-year term and $300 million
for a four-year term). Interest rate swaps aggregating
$400 million effectively convert Term Loan floating rate
debt into a fixed rate of approximately 5.9%. Interest rate
swaps aggregating $100 million effectively convert
Revolving Credit Facilities floating rate debt into a fixed rate
of approximately 5.25%. As of December 31, 2006, the
aggregate fair value of the Companys interest rate swaps
was a liability of $1.1 million, which is included in other
liabilities in the consolidated balance sheets. For the year
ended December 31, 2006, the amount of hedge
ineffectiveness was not material.
All components of the interest rate swaps were included in the
assessment of hedge effectiveness. The Company expects that
within the next 12 months it will reflect as an increase to
earnings $0.9 million of the amount recorded in accumulated
other comprehensive income. The fair value of the interest rate
swaps is based upon the estimated amounts the Company would
receive or pay to terminate the contracts at the reporting date
and is determined using interest rate market pricing models.
In March 2002, the Company entered into an interest rate swap
agreement, with a notional amount of $60 million for a
five-year term, effectively converting a portion of the
outstanding fixed-rate debt under a fixed-rate senior note to a
variable rate of six-month LIBOR.
Swaptions
In anticipation of the joint venture with TIAA-CREF
(Note 22), an affiliate of the Company purchased two
interest rate swaption agreements during 2006 that economically
limits the benchmark interest rate component of future interest
rates on $500 million of forecasted five-year borrowings at
5.72% and $750 million of forecasted ten-year borrowings at
5.78%. These swaptions were not designated for hedge accounting,
and accordingly, gains or losses are reported in earnings as a
component of interest expense, which approximated
$1.2 million of additional expense for the year ended
December 31, 2006. The fair value was calculated based upon
expected changes in forward interest rates. TIAA-CREF will be
obligated to fund its proportionate share of the cost and be
entitled to the economic benefits, if any, of the swaptions upon
formation of the joint venture.
Joint
Venture Derivative Instruments
At December 31, 2006 and 2005, certain of the
Companys joint ventures had interest rate swaps with
notional amounts aggregating $557 million and
$150 million, respectively, converting LIBOR to a weighted
average fixed rate of approximately 5.28% and 4.36%,
respectively. The aggregate fair value of these instruments at
December 31, 2006 and 2005, was a liability of
$5.0 million and an asset of $1.0 million,
respectively.
12. Commitments
and Contingencies
Leases
The Company is engaged in the operation of shopping centers,
which are either owned or, with respect to certain shopping
centers, operated under long-term ground leases that expire at
various dates through 2070, with renewal options. Space in the
shopping centers is leased to tenants pursuant to agreements
that provide for terms ranging generally from one month to
30 years and, in some cases, for annual rentals subject to
upward adjustments based on operating expense levels, sales
volume, or contractual increases as defined in the lease
agreements.
F-32
The scheduled future minimum revenues from rental properties
under the terms of all non-cancelable tenant leases, assuming no
new or renegotiated leases or option extensions for such
premises for the subsequent five years ending December 31,
are as follows for continuing operations (in thousands):
|
|
|
|
|
2007
|
|
$
|
500,949
|
|
2008
|
|
|
468,780
|
|
2009
|
|
|
427,151
|
|
2010
|
|
|
384,983
|
|
2011
|
|
|
333,471
|
|
Thereafter
|
|
|
1,757,530
|
|
|
|
|
|
|
|
|
$
|
3,872,864
|
|
|
|
|
|
|
Scheduled minimum rental payments under the terms of all capital
and non-cancelable operating leases in which the Company is the
lessee, principally for office space and ground leases, for the
subsequent five years ending December 31, are as follows
for continuing operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Capital
|
|
|
|
Leases
|
|
|
Leases
|
|
|
2007
|
|
$
|
5,320
|
|
|
$
|
305
|
|
2008
|
|
|
5,232
|
|
|
|
315
|
|
2009
|
|
|
4,970
|
|
|
|
315
|
|
2010
|
|
|
4,882
|
|
|
|
315
|
|
2011
|
|
|
4,879
|
|
|
|
315
|
|
Thereafter
|
|
|
204,465
|
|
|
|
12,283
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
229,748
|
|
|
$
|
13,848
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Guarantees
In conjunction with the development and expansion of various
shopping centers, the Company has entered into agreements with
general contractors for the construction of shopping centers
aggregating approximately $63.7 million as of
December 31, 2006.
At December 31, 2006, the Company had letters of credit
outstanding of approximately $20.6 million. The Company has
not recorded any obligation associated with these letters of
credit. The majority of letters of credit are collateral for
existing indebtedness and other obligations of the Company.
As discussed in Note 2, the Company and certain equity
affiliates entered into several joint ventures with various
third-party developers. In conjunction with certain joint
venture agreements, the Company and/or its equity affiliate has
agreed to fund the required capital associated with approved
development projects, comprised principally of outstanding
construction contracts, aggregating approximately
$6.8 million as of December 31, 2006. The Company
and/or its equity affiliate are entitled to receive a priority
return on these capital advances at rates ranging from 10.0% to
11.0%.
In connection with certain of the Companys joint ventures,
the Company agreed to fund any amounts due the joint
ventures lender if such amounts are not paid by the joint
venture based on the Companys pro rata share of such
amount, aggregating $61.1 million at December 31,
2006. The Company and its joint venture partner provided a
$33.0 million payment and performance guarantee on behalf
of the Mervyns Joint Venture to the joint ventures lender
in certain events such as the bankruptcy of Mervyns. The
Companys maximum obligation is equal to its effective 50%
ownership percentage, or $16.5 million.
In 2003, the Company entered into an agreement with DRA
Advisors, one of its joint venture partners, to pay a
$0.8 million annual consulting fee for ten years for
ongoing services relating to the assessment of financing and
strategic investment alternatives.
F-33
In connection with the transfer of one of the properties to the
MDT Joint Venture, the Company deferred the recognition of
approximately $2.8 million and $2.9 million at
December 31, 2006 and 2005, respectively, of the gain on
sale of real estate related to a shortfall agreement guarantee
maintained by the Company. The MDT Joint Venture is obligated to
fund any shortfall amount caused by the failure of the landlord
or tenant to pay taxes on the shopping center when due and
payable. The Company is obligated to pay any shortfall to the
extent that the shortfall is not caused by the failure of the
landlord or tenant to pay taxes on the shopping center when due
and payable. No shortfall payments have been made on this
property since the completion of construction in 1997.
The Company entered into master lease agreements during 2003
through 2006 with the transfer of properties to certain joint
ventures, which are recorded as a liability and reduction of its
related gain. The Company is responsible for the monthly base
rent, all operating and maintenance expenses and certain tenant
improvements and leasing commissions for units not yet leased at
closing for a three-year period. At December 31, 2006, the
Companys material master lease obligations, included in
accounts payable and other expenses, in the following amounts,
were incurred with the properties transferred to the following
joint ventures (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
MDT Joint Venture
|
|
$
|
2.1
|
|
|
$
|
4.9
|
|
MDT Preferred Joint Venture
|
|
|
3.3
|
|
|
|
|
|
DDR Markaz II
|
|
|
0.6
|
|
|
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
6.0
|
|
|
$
|
7.4
|
|
|
|
|
|
|
|
|
|
|
In connection with the Service Holdings LLC joint venture, the
Company guaranteed the base rental income from one to three
years for various affiliates of the Service Holdings LLC joint
venture in the aggregate amount of $2.8 million. The
Company has not recorded a liability for the guarantee, as the
subtenants of the Service Holdings LLC affiliates are paying
rent as due. The Company has recourse against the other parties
in the partnership in the event of default. No assets of the
Company are currently held as collateral to pay this guarantee.
In the event of any loss or the reduction in the historic tax
credit allocated or to be allocated to a joint venture partner
in connection with a historic commercial parcel acquired in
2002, the Company guaranteed payment in the maximum amount of
$0.7 million to the other joint venture partner. The
Company has a liability recorded as of December 31, 2006,
related to this guarantee. The Company does not have recourse
against any other party in the event of default. No assets of
the Company are currently held as collateral to pay this
guarantee.
Related to one of the Companys developments in Long Beach,
California, the Company guaranteed the payment of any special
taxes levied on the property within the City of Long Beach
Community Facilities District No. 6 and attributable to the
payment of debt service on the bonds for periods prior to the
completion of certain improvements related to this project. In
addition, an affiliate of the Company has agreed to make an
annual payment of approximately $0.6 million to defray a
portion of the operating expenses of a parking garage through
the earlier of October 2032 or until the Citys parking
garage bonds are repaid. There are no assets held as collateral
or liabilities recorded related to these obligations.
