NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of Significant Accounting Policies
Business
Weingarten Realty Investors is a real estate investment trust (“REIT”) organized under the Texas Real Estate Investment Trust Act. Effective January 1, 2010, the Texas Real Estate Investment Trust Act was replaced by the Texas Business Organizations Code. We, and our predecessor entity, began the ownership and development of shopping centers and other commercial real estate in 1948. Our primary business is leasing space to tenants in the shopping and industrial centers we own or lease. We also manage centers for joint ventures in which we are partners or for other outside owners for which we charge fees.
We operate a portfolio of properties that include neighborhood and community shopping centers and industrial properties of approximately 71.5 million square feet. We have a diversified tenant base with our largest tenant comprising only 3.0% of total rental revenues during 2010.
We currently operate, and intend to operate in the future, as a REIT.
Basis of Presentation
Our consolidated financial statements include the accounts of our subsidiaries, certain partially owned real estate joint ventures or partnerships and variable interest entities which meet the guidelines for consolidation. All intercompany balances and transactions have been eliminated.
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Such statements require management to make estimates and assumptions that affect the reported amounts on our consolidated financial statements. Actual results could differ from these estimates.
Revenue Recognition
Rental revenue is generally recognized on a straight-line basis over the term of the lease, which begins the date the leasehold improvements are substantially complete, if owned by us, or the date the tenant takes control of the space, if the leasehold improvements are owned by the tenant. Revenue from tenant reimbursements of taxes, maintenance expenses and insurance is subject to our interpretation of lease provisions and is recognized in the period the related expense is recognized. Revenue based on a percentage of tenants' sales is recognized only after the tenant exceeds their sales breakpoint. In addition, in circumstances where we provide a tenant improvement allowance for improvements that are owned by the tenant, we recognize the allowance as a reduction of rental revenue on a straight-line bas is over the term of the lease. Other revenue is income from contractual agreements with third parties, tenants or partially owned real estate joint ventures or partnerships, which is recognized as the related services are performed under the respective agreements.
Real Estate Joint Ventures and Partnerships
To determine the method of accounting for partially owned real estate joint ventures and partnerships, we apply the guidelines as set forth in GAAP. Entities identified as variable interest entities are consolidated if we are determined to be the primary beneficiary of the partially owned real estate joint venture or partnership.
Partially owned real estate joint ventures and partnerships over which we have a controlling financial interest are consolidated in our financial statements. In determining if we have a controlling financial interest, we consider factors such as ownership interest, authority to make decisions, kick-out rights and substantive participating rights. Management continually analyzes and assesses reconsideration events, including changes in these factors, to determine if the consolidation treatment remains appropriate. Partially owned real estate joint ventures and partnerships where we do not have a controlling financial interest, but have the ability to exercise significant influence, are accounted for using the equity method.
Property
Real estate assets are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method, generally over estimated useful lives of 18-40 years for buildings and 10-20 years for parking lot surfacing and equipment. Major replacements where the betterment extends the useful life of the asset are capitalized and the replaced asset and corresponding accumulated depreciation are removed from the accounts. All other maintenance and repair items are charged to expense as incurred.
Acquisitions of properties are accounted for utilizing the acquisition method and, accordingly, the results of operations of an acquired property are included in our results of operations from the date of acquisition. Estimates of fair values are based upon future cash flows and other valuation techniques in accordance with our fair value measurements accounting policy, which are used to record the purchase price of acquired property among land, buildings on an "as if vacant" basis, tenant improvements, other identifiable intangibles and any goodwill or gain on purchase. Other identifiable intangible assets and liabilities include the effect of out-of-market leases, the value of having leases in place (“as is” versus “as if vacant” and absorption costs), out-of-market assumed mortgages and tenant relationships. Depreciation and amortization is computed using the straight-line method, generally over estimated useful lives of 40 years for buildings and over the lease term which includes bargain renewal options for other identifiable intangible assets. Effective 2009, acquisition costs are expensed as incurred.
Property also includes costs incurred in the development of new operating properties and properties in our merchant development program. Merchant development is a program in which we develop a project with the objective of selling all or part of it, instead of retaining it in our portfolio on a long-term basis. Also, disposition of land parcels and non-operating properties are included in this program. These properties are carried at cost, and no depreciation is recorded on these assets until rent commences or no later than one year from the completion of major construction. These costs include preacquisition costs directly identifiable with the specific project, development and construction costs, interest and real estate taxes. Indirect development costs, including salaries and b enefits, travel and other related costs that are directly attributable to the development of the property, are also capitalized. The capitalization of such costs ceases at the earlier of one year from the completion of major construction or when the property, or any completed portion, becomes available for occupancy.
Property also includes costs for tenant improvements paid by us, including reimbursements to tenants for improvements that are owned by us and will remain our property after the lease expires.
Some of our properties are held in single purpose entities. A single purpose entity is a legal entity typically established at the request of a lender solely for the purpose of owning a property or group of properties subject to a mortgage. There may be restrictions limiting the entity’s ability to engage in an activity other than owning or operating the property, assuming or guaranteeing the debt of any other entity, or dissolving itself or declaring bankruptcy before the debt has been repaid. Most of our single purpose entities are 100% owned by us and are consolidated in our financial statements.
Impairment
Our property is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property, including any capitalized costs and any identifiable intangible assets, may not be recoverable.
If such an event occurs, a comparison is made of the current and projected operating cash flows of each such property into the foreseeable future, with consideration of applicable holding periods, on an undiscounted basis to the carrying amount of such property. If we determine the carrying amount is not recoverable, our basis in the property is reduced to its estimated fair value to reflect impairment in the value of the asset. Fair values are determined by management utilizing cash flow models, market capitalization rates and market discount rates, or by obtaining third-party broker or appraisal estimates in accordance with our fair value measurements accounting policy.
We continuously review economic considerations at each reporting period, including the effects of tenant bankruptcies, the suspension of tenant expansion plans for new development projects, declines in real estate values, and any changes to plans related to our new development properties including land held for development, to identify properties where we believe market values may be deteriorating. Impairments, primarily related to land held for development, of $5.2 million, $38.8 million and $52.5 million were recognized for the year ended December 31, 2010, 2009 and 2008, respectively. Determining whether a property is impaired and, if impaired, the amount of write-down to fair value requires a significant amount of judgment by management and is based on the best information available to management at the t ime of evaluation. If market conditions continue to deteriorate or management’s plans for certain properties change, additional write-downs could be required in the future.
Our investment in partially owned real estate joint ventures and partnerships is reviewed for impairment each reporting period. The ultimate realization is dependent on a number of factors, including the performance of each investment and market conditions. We will record an impairment charge if we determine that a decline in the value of an investment below its carrying amount is other than temporary. For the year ended December 31, 2010, an impairment loss of $15.8 million was recognized in connection with the revaluation of our 50% equity interest in a development project in Sheridan, Colorado, as a result of our assumption of control of the project as of April 1, 2010. See Note 4 for additional information. No impairment on these investments was recorded for the year ended Dece mber 31, 2009 and 2008. However, due to the current credit and real estate market conditions, there is no certainty that impairments would not occur in the future.
Our investments in tax increment revenue bonds, which were classified as held to maturity during 2010, are reviewed for impairment, if events or circumstances change indicating that the carrying amount of the investment may not be recoverable. Realization is dependent on a number of factors, including investment performance and market conditions. We will record an impairment charge if we determine that a decline in the value of the investment below its carrying amount is other than temporary, and it is uncertain if the investment will be held to maturity. For the year ended December, 31, 2010, we recorded an $11.7 million impairment associated with our investment in the subordinated tax increment revenue bonds (see Note 18 for further information). No such impairment was recorded for the year ended December 31, 2009 and 2008. On December 31, 2010, the tax increment revenue bonds have been classified as available for sale based on our anticipation that the bonds may be reissued during 2011.
Interest Capitalization
Interest is capitalized on land under development and buildings under construction based on rates applicable to borrowings outstanding during the period and the weighted average balance of qualified assets under development/construction during the period.
Fair Value Measurements
Certain financial instruments, estimates and transactions are required to be calculated, reported and/or recorded at fair value. The estimated fair values of such financial items, including debt instruments, impairments, acquisitions, investment securities and derivatives, have been determined using a market-based measurement. This measurement is determined based on the assumptions that management believes market participants would use in pricing an asset or liability. As a basis for considering market participant assumptions in fair value measurements, GAAP establishes a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy ) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which is typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair val ue measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The fair value of such financial instruments estimates and transactions was determined using available market information and appropriate valuation methodologies as prescribed by GAAP.
Notes Receivable from Real Estate Joint Ventures and Partnerships
Notes receivable from real estate joint ventures and partnerships in which we have an ownership interest, primarily represent mortgage construction notes. We consider applying a reserve to a note receivable when it becomes apparent that conditions exist that may lead to our inability to fully collect on outstanding amounts due. Such conditions include delinquent or late payments on notes, deterioration in the ongoing relationship with the borrower and other relevant factors. When such conditions leading to expected losses exist, we would estimate a reserve by reviewing the borrower’s ability to meet scheduled debt service, our partner’s ability to make contributions and the fair value of the collateral.
Deferred Charges
Debt financing costs are amortized primarily on a straight-line basis, which approximates the effective interest method, over the terms of the debt. Lease costs represent the initial direct costs incurred in origination, negotiation and processing of a lease agreement. Such costs include outside broker commissions and other independent third party costs, as well as salaries and benefits, travel and other internal costs directly related to completing a lease and are amortized over the life of the lease on a straight-line basis. Costs related to supervision, administration, unsuccessful origination efforts and other activities not directly related to completed lease agreements are charged to expense as incurred.
Sales of Real Estate
Sales of real estate include the sale of tracts of land within a shopping center development, property adjacent to shopping centers, shopping center properties, merchant development properties, investments in real estate joint ventures and partnerships and partial sales to real estate joint ventures and partnerships in which we participate.
Profits on sales of real estate, including merchant development sales are not recognized until (a) a sale is consummated; (b) the buyer’s initial and continuing investments are adequate to demonstrate a commitment to pay; (c) the seller’s receivable is not subject to future subordination; and (d) we have transferred to the buyer the usual risks and rewards of ownership in the transaction, and we do not have a substantial continuing involvement with the property.
We recognize gains on the sale of real estate to joint ventures and partnerships in which we participate to the extent we receive cash from the joint venture or partnership, if it meets the sales criteria in accordance with GAAP and we do not have a commitment to support the operations of the real estate joint venture or partnership to an extent greater than our proportionate interest in the real estate joint venture or partnership.
Accrued Rent and Accounts Receivable, net
Receivable balances outstanding include base rents, tenant reimbursements and receivables attributable to the straight-lining of rental commitments. An allowance for the uncollectible portion of accrued rents and accounts receivable is determined based upon an analysis of balances outstanding, historical bad debt levels, tenant creditworthiness and current economic trends. Additionally, estimates of the expected recovery of pre-petition and post-petition claims with respect to tenants in bankruptcy are considered in assessing the collectibility of the related receivables. Management’s estimate of the collectibility of accrued rents and accounts receivable is based on the best information available to management at the time of evaluation.