Related to the development of a shopping center in San Antonio,
Texas, the Company guaranteed the payment of certain road
improvements expected to be funded by the City of San Antonio,
Texas, of approximately $1.5 million. These road
improvements are expected to be completed in 2007. There are no
assets held as collateral or liabilities recorded related to
this guarantee.
The Company continually monitors obligations and commitments
entered into on its behalf. There have been no other material
items entered into by the Company since December 31, 2003,
through December 31, 2006, other than as described above.
Legal
Matters
The Company and its subsidiaries are subject to various legal
proceedings, which, taken together, are not expected to have a
material adverse effect on the Company. The Company is also
subject to a variety of legal actions for personal injury or
property damage arising in the ordinary course of its business,
most of which are covered by
F-34
insurance. While the resolution of all matters cannot be
predicted with certainty, management believes that the final
outcome of such legal proceedings and claims will not have a
material adverse effect on the Companys liquidity,
financial position or results of operations.
|
|
13.
|
Minority
Equity Interests, Operating Partnership Minority Interests,
Preferred Shares, Common Shares and Common Shares in Treasury
and Deferred Obligations
|
Minority
Equity Interests
Minority equity interests consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
Mervyns Joint Venture
|
|
$
|
77.6
|
|
|
$
|
75.1
|
|
Shopping centers and development
parcels in Arizona, Missouri, New York, Texas and Utah
|
|
|
8.2
|
|
|
|
6.8
|
|
Business center in Massachusetts
|
|
|
16.5
|
|
|
|
14.3
|
|
Coventry
|
|
|
2.3
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
104.6
|
|
|
$
|
99.2
|
|
|
|
|
|
|
|
|
|
|
Operating
Partnership Minority Interests
At December 31, 2006 and 2005, the Company had 872,373 and
1,349,822 OP Units outstanding, respectively. These OP Units,
issued to different partnerships, are exchangeable, by the
election of the OP Unit holder, and under certain circumstances
at the option of the Company, into an equivalent number of the
Companys common shares or for the equivalent amount of
cash. Most of these OP Units have registration rights agreements
equivalent to the amount of OP Units held by the holder if the
Company elects to settle in its common shares. The liability for
the OP Units is classified on the Companys balance sheet
as operating partnership minority interests.
The OP Unit holders are entitled to receive distributions, per
OP Unit, generally equal to the per share distributions on the
Companys common shares.
In 2004, the Company issued 0.5 million OP Units in
conjunction with the purchase of assets from Benderson. In
December 2005, Benderson exercised its option to convert its
remaining 0.4 million OP Units (Note 4), effective
February 2006. The Company agreed to issue an equivalent number
of common shares of the Company. In 2004 the Company exchanged
284,304 OP Units for common shares of the Company including
60,260 OP Units issued to Benderson. Also in 2006, the Company
purchased 32,274 OP Units for cash of $2.1 million. These
transactions were treated as a purchase of minority interest.
F-35
Preferred
Shares
The Companys preferred shares outstanding at December 31
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
2005
|
|
|
Class F 8.60%
cumulative redeemable preferred shares, without par value, $250
liquidation value; 750,000 shares authorized;
600,000 shares issued and outstanding at December 31,
2006 and 2005
|
|
$
|
150,000
|
|
|
$
|
150,000
|
|
Class G 8.0%
cumulative redeemable preferred shares, without par value, $250
liquidation value; 750,000 shares authorized;
720,000 shares issued and outstanding at December 31,
2006 and 2005
|
|
|
180,000
|
|
|
|
180,000
|
|
Class H 7.375%
cumulative redeemable preferred shares, without par value, $500
liquidation value; 410,000 shares authorized;
410,000 shares issued and outstanding at December 31,
2006 and 2005
|
|
|
205,000
|
|
|
|
205,000
|
|
Class I 7.5%
cumulative redeemable preferred shares, without par value, $500
liquidation value; 360,000 shares authorized;
360,000 shares issued and outstanding at December 31,
2006 and 2005
|
|
|
170,000
|
|
|
|
170,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
705,000
|
|
|
$
|
705,000
|
|
|
|
|
|
|
|
|
|
|
In May 2004, the Company issued $170.0 million, 7.5%
Preferred I Depositary shares and received net proceeds of
approximately $164.2 million.
The Class F and G depositary shares represent 1/10 of a
share of their respective preferred class of shares and have a
stated value of $250 per share. The Class H and I
depositary shares represent 1/20 of a share of a preferred share
and have a stated value of $500 per share. The Class F,
Class G, Class H and Class I depositary shares
are not redeemable by the Company prior to March 27, 2007,
March 28, 2008, July 28, 2008, and May 7, 2009,
respectively, except in certain circumstances relating to the
preservation of the Companys status as a REIT.
The Companys authorized preferred shares consist of the
following:
|
|
|
|
|
750,000 Class A Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class B Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class C Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class D Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class E Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class F Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class G Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class H Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class I Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class J Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Class K Cumulative Redeemable Preferred Shares,
without par value
|
|
|
|
750,000 Non Cumulative preferred shares, without par value
|
Common
Shares
The Companys common shares have a $0.10 per share stated
value.
In December 2006, the Company entered into forward sale
agreements in anticipation of a merger (Note 22). Pursuant to
the terms of the forward sale agreements, and subject to the
Companys right to elect cash settlement, the Company
agreed to sell, upon physical settlement of such forward sale
agreements, an aggregate of 11,599,134 of its common shares for
approximately $750 million. The forward sale contract
expires September 2007 and will
F-36
be reflected in shareholders equity as the contract does not
include any provision that could require the Company to net cash
settle the contract. The Company will not receive any proceeds
from the sale of its common shares until settlement of the
forward sale agreements, which is expected to occur on or before
September 2007.
Common share issuances over the three-year period ended
December 31, 2006, are as follows (in millions):
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Shares
|
|
|
Net Proceeds
|
|
|
December 2004
|
|
|
5.45
|
|
|
$
|
248
|
|
May 2004
|
|
|
15.0
|
|
|
$
|
491
|
|
Common
Shares in Treasury and Deferred Obligations
In August 2006, the Companys Board of Directors authorized
the Company to repurchase 909,000 common shares of the
Companys common stock at a cost of $53.15 per share in
connection with the convertible debt financing (Note 9).
In 2006, 2005 and 2004, certain officers and a director of the
Company completed a stock for stock option exercise and received
approximately 0.3 million, 0.1 million and
1.0 million common shares, respectively, in exchange for
0.2 million, 0.1 million and 0.6 million common
shares of the Company. In addition, vesting of restricted stock
grants approximating less than 0.1 million,
0.1 million and 0.1 million shares in 2006, 2005 and
2004, respectively, of common stock of the Company was deferred.
The Company recorded $0.8 million, $1.4 million and
$1.9 million in 2006, 2005 and 2004, respectively, in
shareholders equity as deferred obligations for the vested
restricted stock deferred into the Companys non-qualified
deferred compensation plans.
14. Other
Income
Other income from continuing operations was comprised of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Lease terminations and bankruptcy
settlements
|
|
$
|
13,989
|
|
|
$
|
5,166
|
|
|
$
|
6,477
|
|
Acquisitions and financing fees
|
|
|
414
|
|
|
|
2,424
|
|
|
|
2,997
|
|
Other, net
|
|
|
454
|
|
|
|
961
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income
|
|
$
|
14,857
|
|
|
$
|
8,551
|
|
|
$
|
11,430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15. Comprehensive
Income
Comprehensive income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Net income
|
|
$
|
253,264
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Other comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in fair value of interest
rate contracts
|
|
|
(2,729
|
)
|
|
|
10,619
|
|
|
|
867
|
|
Amortization of interest rate
contracts
|
|
|
(1,454
|
)
|
|
|
(520
|
)
|
|
|
|
|
Foreign currency translation
|
|
|
1,587
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(2,596
|
)
|
|
|
10,099
|
|
|
|
867
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income
|
|
$
|
250,668
|
|
|
$
|
292,742
|
|
|
$
|
270,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Discontinued
Operations and Disposition of Real Estate and Real Estate
Investments
Discontinued
Operations
During the year ended December 31, 2006, the Company sold
six properties and one property was classified as held for sale
at December 31, 2006, which were classified as discontinued
operations for the years ended
F-37
December 31, 2006, 2005 and 2004, aggregating
1.0 million square feet. The Company did not have any
properties considered as held for sale at December 31, 2005
or 2004. During the period January 1, 2007 through June 30, 2007,
the Company sold 58 properties (including one property held for sale
at December 31, 2006). Included in discontinued operations for the three years
ending December 31, 2006, are 57 properties aggregating
5.6 million square feet. Of these properties, 30 previously
had been included in the shopping center segment and 27 of these
properties previously had been included in the business center
segment (Note 21). The operations of these properties have
been reflected on a comparative basis as discontinued operations
in the consolidated financial statements for the three years
ended December 31, included herein.