Restricted Deposits and Mortgage Escrows
Restricted deposits and mortgage escrows consist of escrow deposits held by lenders primarily for property taxes, insurance and replacement reserves and restricted cash that is held for a specific use or in a qualified escrow account for the purposes of completing like-kind exchange transactions. At December 31, 2010 and 2009, we had $1.8 million and $1.6 million of restricted cash, respectively, and $8.4 million and $11.1 million held in escrow related to our mortgages, respectively.
Other Assets, net
Other assets include an asset related to the debt service guaranty (see Note 6 for further information), tax increment revenue bonds, investments held in grantor trusts, deferred tax assets, prepaid expenses, interest rate derivatives, the value of above-market leases and the related accumulated amortization and other miscellaneous receivables. Investments held in grantor trusts are adjusted to fair value at each period end with changes included in our Statements of Consolidated Income and Comprehensive Income. Above-market leases are amortized as adjustments to rental revenues over terms of the acquired leases. Other miscellaneous receivables have a reserve applied to the carrying amount when it becomes apparent that conditions exist that may lead to our inability to fully collect on outstanding amount s due. Such conditions include delinquent or late payments on receivables, deterioration in the ongoing relationship with the borrower and other relevant factors. We would apply a reserve when expected loss conditions exist by reviewing the borrower’s ability to generate revenues to meet debt service requirements and the fair value of any collateral.
Per Share Data
Earnings per common share – basic is computed using net income attributable to common shareholders and the weighted average shares outstanding. Earnings per common share – diluted include the effect of potentially dilutive securities. Income from continuing operations attributable to common shareholders includes gain on sale of property in accordance with SEC guidelines. Earnings per common share – basic and diluted components for the periods indicated are as follows (in thousands):
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Numerator: | | | | | | | | | |
| Net income attributable to common shareholders – basic and diluted | | $ | 10,730 | | | $ | 135,626 | | | $ | 109,091 | |
| | | | | | | | | | | | | |
| Denominator: | | | | | | | | | | | | |
| Weighted average shares outstanding – basic | | | 119,935 | | | | 109,546 | | | | 84,474 | |
| Effect of dilutive securities: | | | | | | | | | | | | |
| Share options and awards | | | 845 | | | | 632 | | | | 443 | |
| Weighted average shares outstanding – diluted | | | 120,780 | | | | 110,178 | | | | 84,917 | |
Options to purchase common shares of beneficial interest (“common shares”) of 3.5 million, 3.1 million and 2.4 million for the year ended December 31, 2010, 2009 and 2008, respectively, were not included in the calculation of net income per common share - diluted as the exercise prices were greater than the average market price for the year. For the year ended December 31, 2010, 2009 and 2008, 1.7 million, 2.0 million and 2.4 million, respectively, of operating partnership units were not included in the calculation of net income per common share – diluted because these units had an anti-dilutive effect.
Income Taxes
We have elected to be treated as a REIT under the Internal Revenue Code of 1986, as amended. As a REIT, we generally will not be subject to corporate level federal income tax on taxable income we distribute to our shareholders. To be taxed as a REIT, we must meet a number of requirements including defined percentage tests concerning the amount of our assets and revenues that come from, or are attributable to, real estate operations. As long as we distribute at least 90% of the taxable income of the REIT (without regard to capital gains or the dividends paid deduction) to our shareholders as dividends, we will not be taxed on the portion of our income we distribute as dividends unless we have ineligible transactions.
The Tax Relief Extension Act of 1999 gave REITs the ability to conduct activities which a REIT was previously precluded from doing as long as such activities are performed in entities which have elected to be treated as taxable REIT subsidiaries under the IRS code. These activities include buying or developing properties with the express purpose of selling them. We conduct certain of these activities in taxable REIT subsidiaries that we have created. We calculate and record income taxes in our consolidated financial statements based on the activities in those entities. Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between our carrying amounts of existing assets and liabilities and their respective tax bases and operati ng loss and tax credit carry-forwards. These are measured using enacted tax rates in effect for the year in which those temporary differences are expected to be recovered or settled. A valuation allowance for deferred tax assets is established for those assets we do not consider the realization of such assets to be more likely than not.
Additionally, GAAP prescribes a recognition threshold and measurement attribute for the financial statement recognition of a tax position taken, or expected to be taken, in a tax return. A tax position may only be recognized in the financial statements if it is more likely than not that the tax position will be sustained upon examination. We believe it is more likely than not that our tax positions will be sustained in any tax examinations.
Cash and Cash Equivalents
All highly liquid investments with original maturities of three months or less are considered cash equivalents. Cash and cash equivalents are primarily held at major financial institutions in the United States. We had cash and cash equivalents in certain financial institutions in excess of federally insured levels. We have diversified our cash and cash equivalents amongst several banking institutions in an attempt to minimize exposure to any one of these entities. We believe we are not exposed to any significant credit risk and regularly monitor the financial stability of these financial institutions.
Cash Flow Information
We issued common shares valued at $.7 million, $14.3 million and $2.3 million during 2010, 2009 and 2008, respectively, in exchange for interests in real estate joint ventures and partnerships, which had been formed to acquire properties. We also accrued $6.9 million, $10.7 million and $25.8 million at December 31, 2010, 2009 and 2008, respectively, associated with the construction of property. Cash payments for interest on debt, net of amounts capitalized, of $140.3 million, $156.5 million and $154.8 million were made during 2010, 2009 and 2008, respectively. Cash payments of $2.1 million, $3.1 million and $5.1 million for income taxes were made during 2010, 2009 and 2008, respectively.
In connection with the sale of an 80% interest in two properties during 2010, we retained a 20% unconsolidated investment of $9.8 million. In addition, this transaction resulted in the unconsolidated joint venture assuming debt totaling $28.1 million.
Effective April 1, 2010, two previously unconsolidated joint ventures were consolidated within our consolidated financial statements. The resulting non-cash investing and financing activities were as follows (in thousands):
| Increase in other assets | | $ | 148,255 | |
| Decrease in notes receivable from real estate joint ventures and partnerships | | | 123,912 | |
| Increase in debt, net | | | 101,741 | |
| Increase in property, net | | | 32,940 | |
| Decrease in other liabilities, net | | | 21,858 | |
| Decrease in noncontrolling interests | | | 18,573 | |
Also, in April 2010, we acquired a partner’s noncontrolling interests in a consolidated real estate joint venture that reduced equity by $.9 million.
In association with property acquisitions and investments in unconsolidated real estate joint ventures, the non-cash investing and financing activities were as follows (in thousands):
| | | Year Ended December 31, | |
| | | 2010 | | 2009 | | 2008 | |
| | | | | | | | |
| Increase in debt, net | | $ | 27,302 | | | | | |
| Increase (decrease) in investment in property | | | 18,376 | | | | $ | (15,414 | ) |
| Increase in real estate joint ventures and partnerships - investments | | | | | | | | 11,285 | |
| Increase in notes receivable from real estate joint ventures and partnerships and other receivables - advances | | | | | | | | 6,948 | |
| Increase in noncontrolling interests | | | | | | | | 634 | |
| Increase in restricted deposits and mortgage escrows | | | 498 | | | | | 193 | |
| Increase in other, net | | | 302 | | | | | 17 | |
In connection with the sale of improved properties during 2009, we received notes receivable totaling $.2 million and a mortgage of $9.1 million was assumed by the purchaser. In connection with the sale of an 80% interest in four properties, we retained a 20% unconsolidated investment of $19.1 million. Also, our investment in real estate joint ventures and a non-cash contingent liability was reduced by $41 million as result of the cash settlement associated with a lawsuit in 2009.
In connection with the sale of improved properties during 2008, we received notes receivable totaling $6.0 million. Net assets and liabilities were reduced by $68.3 million during 2008 from the reorganization of four joint ventures, which were previously consolidated. In addition, we recorded a $41 million non-cash contingent liability as an increase to our investment in real estate joint ventures and partnerships and accrued $8.5 million for property damages associated with Hurricane Ike.
Accumulated Other Comprehensive Loss
As of December 31, 2010, the balance in accumulated other comprehensive loss relating to derivatives and our retirement liability was $11.7 million and $10.1 million, respectively. As of December 31, 2009, the balance in accumulated other comprehensive loss relating to derivatives and our retirement liability was $14.4 million and $9.6 million, respectively.
Reclassifications
The reclassification of prior years’ operating results for certain properties to discontinued operations was made to conform to the current year presentation. This reclassification had no impact on previously reported net income, earnings per share, the consolidated balance sheet or cash flows.
Note 2. Newly Issued Accounting Pronouncements
In June 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-17 (“ASU 2009-17”), “Improvements to Financial Reporting by Enterprises Involved with Variable Interest Entities.” ASU 2009-17 updated Accounting Standards Codification (“ASC") 810, “Consolidations” and was intended to improve an organization’s variable interest entity reporting. It required a change in the analysis used to determine whether an entity has a controlling financial interest in a variable interest entity, including the identification of the primary beneficiary of a variable interest entity. The holder of the variable interest is defined as the primary beneficiary if it has both the power to direct the entity’s significa nt economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. ASU 2009-17 also requires additional disclosures about an entity’s variable interest entities. The update was effective for us on January 1, 2010. Implementation of ASU 2009-17 did not impact our previous determinations of primary beneficiary status, but it resulted in additional disclosures included on the face of the Consolidated Balance Sheets and in Note 3.
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, “Improving Disclosures about Fair Value Measurements,” which provides for new disclosures, as well as clarification of existing disclosures on fair value measurements including employers’ disclosures about postretirement benefit plan assets. The update was effective for us beginning January 1, 2010, and its adoption did not materially impact our consolidated financial statements.
In July 2010, the FASB issued Accounting Standards Update No. 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses,” which provides for additional disclosures about the credit quality of an entity’s financing receivables, including loans and trade accounts receivables with contractual maturities exceeding one year and any related allowance for losses. The provisions of this update were effective for us at December 31, 2010, with the exception of disclosures related to activity occurring during a reporting period, which is effective for us in the first quarter of 2011. The adoption did not materially impact our consolidated financial statements nor do we anticipate the future adoption to materially impact our consolidated financial statements.
In December 2010, the FASB issued Accounting Standards Update No. 2010-29, “Disclosures of Supplementary Pro Forma Information for Business Combinations,” which clarifies that an entity should disclose revenue and earnings of the combined entity as though the business combination occurred during the current year as of the beginning of the comparable prior annual reporting period only. The update also expands disclosures on the supplemental pro forma. The update is effective for us beginning January 1, 2011; however, early adoption is permitted. We adopted this update as of December 31, 2010, and its adoption resulted in the disclosures included in Note 4.