The balance sheet relating to the assets held for sale and the
operating results relating to assets sold or designated as
assets held for sale after December 31, 2003, are as
follows (in thousands):
|
|
|
|
|
|
|
December 31
|
|
|
|
2006
|
|
|
Land
|
|
$
|
685
|
|
Building
|
|
|
7,679
|
|
Other real estate assets
|
|
|
194
|
|
|
|
|
|
|
|
|
|
8,558
|
|
Less: Accumulated depreciation
|
|
|
(3,326
|
)
|
|
|
|
|
|
|
|
|
5,232
|
|
Other assets
|
|
|
92
|
|
|
|
|
|
|
Total assets held for sale
|
|
$
|
5,324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Revenues
|
|
$
|
44,542
|
|
|
$
|
65,724
|
|
|
$
|
70,266
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
|
|
|
11,422
|
|
|
|
20,342
|
|
|
|
20,992
|
|
Impairment charge
|
|
|
|
|
|
|
642
|
|
|
|
586
|
|
Interest, net
|
|
|
11,675
|
|
|
|
12,582
|
|
|
|
11,668
|
|
Depreciation
|
|
|
10,356
|
|
|
|
15,998
|
|
|
|
15,844
|
|
Minority interests
|
|
|
|
|
|
|
67
|
|
|
|
(47
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,453
|
|
|
|
49,631
|
|
|
|
49,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
11,089
|
|
|
|
16,093
|
|
|
|
21,223
|
|
Gain on dispostion of real estate
|
|
|
11,051
|
|
|
|
16,667
|
|
|
|
8,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
22,140
|
|
|
$
|
32,760
|
|
|
$
|
29,784
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company sold properties and recorded gains on disposition as
described below, for the three years ended December 31,
2006 (in millions):
|
|
|
|
|
|
|
|
|
|
|
Number
|
|
|
|
|
|
|
of
|
|
|
Gain on
|
|
|
|
Properties
|
|
|
Dispostion of
|
|
|
|
Sold
|
|
|
Real Estate
|
|
|
2006
|
|
|
6
|
|
|
$
|
11.1
|
|
2005
|
|
|
35
|
|
|
|
16.7
|
|
2004
|
|
|
15
|
|
|
|
8.6
|
|
In the second quarter of 2005, the Company recorded an
impairment charge of $0.6 million relating to one remaining
former Best Products site sold in the third quarter of 2005. In
the third quarter of 2004, the Company recorded an impairment
charge of $0.6 million relating to the sale of a business
center in the fourth quarter of 2004.
F-38
These impairment charges were reclassified into discontinued
operations (see table above) due to the sale of the property.
Disposition
of Real Estate and Real Estate Investments
The Company recorded gains on disposition of real estate and
real estate investments for the three years ended
December 31, 2006, as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Transfer of assets to the Service
Holdings LLC Joint Venture (1)
|
|
$
|
6.1
|
|
|
$
|
|
|
|
$
|
|
|
Transfer of assets to the DPG
Realty Holdings Joint Venture (2)
|
|
|
0.6
|
|
|
|
|
|
|
|
4.2
|
|
Transfer of assets to the Markaz
II Joint Venture (3)
|
|
|
|
|
|
|
|
|
|
|
2.5
|
|
Transfer of assets to the MDT
Joint Venture (4)
|
|
|
9.2
|
|
|
|
81.2
|
|
|
|
65.4
|
|
Transfer of assets to the MDT
Preferred Joint Venture (5)
|
|
|
38.9
|
|
|
|
|
|
|
|
|
|
Land sales (6)
|
|
|
14.8
|
|
|
|
6.0
|
|
|
|
14.3
|
|
Previously deferred gains (7)
|
|
|
1.3
|
|
|
|
0.9
|
|
|
|
0.8
|
|
Gain (loss) on disposition of
non-core assets (8)
|
|
|
1.1
|
|
|
|
|
|
|
|
(2.6
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
72.0
|
|
|
$
|
88.1
|
|
|
$
|
84.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The Company transferred 51 retail
sites previously occupied by Service Merchandise. This
disposition is not classified as discontinued operations because
of the Companys continuing involvement due to its retained
ownership interest and management agreements.
|
|
(2)
|
|
The Company transferred a newly
developed expansion area adjacent to a shopping center owned by
the joint venture in 2006. The Company transferred 12 assets in
2004. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(3)
|
|
The Company transferred 13 assets
in 2004. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(4)
|
|
The Company transferred newly
developed expansion areas adjacent to four shopping centers
owned by the joint venture in 2006. The Company transferred 12
and 11 assets in 2005 and 2004, respectively. These dispositions
are not classified as discontinued operations because of the
Companys continuing involvement due to its retained
ownership interest and management agreements.
|
|
(5)
|
|
The Company transferred six assets
in 2006. These dispositions are not classified as discontinued
operations because of the Companys continuing involvement
due to its retained ownership interest and management agreements.
|
|
(6)
|
|
These dispositions do not qualify
for discontinued operations presentation.
|
|
(7)
|
|
These were primarily attributable
to the recognition of additional gains from the leasing of units
associated with master lease obligations and other obligations
on disposed assets.
|
|
(8)
|
|
The loss recorded in 2004 may be
recovered through an earnout arrangement with the buyer over the
next several years.
|
17. Transactions
With Related Parties
The Company sold a 4% interest in Coventry to certain Coventry
employees in 2005. At December 31, 2006, the Company owns a
75% interest in Coventry.
As discussed in Note 2, the Company entered into the KLA/SM
joint venture in March 2002 with Lubert-Adler Real Estate Funds,
which is owned in part by a director of the Company. In August
2006, the Company purchased its then partners approximate
75% interest in the remaining 52 assets at a gross purchase
price of approximately $138 million relating to the
partners ownership, based on a total valuation of
approximately $185 million. The Company sold 51 of the
assets to the Service Holding LLC in September 2006.
In 1999, the Company entered into a joint venture owned 75% by
Lubert-Adler Real Estate Funds, which is owned in part by a
director of the Company and 25% by the Company. The asset, a
shopping center in Coon Rapids, Minnesota, was sold to the MDT
Joint Venture in November 2003. The Company had a management
agreement and
F-39
performed certain administrative functions for the joint venture
pursuant to which the Company earned management, leasing,
development fees and interest income of $2.6 million in
2004.
As discussed in Note 4, in 2005, the Company entered into
the Mervyns Joint Venture that acquired the underlying real
estate of 36 operating Mervyns stores for approximately
$396.2 million. In 2006, the Mervyns Joint Venture
purchased one additional site for approximately
$11.0 million and the Company purchased one additional site
for approximately $12.4 million. In 2005, the Company also
purchased an additional site for approximately
$14.4 million. The assets were acquired from several funds,
one of which was managed by Lubert-Adler Real Estate Funds,
which is owned in part by a director of the Company.
The Company utilizes a law firm for one of its development
projects in which the father of one of the Companys
executive officers is a partner. The Company paid less than
$0.1 million to this law firm in 2006 and 2005.
In 1995, the Company entered into a lease for office space owned
by the mother of the Chairman of the Board and CEO
(CEO). General and administrative rental expense
associated with this office space aggregated $0.6 million,
$0.6 million and $0.5 million for the years ended
December 31, 2006, 2005 and 2004, respectively. The Company
periodically utilizes a conference center owned by the trust of
Bert Wolstein, deceased founder of the Company, father of the
CEO, and one of its principal shareholders, for
Company-sponsored events and meetings. The Company paid less
than $0.1 million in 2006 and 2005 for the use of this
facility.
The Company was also a party to a lawsuit that involved various
claims against the Company relating to certain
management-related services provided by the Company. The owner
of the properties had entered into a management agreement with
two entities (Related Entities) controlled by one of
its principal shareholders and a former director of the Company,
to provide management services. The Company agreed to perform
those services on behalf of the Related Entities, and the fees
paid by the owner of the properties were paid to the Company.
One of the services to be provided by the Company was to obtain
and maintain casualty insurance for the owners properties.
A loss was incurred at one of the owners properties and
the insurance company denied coverage. The Company filed a
lawsuit against the insurance company. Separately, the Company
entered into a settlement pursuant to which the Company paid
$750,000 to the owner of the properties in 2004 and agreed to
indemnify the Related Entities for any loss or damage incurred
by either of the Related Entities if it were judicially
determined that the owner of the property is not entitled to
receive insurance proceeds under a policy obtained and
maintained by the Company. The lawsuit against the insurance
company was resolved with the insurance company agreeing to
compensate the claimant for the loss as well as reimburse the
Company for a portion of its attorneys fees.
In connection with the settlement, the CEO entered into a joint
venture with the principal of the owner of the properties, and
the Company entered into a management agreement with the joint
venture effective February 1, 2004. The CEO holds an
ownership interest of approximately 25% in the joint venture.
The Company provides management and administrative services and
receives fees equal to 3% of the gross income of each property
for which services are provided, but not less than $5,000 per
year from each such property, of which an aggregate of
$0.1 million was earned in 2006 and 2005. The management
agreement expires on February 28, 2007, unless terminated
earlier at any time by the joint venture upon 30 days
notice to the Company or by the Company upon 60 days notice
to the joint venture.
Transactions with the Companys equity affiliates are
described in Note 2.
Stock-Based
Compensation
The Companys stock option and equity-based award plans
provide for grants to employees of the Company of incentive and
non-qualified stock options to purchase common shares of the
Company, rights to receive the appreciation in value of common
shares, awards of common shares subject to restrictions on
transfer, awards of common shares issuable in the future upon
satisfaction of certain conditions and rights to purchase common
shares and other awards based on common shares. Under the terms
of the award plans, awards available for grant approximated
2.1 million shares at December 31, 2006. Options may
be granted at per share prices not less than fair market value
at the date of grant, and in the case of incentive options, must
be exercisable within the maximum
F-40
contractual term of 10 years thereof (or, with respect to
incentive options granted to certain shareholders, within five
years thereof). Options granted under the plans generally vest
one year after the date of grant as to one-third of the optioned
shares, with the remaining options vesting over the following
two-year period.
The Company grants options to its directors. Such options are
granted at the fair market value on the date of grant. Options
granted generally become exercisable one year after the date of
grant as to one-third of the options, with the remaining options
being exercisable over the following two-year period.
Effective January 1, 2006, the Company adopted
SFAS 123(R) using the modified prospective method. The
Companys consolidated financial statements as of and for
the year ended December 31, 2006, reflect the impact of
SFAS 123(R). In accordance with the modified prospective
method, the Companys consolidated financial statements for
prior periods have not been restated to reflect the impact of
SFAS 123(R). Prior to the adoption of FAS 123(R), the
Company applied APB 25, Accounting for Stock Issued to
Employees, in accounting for its plans. Accordingly, the
Company did not recognize compensation cost for stock options
when the option exercise price equaled or exceeded the market
value on the date of the grant. See Note 1 for disclosure
of pro forma information regarding net income and earnings per
share for 2005 and 2004. Assuming application of the fair value
method pursuant to SFAS 123, the compensation cost, which
was required to be charged against income for all of the above
mentioned plans, was $5.3 million and $5.1 million for
2005 and 2004, respectively.
The fair values for stock-based awards granted in 2006, 2005 and
2004 were estimated at the date of grant using the Black-Scholes
option pricing model with the following weighted average
assumptions:
|
|
|
|
|
|
|
|
|
For the Year Ended December 31
|
|
|
2006
|
|
2005
|
|
2004
|
|
Weighted average fair value of
grants
|
|
$6.50
|
|
$4.52
|
|
$3.40
|
Risk-free interest rate (range)
|
|
4.4% - 5.1%
|
|
3.2% - 4.3%
|
|
2.2% - 3.3%
|
Dividend yield (range)
|
|
4.2% - 5.0%
|
|
4.6% - 5.4%
|
|
4.5% - 5.8%
|
Expected life (range)
|
|
3 - 4 years
|
|
3 - 6 years
|
|
3 - 5 years
|
Expected volatility (range)
|
|
19.8% - 20.3%
|
|
19.8% - 22.9%
|
|
19.9% - 22.7%
|
The risk-free rate was based upon a U.S. Treasury Strip with a
maturity date that approximates the expected term of the award.
The expected life of the award was derived by referring to
actual exercise experience. The expected volatility of the stock
was derived by referring to changes in the Companys
historical stock prices over a time frame similar to the
expected life of the award. The Company has no reason to believe
that future stock volatility is likely to materially differ from
historical volatility.
F-41
The following table reflects the stock option activity described
above (aggregate intrinsic value in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of Options
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Employees
|
|
|
Directors
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
|
Balance December 31, 2003
|
|
|
2,785
|
|
|
|
125
|
|
|
$
|
20.48
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
665
|
|
|
|
|
|
|
|
36.40
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(1,402
|
)
|
|
|
(37
|
)
|
|
|
20.06
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(72
|
)
|
|
|
|
|
|
|
26.92
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2004
|
|
|
1,976
|
|
|
|
88
|
|
|
$
|
25.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
622
|
|
|
|
|
|
|
|
41.96
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(639
|
)
|
|
|
(26
|
)
|
|
|
20.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(56
|
)
|
|
|
|
|
|
|
34.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2005
|
|
|
1,903
|
|
|
|
62
|
|
|
$
|
32.46
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
302
|
|
|
|
|
|
|
|
51.19
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(679
|
)
|
|
|
(20
|
)
|
|
|
29.31
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
|
|
|
|
42.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance December 31, 2006
|
|
|
1,485
|
|
|
|
42
|
|
|
$
|
37.28
|
|
|
|
7.4
|
|
|
$
|
39,205
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
616
|
|
|
|
42
|
|
|
$
|
28.75
|
|
|
|
6.1
|
|
|
$
|
22,517
|
|
2005
|
|
|
635
|
|
|
|
62
|
|
|
|
25.22
|
|
|
|
6.2
|
|
|
|
15,198
|
|
2004
|
|
|
532
|
|
|
|
84
|
|
|
|
18.63
|
|
|
|
5.7
|
|
|
|
15,865
|
|
The following table summarizes the characteristics of the
options outstanding at December 31, 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Average
|
|
Weighted-
|
|
|
|
Weighted-
|
Range of
|
|
as of
|
|
Remaining
|
|
Average
|
|
Exercisable as
|
|
Average
|
Exercise Prices
|
|
12/31/06
|
|
Contractual Life
|
|
Exercise Price
|
|
of 12/31/06
|
|
Exercise Price
|
|
$11.50-$16.00
|
|
|
26,211
|
|
|
|
3.4
|
|
|
$
|
13.18
|
|
|
|
26,211
|
|
|
$
|
13.18
|
|
$16.01-$22.50
|
|
|
130,343
|
|
|
|
3.7
|
|
|
|
20.10
|
|
|
|
130,343
|
|
|
|
20.10
|
|
$22.51-$29.00
|
|
|
196,990
|
|
|
|
6.0
|
|
|
|
23.38
|
|
|
|
196,990
|
|
|
|
23.38
|
|
$29.01-$35.50
|
|
|
37,240
|
|
|
|
6.8
|
|
|
|
29.86
|
|
|
|
35,572
|
|
|
|
29.63
|
|
$35.51-$42.00
|
|
|
789,020
|
|
|
|
7.7
|
|
|
|
39.01
|
|
|
|
261,356
|
|
|
|
38.02
|
|
$42.01-$48.50
|
|
|
60,101
|
|
|
|
8.6
|
|
|
|
45.86
|
|
|
|
7,898
|
|
|
|
46.30
|
|
$48.51-$56.00
|
|
|
287,291
|
|
|
|
9.2
|
|
|
|
51.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,527,196
|
|
|
|
7.4
|
|
|
$
|
37.28
|
|
|
|
658,370
|
|
|
$
|
28.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-42
The following table reflects the activity for unvested stock
option awards for the year ended December 31, 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2005
|
|
|
1,268
|
|
|
$
|
4.27
|
|
Granted
|
|
|
302
|
|
|
|
6.50
|
|
Vested
|
|
|
(660
|
)
|
|
|
3.74
|
|
Forfeited
|
|
|
(41
|
)
|
|
|
4.64
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
869
|
|
|
$
|
5.42
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, total unrecognized stock option
compensation cost of share-based compensation arrangements
aggregated $2.6 million. The cost is expected to be
recognized over a weighted-average period of approximately
0.9 years.
Exercises
of Employee Stock Options
The total intrinsic value of options exercised for the year
ended December 31, 2006, was approximately
$17.6 million. The total cash received from employees as a
result of employee stock option exercises for the year ended
December 31, 2006, was approximately $11.2 million.
The Company settles employee stock option exercises primarily
with newly issued common shares and, occasionally, with treasury
shares.
Performance
Units
In 2000, the Board of Directors approved a grant of 30,000
Performance Units to the Companys CEO. Pursuant to the
provisions of the Plan, the 30,000 Performance Units were
converted on December 31, 2004, to 200,000 restricted
common shares based on the annualized total shareholders
return for the five-year period ended December 31, 2004.
These shares will vest over the following five-year period. In
2002, the Board of Directors approved grants aggregating 70,000
Performance Units to the Companys CEO, President and
Senior Executive Vice President. The 70,000 Performance Units
granted to each of the individuals in 2002 converted to common
restricted shares in amounts ranging from 70,000 to 466,666
common shares based on the annualized total shareholders
return, as defined by the Plan, for the five-year period ending
December 31, 2006. These restricted shares will vest over
the following five-year period.