Note 3. Variable Interest Entities
Management determines whether an entity is a variable interest entity (“VIE”) and, if so, determines which party is the primary beneficiary by analyzing if we have both the power to direct the entity’s significant economic activities and the obligation to absorb potentially significant losses or receive potentially significant benefits. Significant judgments and assumptions inherent in this analysis include the design of the entity structure, the nature of the entity’s operations, future cash flow projections, the entity’s financing and capital structure, and contractual relationships and terms. We consolidate a VIE when we have determined that we are the primary beneficiary.
Risks associated with our involvement with our VIEs include primarily the potential of funding the VIE’s debt obligations or making additional contributions to fund the VIE’s operations.
Consolidated VIEs:
Two of our real estate joint ventures whose activities principally consist of owning and operating 30 neighborhood/community shopping centers, of which 22 are located in Texas, three in Georgia, two each in Tennessee and Florida and one in North Carolina, were determined to be VIEs. These VIEs have financing agreements that are guaranteed solely by us for tax planning purposes. We have determined that we are the primary beneficiary and have consolidated these joint ventures. Our maximum exposure to loss associated with these joint ventures is primarily limited to our guaranties of the debt, which were approximately $157.4 million at December 31, 2010.
Assets held by our consolidated VIEs approximate $280.3 million and $291.6 million at December 31, 2010 and 2009, respectively. Of these assets, $253.6 million and $260.3 million at December 31, 2010 and 2009, respectively, are collateral for debt.
Restrictions on the use of these assets are significant because they are collateral for the VIEs’ debt, and we would be required to obtain our partners’ approval in accordance with the joint venture agreements on any major transactions. The impact of these transactions on our consolidated financial statements has been limited to changes in noncontrolling interests and reductions in debt from our partners’ contributions. We and our partners are subject to the provisions of the joint venture agreements which include provisions for when additional contributions may be required including operating cash shortfalls and unplanned capital expenditures. We have not provided any additional support as of December 31, 2010.
Unconsolidated VIEs:
We also have unconsolidated real estate joint ventures which engage in operating or developing real estate that have been determined to be VIEs due to agreements entered into by the joint ventures. We were not determined to be the primary beneficiary of the VIEs.
An unconsolidated real estate joint venture was determined to be a VIE through the issuance of a secured loan since the lender has the ability to make decisions that could have a significant impact on the success of the entity. In addition, we have another unconsolidated real estate joint venture with an interest in an entity which is deemed to be a VIE since the unconsolidated joint venture provided a guaranty on debt obtained from its investment in a joint venture. A summary of our unconsolidated VIEs is as follows (in thousands):
| Period | | Investment in Real Estate Joint Ventures and Partnerships, net (1) | | | Maximum Risk of Loss (2) | |
| December 31, 2010 | | $ | 11,581 | | | $ | 56,448 | |
| December 31, 2009 | | $ | 7,088 | | | $ | 58,061 | |
_______________
| | (1) | The carrying amount of the investments represents our contributions to the real estate joint ventures net of any distributions made and our portion of the equity in earnings of the joint ventures. |
| | (2) | The maximum risk of loss has been determined to be limited to our debt exposure for each real estate joint venture. |
We and our partners are subject to the provisions of the joint venture agreements that specify conditions, including operating shortfalls and unplanned capital expenditures, under which additional contributions may be required.
Note 4. Business Combinations
Effective April 1, 2010, we assumed control of two 50%-owned unconsolidated joint ventures (“Sheridan”) related to a development project in Sheridan, Colorado, which resulted in the consolidation of these joint ventures within our shopping center segment that had previously been accounted for under the equity method. Control was assumed through a modification of the joint venture agreements in which we assumed all management, voting and approval rights without transferring consideration to our joint venture partner. Each partner’s percentage interest in the joint ventures remained unchanged. Management has determined that these transactions qualified as business combinations to be accounted for under the acquisition method. Accordingly, the assets and liabilities of the join t ventures were recorded on our consolidated balance sheet at their estimated fair values as of April 1, 2010, with our partner’s share of the resulting net deficit included in noncontrolling interests. Fair value of assets acquired, liabilities assumed and equity interests was estimated using market-based measurements, including cash flow and other valuation techniques. The fair value measurement is based on both significant inputs for similar assets and liabilities in active markets and significant inputs that are not observable in the markets in accordance with our fair value measurements accounting policy. Key assumptions include third-party broker valuation estimates, discount rates ranging from 8% to 17%, a terminal cap rate for similar properties, and factors that we believe market participants would consider in estimating fair value. The results of the joint ventures are included in our Statements of Consolidated Income and Comprehensive Income beginn ing April 1, 2010.
The following table summarizes the transactions related to the business combinations, including the assets acquired and liabilities assumed as of April 1, 2010 (in thousands):
| Fair value of our equity interests before business combinations | | $ | (21,858 | ) |
| | | | | |
| Amounts recognized for assets and liabilities assumed: | | | | |
| Assets: | | | | |
| Property | | $ | 32,940 | |
| Unamortized Debt and Lease Costs | | | 5,182 | |
| Accrued Rent and Accounts Receivable | | | 213 | |
| Cash and Cash Equivalents | | | 1,522 | |
| Other, net (1) | | | 151,464 | |
| Liabilities: | | | | |
| Debt, net (2) | | | (101,741 | ) |
| Accounts payable and accrued expenses | | | (647 | ) |
| Other, net | | | (1,334 | ) |
| Total Net Assets | | $ | 87,599 | |
| | | | | |
| Noncontrolling interests of the real estate joint ventures | | $ | (18,573 | ) |
_______________
| | (1) | Includes primarily a $97.0 million debt service guaranty asset, tax increment revenue bonds of $51.3 million and intangible and other assets. |
| | (2) | Excludes the effect of $123.9 million in intercompany debt that is eliminated upon consolidation. |
The fair value measurements are subject to change until our information is finalized, which will be no later than twelve months from the business combination date.
We recognized an impairment loss of $15.8 million as a result of revaluing our 50% equity interest held in the real estate joint ventures before the business combinations, which is reported as an impairment loss in the Statements of Consolidated Income and Comprehensive Income. For the year ended December 31, 2010, the impact of this consolidation increased revenues by $1.6 million and decreased net income attributable to common shareholders by $2.5 million.
The following table summarizes the pro forma impact of the real estate joint ventures as if Sheridan had been consolidated at January 1, 2009 as follows (in thousands, except per share amounts):
| | | Year Ended December 31, | |
| | | Pro Forma | | | Pro Forma | |
| | | 2010 (1) | | | 2009 (1) | |
| | | | | | | |
| Revenues | | $ | 555,089 | | | $ | 573,314 | |
| Net income | | $ | 50,715 | | | $ | 169,575 | |
| Net income attributable to common shareholders | | $ | 10,522 | | | $ | 135,249 | |
| Earnings per share - basic | | $ | .09 | | | $ | 1.23 | |
| Earnings per share - diluted | | $ | .09 | | | $ | 1.23 | |
_______________
| | (1) | There are no non-recurring pro forma adjustments included within or excluded from the amounts in the preceding table. |
Note 5. Derivatives and Hedging
Our policy is to manage interest cost using a mixture of fixed-rate and variable-rate debt. To manage our interest rate risk, we occasionally hedge the future cash flows of our debt transactions, as well as changes in the fair value of our debt instruments, principally through interest rate contracts with major financial institutions. Interest rate contracts that meet specific criteria are accounted for as either assets or liabilities as a fair value or cash flow hedge.
Cash Flow Hedges of Interest Rate Risk:
Our objective in using interest rate contracts is to add stability to interest expense and to manage our exposure to interest rate movements. To accomplish this objective, we primarily use interest rate contracts as part of our interest rate risk management strategy. Interest rate contracts designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The ineffective portion of the change in fair value of the derivatives is recognized directly in earnings. At December 31, 2010, we had two active cash flow hedges as described below.
During 2010, two interest rate contracts were designated as cash flow hedges with an aggregate notional amount of $11.8 million, which have maturities through September 2017, and fix interest rates at 2.3% and 2.4%. We have determined that these contracts are highly effective in offsetting future variable interest cash flows. As of December 31, 2010, the fair value of these derivatives was $.09 million and $.1 million and is included in net other assets and net other liabilities, respectively.
As of December 31, 2010 and 2009, the balance in accumulated other comprehensive loss relating to cash flow interest rate contracts was $11.7 million and $14.4 million, respectively, and will be reclassified to net interest expense as interest payments are made on our fixed-rate debt. Amounts reclassified from accumulated other comprehensive loss to net interest expense were $2.6 million in 2010, $2.5 million in 2009 and $2.1 million in 2008. Within the next 12 months, approximately $2.8 million of the balance in accumulated other comprehensive loss is expected to be amortized to net interest expense related to settled interest rate contracts.
Fair Value Hedges of Interest Rate Risk:
We are exposed to changes in the fair value of certain of our fixed-rate obligations due to changes in benchmark interest rates, such as LIBOR. We use interest rate contracts to manage our exposure to changes in fair value on these instruments attributable to changes in the benchmark interest rate. Interest rate contracts designated as fair value hedges involve the receipt of fixed-rate amounts from a counterparty in exchange for us making variable-rate payments over the life of the agreements without the exchange of the underlying notional amount. Changes in the fair value of interest rate contracts designated as fair value hedges, as well as changes in the fair value of the related debt being hedged, are recorded in earnings each reporting period.
In April 2010, we entered into two interest rate contracts with a total notional amount of $71.3 million that mature in October 2017, which convert fixed interest payments at rates of 7.5% to variable interest payments. These contracts were designated as fair value hedges, and we have determined that they are highly effective in limiting our risk of changes in the fair value of fixed-rate notes attributable to changes in variable interest rates.
In December 2009, we entered into 11 interest rate contracts with a total notional amount of $302.6 million, which had various maturities through February 2014. In February 2010, we settled $7.0 million of these interest rate contracts in conjunction with the repurchase of the related unsecured fixed-rate medium term notes, and a $.02 million gain was realized. In November 2010, the remaining $295.6 million of these interest rate contracts was settled for $8.9 million including accrued interest whereby net debt was increased by $8.2 million, and a gain of $.1 million was realized. The increase in net debt is being amortized to net interest expense over the remaining life of the original underlying debt instruments.
As of December 31, 2010, we had four interest rate contracts with an aggregate notional amount of $120.4 million that were designated as fair value hedges and convert fixed interest payments at rates from 4.2% to 7.5% to variable interest payments ranging from .3% to 4.4%. As of December 31, 2009, we had 13 interest rate contracts with an aggregate notional amount of $352.6 million, of which $352.6 million is designated as fair value hedges that convert fixed interest payments at rates ranging from 4.2% to 7.5% to variable interest payments ranging from .3% to 6.1%. We have determined that our fair value hedges are highly effective in limiting our risk of changes in the fair value of fixed-rate notes attributable to changes in interest rates.