The fair value of each Performance Unit grant was estimated on
the date of grant using a simulation approach model using the
following assumptions:
|
|
|
|
|
Range
|
|
Risk-free interest rate
|
|
4.4%-6.4%
|
Dividend yield
|
|
7.8%-10.9%
|
Expected life
|
|
10 years
|
Expected volatility
|
|
20%-23%
|
The performance units awards granted in 2000, were converted
into restricted stock after the measurement date. The following
table reflects the activity for the unvested awards for the year
ended December 31, 2006 (in thousands):
|
|
|
|
|
|
|
Awards
|
|
|
Unvested at December 31, 2005
|
|
|
170
|
|
Vested
|
|
|
(34
|
)
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
136
|
|
|
|
|
|
|
F-43
As of December 31, 2006, total unrecognized compensation
cost of the 2000 and 2002 Performance Units granted, aggregated
$0.2 million and $1.4 million, respectively. The cost
is expected to be recognized over a three- and five-year term,
respectively.
Outperformance
Awards
In December 2005 and August 2006, the Board of Directors
approved a grant of outperformance long-term incentive plan
agreements with certain executive officers. The outperformance
agreements provide for awards of the Companys common
shares, or an equivalent amount in cash, at the Companys
option, to certain officers of the Company if stated performance
metrics are achieved.
With respect to the award plans granted to the Companys
Chief Executive Officer and Senior Executive Vice President (the
Senior Executive Officers), the performance metrics
are as follows: (a) a specified level of growth in the
Companys funds from operations (the FFO
Target), (b) an increase in the market price of the
Companys common shares (the Share Price
Target), (c) an increase in the market price of the
Companys common shares relative to the increase in the
market prices of the relative common stock of companies included
in a specified peer group (the Comparative Share Price
Target,) together with the Share Price Target (the
Share Price Metrics) and (d) non-financial
performance criteria established by the Compensation Committee
of the Board of Directors of the Company (the
Discretionary Metrics) and, together with the FFO
Target and the Share Price Metrics (the Senior Executive
Officer Targets). The beginning of the measurement period
for the Senior Executive Officer Targets is January 1,
2005, because the prior performance award measurement period for
the Chief Executive Officer ended December 31, 2004. The
current measurement period ends the earlier of December 31,
2007, or the date of a change in control.
If the FFO Target is achieved, the Company will issue to the
Senior Executive Officers a number of common shares equal to
(a) the dollar value assigned to the FFO Target set forth
in such officers outperformance agreement, divided by
(b) the greater of (i) the average closing price for
the common shares over the 20 trading days ending on the
applicable valuation date (as defined in the outpeformance
agreements) or (ii) the closing price per common share on
the last trading date before the senior officer valuation date
(as defined in the outperformance agreements), or the equivalent
amount of cash, at the Companys option, as soon as
practicable following the applicable vesting date, March 1,
2008.
If one or both of the Share Price Metrics are achieved, the
Company will issue to the officer a number of shares set forth
in the agreement, depending on whether one or both of the Share
Price Metrics have been achieved, or the equivalent amount of
cash, at the Companys option, as soon as practicable
following the applicable vesting date, March 1, 2008. The
value of the number of common shares or equivalent amount paid
in cash with respect to the Share Price Metrics that may be paid
is capped at the amount specified in each Senior Executive
Officers outperformance agreement.
If in the discretion of the Compensation Committee, the
Discretionary Metrics have been achieved, the Company will issue
to the officer a number of common shares equal to (a) the
dollar value assigned to the Discretionary Metrics set forth in
such Senior Executive Officers outperformance agreement,
(b) divided by the greater of (i) the average closing
price for the common shares over the twenty trading days ending
on the valuation date (as defined in the outperformance
agreements), or (ii) the closing price per common share on
the last trading date before the senior officer valuation date
(as defined in the outperformance agreements), or the equivalent
amount of cash, at the Companys option, as soon as
practicable following the applicable vesting date, March 1,
2008.
With respect to nine additional executive officers (the
Officers), the performance metrics are as follows:
(a) the FFO Target, (b) a total return to the
Companys shareholders target (the TRS Target)
and (c) a total return to the Companys shareholders
target relative to that of the total return to shareholders of
companies included in a specified peer group (the
Comparative TRS Target, together with the TRS
Target, the TRS Metrics and, together with the FFO
Target and the TRS Target, the Officer Targets). The
measurement period for the Officer Targets is January 1,
2005, through the earlier of December 31, 2009, or the date
of a change in control.
F-44
If the FFO Target is achieved, the Company will issue to the
Officer a number of common shares equal to (a) the dollar
value assigned to the FFO Target set forth in such
officers outperformance agreement and (b) divided by
the greater of (i) the average closing price for the common
shares over the twenty trading days ending on the valuation date
(as defined in the outperformance agreements) or (ii) the
closing price per common share on the last trading date before
the officer valuation date (as defined in the outperformance
agreements), or the equivalent amount of cash, at the
Companys option, as soon as practicable following the
applicable vesting date, March 1, 2010.
If one or both of the TRS Metrics are achieved, the Company will
issue to the Officer a number of shares set forth in the
agreement, depending on whether one or both of the TRS Metrics
have been achieved, or the equivalent amount of cash, at the
Companys option, as soon as practicable following the
applicable vesting date. The value of the number of common
shares or equivalent amount paid in cash with respect to the TRS
Metrics that may be paid is capped at an amount specified in
each Officers outperformance agreement, which management
believes does not represent an obligation that is based solely
or predominantly on a fixed monetary amount known at the grant
date.
The fair value of each outperformance unit grant for the share
price metrics was estimated on the date of grant using a Monte
Carlo approach model using the following assumptions:
|
|
|
|
|
Range
|
|
Risk-free interest rate
|
|
4.4%-5.0%
|
Dividend yield
|
|
4.4%-4.5%
|
Expected life
|
|
3-5 years
|
Expected volatility
|
|
19%-21%
|
As of December 31, 2006, there was $1.2 million and
$1.1 million of total unrecognized compensation costs
related to the two market metric components associated with the
Senior Executive Officer and the Officers outperformance plans
granted, respectively, and expected to be recognized over a
3.25-and 1.25-year term, respectively.
Restricted
Stock Awards
In 2004, 2005 and 2006, the Board of Directors approved a grant
of 105,974, 88,360 and 64,940 restricted shares of common stock,
respectively, to several executives and outside directors of the
Company. The restricted stock grants vest in equal annual
amounts over a five-year period for the Companys
executives and over a three-year period for the restricted
grants in 2004 to the outside directors of the Company.
Restricted stock awards have the same cash dividend and voting
rights as other common stock and are considered to be currently
issued and outstanding. These grants have a weighted-average
fair value at the date of grant ranging from $23.00 to $50.81,
which was equal to the market value of the Companys stock
at the date of grant. In 2006 and 2005, grants of 9,497 and
6,912 shares of common stock, respectively, were issued as
compensation to the outside directors. These grants had a
weighted-average fair value at the date of grant ranging from
$45.60 to $61.12, which was equal to the market value of the
Companys stock at the date of grant.
The following table reflects the activity for unvested
restricted stock awards for the year ended December 31,
2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant Date
|
|
|
|
Awards
|
|
|
Fair Value
|
|
|
Unvested at December 31, 2005
|
|
|
191
|
|
|
$
|
33.46
|
|
Granted
|
|
|
65
|
|
|
|
50.81
|
|
Vested
|
|
|
(94
|
)
|
|
|
32.37
|
|
|
|
|
|
|
|
|
|
|
Unvested at December 31, 2006
|
|
|
162
|
|
|
$
|
41.04
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2006, total unrecognized compensation of
restricted stock award arrangements granted under the plans
aggregated $6.6 million The cost is expected to be
recognized over a weighted-average period of approximately
1.1 years.
F-45
During 2006, 2005 and 2004, approximately $8.3 million,
$5.7 million and $6.3 million, respectively, was
charged to expense associated with awards under the equity-based
award plans relating to stock grants, restricted stock and
Performance Units.
401(k)
Plan
The Company has a 401(k) defined contribution plan, covering
substantially all of the officers and employees of the Company,
that permits participants to defer up to a maximum of 15% of
their compensation. The Company matched the participants
contribution in an amount equal to 50% of the participants
elective deferral for the plan year up to a maximum of 6% of a
participants base salary plus annual cash bonus, not to
exceed the sum of 3% of the participants base salary plus
annual cash bonus. The Companys plan allows for the
Company to also make additional discretionary contributions. No
discretionary contributions have been made. Employees
contributions are fully vested, and the Companys matching
contributions vest 20% per year. Once an employee has been with
the Company five years, all matching contributions are fully
vested. The Company funds all matching contributions with cash.
The Companys contributions for each of the three years
ended December 31, 2006, 2005 and 2004, were
$0.6 million, $0.6 million and $0.5 million,
respectively. The 401(k) plan is fully funded at
December 31, 2006.
Elective
Deferred Compensation Plan
The Company has a non-qualified elective deferred compensation
plan for certain officers that permits participants to defer up
to 100% of their base salaries and annual performance-based cash
bonuses, less applicable taxes and benefits deductions. The
Company matched the participants contribution to any
participant who has contributed the maximum permitted under the
401(k) plan. This matching contribution is equal to the
difference between (a) 3% of the sum of the
participants base salary and annual performance-based
bonus deferred under the 401(k) plan and the deferred
compensation combined and (b) the actual employer matching
contribution under the 401(k) plan. Deferred compensation
related to an employee contribution is charged to expense and is
fully vested. Deferred compensation related to the
Companys matching contribution is charged to expense and
vests 20% per year. Once an employee has been with the Company
five years, all matching contributions are fully vested. The
Companys contribution was $0.1 million annually for
the three years ended December 31, 2006. At
December 31, 2006, 2005 and 2004, deferred compensation
under this plan aggregated approximately $12.3 million,
$9.9 million and $8.7 million, respectively. The plan
is fully funded at December 31, 2006.
Equity
Deferred Compensation Plan
In 2003, the Company established the Developers Diversified
Realty Corporation Equity Deferred Compensation Plan (the
Plan), a non-qualified compensation plan for certain
officers and directors of the Company to defer the receipt of
restricted shares and, for compensation earned prior to
December 31, 2004, the gain otherwise recognizable upon the
exercise of options (see Note 13 regarding the deferral of
stock to this Plan.) At December 31, 2006 and 2005, there
were 0.6 million common shares of the Company in the Plan
in each year, valued at $39.6 million and
$28.6 million, respectively. The Plan is fully funded at
December 31, 2006.
Other
Compensation
During 2006, 2005 and 2004, the Company recorded a
$0.7 million, $1.5 million and $0.8 million
charge, respectively, as additional compensation to the
Companys CEO, relating to an incentive compensation
agreement associated with the Companys investment in the
Retail Value Fund Program. Pursuant to this agreement, the
Companys CEO is entitled to receive up to 25% of the
distributions made by Coventry (Note 2), provided the
Company achieves certain performance thresholds in relation to
funds from operations growth and/or total shareholder return.
|
|
19.
|
Earnings
and Dividends Per Share
|
Earnings Per Share (EPS) have been computed pursuant
to the provisions of SFAS No. 128. The following table
provides a reconciliation of income from continuing operations
and the number of common shares used in the
F-46
computations of basic EPS, which utilizes the
weighted average of common shares outstanding without regard to
dilutive potential common shares, and diluted EPS,
which includes all such shares.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
(In thousands, except per share amounts)
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Income from continuing operations
|
|
$
|
159,101
|
|
|
$
|
161,743
|
|
|
$
|
158,337
|
|
Add: Gain on disposition of real
estate and real estate investments
|
|
|
72,023
|
|
|
|
88,140
|
|
|
|
84,642
|
|
Less: Preferred stock dividends
|
|
|
(55,169
|
)
|
|
|
(55,169
|
)
|
|
|
(50,706
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Income from
continuing operations applicable to common shareholders
|
|
|
175,955
|
|
|
|
194,714
|
|
|
|
192,273
|
|
Add: Operating partnership
minority interests
|
|
|
|
|
|
|
|
|
|
|
2,607
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Income from
continuing operations applicable to common shareholders
|
|
$
|
175,955
|
|
|
$
|
194,714
|
|
|
$
|
194,880
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Average shares
outstanding
|
|
|
109,002
|
|
|
|
108,310
|
|
|
|
96,638
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
546
|
|
|
|
677
|
|
|
|
997
|
|
Operating partnership minority
interests
|
|
|
|
|
|
|
|
|
|
|
1,308
|
|
Restricted stock
|
|
|
65
|
|
|
|
155
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Average shares
outstanding
|
|
|
109,613
|
|
|
|
109,142
|
|
|
|
99,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders
|
|
$
|
1.62
|
|
|
$
|
1.80
|
|
|
$
|
1.99
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.30
|
|
|
|
0.31
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
1.82
|
|
|
$
|
2.10
|
|
|
$
|
2.27
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share data:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
applicable to common shareholders
|
|
$
|
1.61
|
|
|
$
|
1.78
|
|
|
$
|
1.97
|
|
Income from discontinued operations
|
|
|
0.20
|
|
|
|
0.30
|
|
|
|
0.30
|
|
Cumulative effect of adoption of a
new accounting standard
|
|
|
|
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income applicable to common
shareholders
|
|
$
|
1.81
|
|
|
$
|
2.08
|
|
|
$
|
2.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options to purchase 1.5 million, 2.0 million and
2.1 million shares of common stock were outstanding at
December 31, 2006, 2005 and 2004, respectively
(Note 18), a portion of which has been reflected above in
diluted per share amounts using the treasury stock method.
Options aggregating 0.1 million were antidilutive at
December 31, 2005, and none of the options outstanding at
2006 or 2004 were antidilutive. Accordingly, the antidilutive
options were excluded from the computations.
Basic average shares outstanding do not include restricted
shares totaling 161,958, 191,406 and 202,198 that were not
vested at December 31, 2006, 2005 and 2004, respectively,
or Performance Units totaling 136,000 and 170,000, that were not
vested at December 31, 2006 and 2005, respectively (there
were none in 2004).
The exchange into common stock of the minority interests,
associated with OP Units, was not included in the computation of
diluted EPS for 2006 or 2005 because the effect of assuming
conversion was antidilutive (Note 13).
F-47
The Senior Convertible Notes issued in August 2006, which are
convertible into common shares of the Company at a price of
$65.11, were not included in the computation of diluted EPS for
2006 as the Companys stock price did not exceed the strike
price of the conversion feature (Note 9). These notes were
not outstanding in 2005 or 2004.
The forward equity contract entered into in December 2006 for
11.6 million common shares of the Company, was not included
in the computation of diluted EPS for 2006 because the effect of
assuming conversion was antidilutive (Note 13). This
contract was not outstanding in 2005 or 2004.
20. Federal
Income Taxes
The Company elected to be treated as a Real Estate Investment
Trust (REIT) under the Internal Revenue Code of
1986, as amended, commencing with its taxable year ended
December 31, 1993. To qualify as a REIT, the Company must
meet a number of organizational and operational requirements,
including a requirement that the Company distribute at least 90%
of its taxable income to its stockholders. It is
managements current intention to adhere to these
requirements and maintain the Companys REIT status. As a
REIT, the Company generally will not be subject to corporate
level federal income tax on taxable income it distributes to its
stockholders. As the Company distributed sufficient taxable
income for the three years ended December 31, 2006, no U.S.
federal income or excise taxes were incurred.
If the Company fails to qualify as a REIT in any taxable year,
it will be subject to federal income taxes at regular corporate
rates (including any alternative minimum tax) and may not be
able to qualify as a REIT for the four subsequent taxable years.
Even if the Company qualifies for taxation as a REIT, the
Company may be subject to certain state and local taxes on its
income and property, and to federal income and excise taxes on
its undistributed taxable income. In addition, the Company has
two taxable REIT subsidiaries that generate taxable income from
non-REIT activities and are subject to federal, state and local
income taxes.
At December 31, 2006, 2005 and 2004, the tax cost basis of
assets was approximately $7.3 billion, $6.9 billion
and $5.6 billion, respectively.
The following represents the combined activity of all of the
Companys taxable REIT subsidiaries (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Book income (loss) before income
taxes
|
|
$
|
7,770
|
|
|
$
|
(5,166
|
)
|
|
$
|
(5,952
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of income tax (benefit)
expense are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
3,410
|
|
|
$
|
|
|
|
$
|
|
|
State and local
|
|
|
490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(6,428
|
)
|
|
|
(1,875
|
)
|
|
|
366
|
|
State and local
|
|
|
(945
|
)
|
|
|
(276
|
)
|
|
|
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,373
|
)
|
|
|
(2,151
|
)
|
|
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) expense
|
|
$
|
(3,473
|
)
|
|
$
|
(2,151
|
)
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The 2006 income tax benefit is primarily attributable to the
Companys ability to deduct intercompany interest costs due
to the increased gain on disposition of real estate. The
allowance of intercompany interest expense within the
Companys taxable REIT subsidiaries is subject to certain
intercompany limitations based upon taxable income as required
under Internal Revenue Code Section 163(j).