For the year ended December 31, 2010, 2009 and 2008, we recognized a net reduction in interest expense of $6.7 million, $2.1 million and $.8 million, respectively, related to our fair value hedges, which includes net settlements and any amortization adjustment of the basis in the hedged item. Also, for the year ended December 31, 2010, we recognized a gain of $1.0 million associated with hedge ineffectiveness with no such activity present in 2009 or 2008.
A summary of the changes in fair value of our interest rate contracts is as follows (in thousands):
| | | Gain (Loss) on Contracts | | | Gain (Loss) on Borrowings | | | Gain (Loss) Recognized in Income | |
| | | | | | | | | | |
| Year Ended December 31, 2010: | | | | | | | | | |
| Interest expense, net | | $ | 17,511 | | | $ | (16,547 | ) | | $ | 964 | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2009: | | | | | | | | | | | | |
| Interest expense, net | | $ | (6,659 | ) | | $ | 6,659 | | | | | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2008: | | | | | | | | | | | | |
| Interest expense, net | | $ | 4,987 | | | $ | (4,987 | ) | | | | |
Non-designated Hedges:
Derivatives not designated as hedges are not speculative and are used to manage our exposure to interest rate movements and other identified risks, but do not meet hedge accounting requirements. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. As of December 31, 2010 and 2009, we did not have any derivatives that were designated as hedges.
During the first quarter of 2010, the initial hedging relationship was terminated on three of our interest rate contracts with a total notional amount of $97.6 million. We simultaneously re-designated $90.0 million as fair value hedges. These hedges were terminated in November 2010 (see Fair Value Hedges of Interest Rate Risk above for additional details). The changes in the fair value of the undesignated portion of the interest rate contract was recorded directly to earnings and increased net interest expense by $.05 million during 2010.
Effective April 1, 2010, we assumed control of a previously unconsolidated real estate joint venture that had an interest rate contract, which sets interest rates at 2.45% on an aggregate notional amount of $5.2 million and expires in December 2015. Prior to consolidation, the interest rate contract was designated as a cash flow hedge; however, upon consolidation, the original hedging relationship could not continue, thus in June 2010 we recognized a loss of $.2 million associated with hedge ineffectiveness. In July 2010, we re-designated this interest rate contract as a cash flow hedge (see Cash Flow Hedges of Interest Rate Risk above).
On March 20, 2008, a cash flow hedge was terminated through the issuance of $154.3 million of fixed-rate long-term debt issued by a consolidated joint venture. A loss of $12.8 million was recorded in accumulated other comprehensive loss based on the fair value of the interest rate swap contracts on that date. On March 27, 2008, the interest rate swap contracts were settled resulting in a loss of $10.0 million. For the period between the termination of the cash flow hedge and the settlement of the swap contracts, a gain of $2.8 million was recognized as a reduction of net interest expense.
The interest rate contracts at December 31, 2010 and 2009 were reported at their fair values as follows (in thousands):
| | | Assets | | Liabilities | |
| Period | | Balance Sheet Location | | Amount | | Balance Sheet Location | | Amount | |
| Designated Hedges: | | | | | | | | | |
| December 31, 2010 | | Other Assets, net | | $ | 7,192 | | Other Liabilities, net | | $ | 108 | |
| December 31, 2009 | | Other Assets, net | | $ | 2,601 | | Other Liabilities, net | | $ | 4,634 | |
| | | | | | | | | | | | |
A summary of our derivatives is as follows (in thousands):
| Derivatives Hedging Relationships | | Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivative (Effective Portion) | | Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion) | | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative | | Location of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | | Amount of Gain (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing) | |
| | | | | | | | | | | | | | | | |
| Year Ended December 31, 2010: | | | | | | | | | | | | | | | |
| Cash Flow Interest Rate Contracts | | $ | (96 | ) | Interest expense, net | | $ | (2,566 | ) | | | | | Interest expense, net | | $ | (27 | ) |
| Fair Value Interest Rate Contracts | | | | | | | | | | Interest expense, net | | $ | 24,483 | | Interest expense, net | | $ | 964 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2009: | | | | | | | | | | | | | | | | | | | |
| Cash Flow Interest Rate Contracts | | | | | Interest expense, net | | $ | (2,481 | ) | | | | | | | | | | |
| Fair Value Interest Rate Contracts | | | | | | | | | | Interest expense, net | | $ | (4,528 | ) | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2008: | | | | | | | | | | | | | | | | | | | |
| Cash Flow Interest Rate Contracts | | | | | Interest expense, net | | $ | (2,095 | ) | | | | | | | | | | |
| Fair Value Interest Rate Contracts | | | | | | | | | | Interest expense, net | | $ | 5,819 | | | | | | |
Note 6. Debt
Our debt consists of the following (in thousands):
| | | December 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Debt payable to 2038 at 2.9% to 8.8% | | $ | 2,389,532 | | | $ | 2,506,069 | |
| Debt service guaranty liability | | | 97,000 | | | | | |
| Unsecured notes payable under revolving credit facilities | | | 80,000 | | | | | |
| Obligations under capital leases | | | 21,000 | | | | 23,115 | |
| Industrial revenue bonds payable to 2015 at 2.4% | | | 1,916 | | | | 2,663 | |
| | | | | | | | | |
| Total | | $ | 2,589,448 | | | $ | 2,531,847 | |
The grouping of total debt between fixed and variable-rate as well as between secured and unsecured is summarized below (in thousands):
| | | December 31, | | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| As to interest rate (including the effects of interest rate contracts): | | | | | | |
| Fixed-rate debt | | $ | 2,349,802 | | | $ | 2,146,133 | |
| Variable-rate debt | | | 239,646 | | | | 385,714 | |
| | | | | | | | | |
| Total | | $ | 2,589,448 | | | $ | 2,531,847 | |
| | | | | | | | | |
| As to collateralization: | | | | | | | | |
| Unsecured debt | | $ | 1,450,148 | | | $ | 1,306,802 | |
| Secured debt | | | 1,139,300 | | | | 1,225,045 | |
| | | | | | | | | |
| Total | | $ | 2,589,448 | | | $ | 2,531,847 | |
Effective February 11, 2010, we entered into an amended and restated $500 million unsecured revolving credit facility. The facility expires in February 2013 and provides borrowing rates that float at a margin over LIBOR plus a facility fee. The borrowing margin and facility fee are priced off a grid that is tied to our senior unsecured credit ratings, which are currently 275.0 and 50.0 basis points, respectively. The facility also contains a competitive bid feature that will allow us to request bids for up to $250 million. Additionally, an accordion feature allows us to increase the new facility amount up to $700 million.