F-48
The differences between total income tax expense or benefit and
the amount computed by applying the statutory federal income tax
rate to income before taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Statutory rate of 34% applied to
pre-tax income (loss)
|
|
$
|
2,642
|
|
|
$
|
(1,757
|
)
|
|
$
|
(2,024
|
)
|
Effect of state and local income
taxes, net of federal tax benefit
|
|
|
388
|
|
|
|
(258
|
)
|
|
|
(298
|
)
|
Valuation allowance (decrease)
increase
|
|
|
(13,043
|
)
|
|
|
2,855
|
|
|
|
(1,226
|
)
|
Other
|
|
|
6,540
|
|
|
|
(2,991
|
)
|
|
|
3,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total (benefit) expense
|
|
$
|
(3,473
|
)
|
|
$
|
(2,151
|
)
|
|
$
|
419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
(44.70
|
)%
|
|
|
41.64
|
%
|
|
|
(7.04
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities of the Companys
taxable REIT subsidiaries were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Deferred tax assets (1)
|
|
$
|
45,100
|
|
|
$
|
53,394
|
|
|
$
|
49,390
|
|
Deferred tax liabilities
|
|
|
(237
|
)
|
|
|
(2,861
|
)
|
|
|
(3,863
|
)
|
Valuation allowance (1)
|
|
|
(36,037
|
)
|
|
|
(49,080
|
)
|
|
|
(46,225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability)
|
|
$
|
8,826
|
|
|
$
|
1,453
|
|
|
$
|
(698
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
The majority of the deferred tax
assets and valuation allowance is attributable to interest
expense, subject to limitations and basis differentials in
assets due to purchase price accounting. Reconciliation of GAAP
net income to taxable income is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
GAAP net income
|
|
$
|
253,263
|
|
|
$
|
282,643
|
|
|
$
|
269,762
|
|
Add: Book depreciation and
amortization (1)
|
|
|
93,189
|
|
|
|
64,854
|
|
|
|
38,999
|
|
Less: Tax depreciation and
amortization (1)
|
|
|
(80,852
|
)
|
|
|
(52,362
|
)
|
|
|
(31,066
|
)
|
Book/tax differences on
gains/losses from capital transactions
|
|
|
12,161
|
|
|
|
(4,382
|
)
|
|
|
(7,006
|
)
|
Joint venture equity in earnings,
net (1)
|
|
|
(41,694
|
)
|
|
|
(111,351
|
)
|
|
|
(64,578
|
)
|
Dividends from subsidiary REIT
investments
|
|
|
33,446
|
|
|
|
96,868
|
|
|
|
32,997
|
|
Deferred income
|
|
|
(2,136
|
)
|
|
|
1,495
|
|
|
|
(2,085
|
)
|
Compensation expense
|
|
|
(9,215
|
)
|
|
|
(10,589
|
)
|
|
|
2,301
|
|
Legal judgment
|
|
|
|
|
|
|
|
|
|
|
(9,190
|
)
|
Miscellaneous book/tax
differences, net
|
|
|
(6,068
|
)
|
|
|
(12,186
|
)
|
|
|
(8,503
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income before adjustments
|
|
|
252,094
|
|
|
|
254,990
|
|
|
|
221,631
|
|
Less: Capital gains
|
|
|
(69,977
|
)
|
|
|
(84,041
|
)
|
|
|
(73,110
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Taxable income subject to the 90%
dividend requirement
|
|
$
|
182,117
|
|
|
$
|
170,949
|
|
|
$
|
148,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Depreciation expense from
majority-owned subsidiaries and affiliates, which are
consolidated for financial reporting purposes, but not for tax
reporting purposes, is included in the reconciliation item
Joint venture equity in earnings, net.
|
F-49
Reconciliation between cash dividends paid and the dividends
paid deduction is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Cash dividends paid
|
|
$
|
306,929
|
|
|
$
|
285,710
|
|
|
$
|
226,537
|
|
Less: Dividends designated to
prior year
|
|
|
(6,900
|
)
|
|
|
(14,651
|
)
|
|
|
(19,557
|
)
|
Plus: Dividends designated from
the following year
|
|
|
6,900
|
|
|
|
6,900
|
|
|
|
14,651
|
|
Less: Portion designated capital
gain distribution
|
|
|
(69,977
|
)
|
|
|
(84,041
|
)
|
|
|
(73,110
|
)
|
Less: Return of capital
|
|
|
(54,835
|
)
|
|
|
(22,969
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid deduction
|
|
$
|
182,117
|
|
|
$
|
170,949
|
|
|
$
|
148,521
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Characterization of distributions is as follows (per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31,
|
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
Ordinary income
|
|
$
|
1.31
|
|
|
$
|
1.24
|
|
|
$
|
1.19
|
|
Capital gains
|
|
|
0.37
|
|
|
|
0.44
|
|
|
|
0.51
|
|
Return of capital
|
|
|
0.50
|
|
|
|
0.21
|
|
|
|
|
|
Unrecaptured Section 1250 gain
|
|
|
0.13
|
|
|
|
0.17
|
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.31
|
|
|
$
|
2.06
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All or a portion of the fourth quarter dividends for each of the
years ended December 31, 2006, 2005 and 2004, have been
allocated and reported to shareholders in the subsequent year.
Dividends per share reported to shareholders for the years ended
December 31, 2006, 2005 and 2004, are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Return of
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Capital
|
|
|
Dividends
|
|
|
4th quarter 2005
|
|
|
01/06/06
|
|
|
$
|
0.30
|
|
|
$
|
0.12
|
|
|
$
|
0.12
|
|
|
$
|
0.54
|
|
1st quarter
|
|
|
04/03/06
|
|
|
|
0.33
|
|
|
|
0.13
|
|
|
|
0.13
|
|
|
|
0.59
|
|
2nd quarter
|
|
|
07/05/06
|
|
|
|
0.34
|
|
|
|
0.12
|
|
|
|
0.13
|
|
|
|
0.59
|
|
3rd quarter
|
|
|
10/02/06
|
|
|
|
0.34
|
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
0.59
|
|
4th quarter
|
|
|
01/08/07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.31
|
|
|
$
|
.50
|
|
|
$
|
.50
|
|
|
$
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Return of
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Capital
|
|
|
Dividends
|
|
|
4th quarter 2004
|
|
|
01/06/05
|
|
|
$
|
0.26
|
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
$
|
0.44
|
|
1st quarter
|
|
|
04/04/05
|
|
|
|
0.32
|
|
|
|
0.16
|
|
|
|
0.06
|
|
|
|
0.54
|
|
2nd quarter
|
|
|
07/05/05
|
|
|
|
0.33
|
|
|
|
0.16
|
|
|
|
0.05
|
|
|
|
0.54
|
|
3rd quarter
|
|
|
10/03/05
|
|
|
|
0.33
|
|
|
|
0.16
|
|
|
|
0.05
|
|
|
|
0.54
|
|
4th quarter
|
|
|
01/08/06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.24
|
|
|
$
|
0.61
|
|
|
$
|
0.21
|
|
|
$
|
2.06
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
|
|
2004
|
|
Date
|
|
|
Ordinary
|
|
|
Capital Gain
|
|
|
Total
|
|
Dividends
|
|
Paid
|
|
|
Income
|
|
|
Distributions
|
|
|
Dividends
|
|
|
4th quarter 2003
|
|
|
01/05/04
|
|
|
$
|
0.18
|
|
|
$
|
0.10
|
|
|
$
|
0.28
|
|
1st quarter
|
|
|
04/05/04
|
|
|
|
0.31
|
|
|
|
0.15
|
|
|
|
0.46
|
|
2nd quarter
|
|
|
07/06/04
|
|
|
|
0.31
|
|
|
|
0.15
|
|
|
|
0.46
|
|
3rd quarter
|
|
|
10/04/04
|
|
|
|
0.34
|
|
|
|
0.17
|
|
|
|
0.51
|
|
4th quarter
|
|
|
01/06/05
|
|
|
|
0.05
|
|
|
|
0.02
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.19
|
|
|
$
|
0.59
|
|
|
$
|
1.78
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company had two reportable business segments, shopping
centers and business centers, determined in accordance with
SFAS No. 131, Disclosures About Segments of an
Enterprise and Related Information. The Company sold the
majority of its business center assets in 2005. Each shopping
center and business center is considered a separate operating
segment, and both segments utilize the accounting policies
described in Note 1; however, each shopping center on a
stand-alone basis is less than 10% of the revenues, profit or
loss, and assets of the combined reported operating segment and
meets the majority of the aggregation criteria under
SFAS 131.
At December 31, 2006, reflecting the impact of the
classification of 63 properties as discontinued operations for the
period January 1, 2007 to June 30, 2007, the shopping center segment consisted
of 404 shopping centers (including 162 owned through
unconsolidated joint ventures and 39 consolidated by the
Company) in 44 states, plus Puerto Rico and Brazil. At
December 31, 2006, the business center segment consists of
seven business centers in five states.
The table below presents information about the Companys
reportable segments for the years ended December 31, 2006,
2005 and 2004 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
4,386
|
|
|
$
|
775,798
|
|
|
|
|
|
|
$
|
780,184
|
|
Operating expenses
|
|
|
(1,999
|
)
|
|
|
(197,090
|
)
|
|
|
|
|
|
|
(199,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,387
|
|
|
|
578,708
|
|
|
|
|
|
|
|
581,095
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(443,878
|
)
|
|
|
(443,878
|
)
|
Equity in net income of
joint ventures
|
|
|
|
|
|
|
30,337
|
|
|
|
|
|
|
|
30,337
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(8,453
|
)
|
|
|
(8,453
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
159,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
90,772
|
|
|
$
|
7,359,921
|
|
|
|
|
|
|
$
|
7,450,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
7,077
|
|
|
$
|
675,771
|
|
|
|
|
|
|
$
|
682,848
|
|
Operating expenses
|
|
|
(1,800
|
)
|
|
|
(171,203
|
)
|
|
|
|
|
|
|
(173,003
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,277
|
|
|
|
504,568
|
|
|
|
|
|
|
|
509,845
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(375,094
|
)
|
|
|
(375,094
|
)
|
Equity in net income of joint
ventures
|
|
|
|
|
|
|
34,873
|
|
|
|
|
|
|
|
34,873
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(7,881
|
)
|
|
|
(7,881
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
161,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
86,374
|
|
|
$
|
6,942,963
|
|
|
|
|
|
|
$
|
7,029,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-51
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
Business
|
|
|
Shopping
|
|
|
|
|
|
|
|
|
|
Centers
|
|
|
Centers
|
|
|
Other
|
|
|
Total
|
|
|
Total revenues
|
|
$
|
8,674
|
|
|
$
|
526,307
|
|
|
|
|
|
|
$
|
534,981
|
|
Operating expenses
|
|
|
(1,734
|
)
|
|
|
(129,021
|
)
|
|
|
|
|
|
|
(130,755
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,940
|
|
|
|
397,286
|
|
|
|
|
|
|
|
404,226
|
|
Unallocated expenses (1)
|
|
|
|
|
|
|
|
|
|
$
|
(281,720
|
)
|
|
|
(281,720
|
)
|
Equity in net income of
joint ventures
|
|
|
|
|
|
|
40,895
|
|
|
|
|
|
|
|
40,895
|
|
Minority interests
|
|
|
|
|
|
|
|
|
|
|
(5,064
|
)
|
|
|
(5,064
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
158,337
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total real estate assets
|
|
$
|
264,615
|
|
|
$
|
5,338,809
|
|
|
|
|
|
|
$
|
5,603,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Unallocated expenses consist of
general and administrative, interest income, interest expense,
tax benefit/expense, other income/expense and depreciation and
amortization as listed in the consolidated statements of
operations.
|
Inland
Retail Real Estate Trust, Inc.
In October 2006, the Company and Inland Retail Real Estate
Trust, Inc. (IRRETI) announced that they entered
into a definitive merger agreement. Under the terms of the
agreement, the Company will acquire all of the outstanding
shares of IRRETI for a total merger consideration of $14.00, of
which $12.50 per share is expected to be funded in cash and
$1.50 per share in the form of DDR common stock is to be based
upon the
ten-day
average closing price of DDRs shares determined two
trading days prior to the IRRETI stockholders meeting to
approve the transaction (plus accrued unpaid dividends),
scheduled for February 22, 2007.
The transaction has a total value of approximately
$6.2 billion. This amount includes approximately
$2.3 billion of existing debt, a significant portion of
which is expected to be extinguished at closing. IRRETIs
real estate portfolio aggregates over 300 community shopping
centers, neighborhood shopping centers and single tenant/net
leased retail properties.
In November 2006, the Company announced the formation of a joint
venture with TIAA-CREF to purchase a portfolio of 66 community
retail centers from the IRRETI portfolio of assets for
approximately $3.0 billion of total asset value. An
affiliate of TIAA-CREF expects to contribute 85% of the equity
in the joint venture, and an affiliate of DDR expects to
contribute 15% of the equity in the joint venture.
It is anticipated that this transaction will be approved by the
IRRETI shareholders and will close at the end of February 2007.
However, there is no assurance that the transaction will close
in February 2007 as expected.
Coventry
Effective January 2007, the Company acquired the remaining 25%
minority interest in Coventry (Note 2) and, as such, the
Company now owns 100% in this entity. The aggregate purchase
price was approximately $12.8 million.
President
and Chief Operating Officer
In February 2007, David M. Jacobstein announced he was stepping
down from the Company effective May 2007. Daniel B. Hurwitz, who
currently serves as Senior Executive Vice President and Chief
Investment Officer will assume the role of President and Chief
Operating Officer effective May 2007. The Company will record a
severance charge of approximately $4.1 million to general
and administrative expense in 2007 in connection with these
agreements.
Forward
Sale Agreements
In February 2007, the Company exercised its option to settle,
pursuant to the terms the forward sale agreements, in its common
shares on February 26, 2007 (Note 13).
F-52
23. Quarterly
Results of Operations (Unaudited)
The following table sets forth the quarterly results of
operations, restated for discontinued operations, for the years
ended December 31, 2006 and 2005 (in thousands, except per
share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
Total
|
|
|
2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
191,019
|
|
|
$
|
189,027
|
|
|
$
|
195,276
|
|
|
$
|
204,862
|
|
|
$
|
780,184
|
|
Net income
|
|
|
49,727
|
|
|
|
78,736
|
|
|
|
62,812
|
|
|
|
61,989
|
|
|
|
253,264
|
|
Net income applicable to common
shareholders
|
|
|
35,935
|
|
|
|
64,943
|
|
|
|
49,020
|
|
|
|
48,197
|
|
|
|
198,095
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.33
|
|
|
$
|
0.59
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.82
|
|
Weighted average number of shares
|
|
|
108,962
|
|
|
|
109,393
|
|
|
|
109,120
|
|
|
|
108,638
|
|
|
|
109,002
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.33
|
|
|
$
|
0.59
|
|
|
$
|
0.45
|
|
|
$
|
0.44
|
|
|
$
|
1.81
|
|
Weighted average number of shares
|
|
|
109,609
|
|
|
|
110,866
|
|
|
|
109,670
|
|
|
|
109,308
|
|
|
|
109,613
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
160,650
|
|
|
$
|
165,424
|
|
|
$
|
169,431
|
|
|
$
|
187,343
|
|
|
$
|
682,848
|
|
Net income
|
|
|
105,550
|
|
|
|
67,954
|
|
|
|
60,277
|
|
|
|
48,862
|
|
|
|
282,643
|
|
Net income applicable to common
shareholders
|
|
|
91,758
|
|
|
|
54,162
|
|
|
|
46,485
|
|
|
|
35,069
|
|
|
|
227,474
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.85
|
|
|
$
|
0.50
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
2.10
|
|
Weighted average number of shares
|
|
|
108,005
|
|
|
|
108,276
|
|
|
|
108,431
|
|
|
|
108,523
|
|
|
|
108,310
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per common share
|
|
$
|
0.84
|
|
|
$
|
0.50
|
|
|
$
|
0.43
|
|
|
$
|
0.32
|
|
|
$
|
2.08
|
|
Weighted average number of shares
|
|
|
110,244
|
|
|
|
109,022
|
|
|
|
109,211
|
|
|
|
109,168
|
|
|
|
109,142
|
|
24. Other Events
Subsequent to the filing of the Companys Annual Report on Form 10-K on February 21, 2007, the
Company has retrospectively adjusted its audited consolidated financial statements for the
years ended December 31, 2006, 2005 and 2004, due to certain provisions of Statement of
Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposals of
Long-Lived Assets that require the Company to report the results of operations of a property
if it has either been disposed or is classified as held for sale in discontinued operations and
meets certain other criteria. Accordingly, the Company has retrospectively adjusted its
audited consolidated financial statements for the years ended December 31, 2006, 2005 and 2004,
to reflect on property that was sold during the six-months ended June 30, 2007 that was not
classified as discontinued operations. The effect of the retrospective adjustment represents a
$8.5 million, $11.2 million, and $10.6 million decrease in its previously reported income from
continuing operations for the years ended December 31, 2006, 2005 and 2004, respectively. In
addition, joint ventures, accounted for under the equity method of accounting, disposed of five
properties during the six-months ended June 30, 2007. As a result of the foregoing Notes 1, 2,
4, 12, 14, 16, 19, 21, and 23 (unaudited) to the consolidated financial statements for the
years ended December 31, 2006, 2005 and 2004 have been updated. There is no effect on the
Companys previously reported net income, financial condition or cash flows.
F-53
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, thereunto duly authorized.
|
|
|
|
|
|
Developers Diversified Realty Corporation
(Registrant)
|
|
|
|
|
|
|
|
|
|
Date November 9, 2007
|
/s/ William H. Schafer
|
|
|
William H. Schafer
|
|
|
Executive Vice President and Chief Financial Officer
|
|
|
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