Effective May 2010, we entered into an agreement with a bank for an unsecured and uncommitted overnight facility totaling $99 million that we intend to maintain for cash management purposes. The facility provides for fixed interest rate loans at a 30 day LIBOR rate plus a borrowing margin based on market liquidity. Any amounts outstanding under this facility reduce the availability of our revolving credit facility.
At December 31, 2010 and 2009, no amounts under our revolving credit facility were outstanding. Letters of credit totaling $52.4 million and $7.2 million were outstanding under the revolving credit facility at December 31, 2010 and 2009, respectively. The balance outstanding under our unsecured and uncommitted overnight facility was $80.0 million at a variable interest rate of 1.8% at December 31, 2010. The available balance under our revolving credit facility was $447.6 million and $567.8 million at December 31, 2010 and 2009, respectively. During 2010, the maximum balance and weighted average balance outstanding under both facilities combined were $80.0 million and $12.2 million, respectively, at a weighted average interest rate of 1.8%. During 2009, the maximum balance and weigh ted average balance outstanding under the facility was $423.0 million and $168.7 million, respectively, at a weighted average interest rate of 1.5%.
We had a $575 million unsecured revolving credit facility held by a syndicate of banks, which was amended and restated in February 2010 as discussed above. Borrowing rates floated at a margin over LIBOR, plus a facility fee. The borrowing margin and facility fee were priced off a grid that was tied to our senior unsecured credit ratings, which were 50.0 and 15.0 basis points.
Effective April 1, 2010, we consolidated a real estate joint venture which includes our investment in a development project in Sheridan, Colorado. We, our joint venture partner and the joint venture have each provided a guaranty for the payment of any debt service shortfalls until a coverage rate of 1.4 is met on tax increment revenue bonds issued in connection with the project. The bonds are to be repaid with incremental sales and property taxes and a public improvement fee (“PIF”) to be assessed on current and future retail sales and, to the extent necessary, any amounts we may have to provide under a guaranty. The incremental taxes and PIF are to remain intact until the earlier of the bond liability has been paid in full or 2030 (unless such date is otherwise extended by the Sheridan Rede velopment Agency). Therefore, a debt service guaranty liability of $97.0 million was recorded by the joint venture equal to the fair value of the amounts funded under the bonds.
At December 31, 2010 and 2009, respectively, we had $129.9 million and $135.2 million face value of 3.95% convertible senior unsecured notes outstanding due 2026. These bonds are recorded at a discount of $1.3 million and $3.4 million as of December 31, 2010 and 2009, respectively, which will be amortized through 2011 resulting in an effective interest rate for both periods of 5.75%. Interest is payable semi-annually in arrears on February 1 and August 1 of each year. The debentures are convertible under certain circumstances for our common shares at an initial conversion rate of 20.3770 common shares per $1,000 of principal amount of debentures (an initial conversion price of $49.075). In addition, the conversion rate may be adjusted if certain change in control transactions or other specifi ed events occur on or prior to August 4, 2011. Upon the conversion of debentures, we will deliver cash for the principal return, as defined, and cash or common shares, at our option, for the excess of the conversion value, as defined, over the principal return. The debentures are redeemable for cash at our option beginning in 2011 for the principal amount plus accrued and unpaid interest. Holders of the debentures have the right to require us to repurchase their debentures for cash equal to the principal of the debentures plus accrued and unpaid interest in 2011, 2016 and 2021 and in the event of a change in control. Net interest expense associated with this debt for the year ended December 31, 2010, 2009 and 2008, totaled $8.0 million, $19.5 million and $33.3 million, respectively, which includes the amortization of the discount totaling $2.2 million, $5.0 million and $8.5 million, respectively. The carrying value of the equity component as of both Dece mber 31, 2010 and 2009 was $23.4 million.
In October 2009, we entered into a $26.6 million secured loan from a bank. The loan is for a four year term with a one year extension option at a floating interest rate of 375 basis points over LIBOR with a 1.50% LIBOR floor. This loan is collateralized by two properties.
In August 2009, we sold $100 million of unsecured senior notes with a coupon of 8.1% which will mature September 15, 2019. We may redeem the notes, in whole or in part, on or after September 15, 2014, at our option, at a redemption price equal to 100% of their principal amount, plus accrued and unpaid interest. The net proceeds of $97.5 million were used to reduce amounts outstanding under our revolving credit facility.
In July 2009, we entered into a $70.8 million secured loan from a life insurance company. The loan is for seven years at a fixed interest rate of 7.4% and is collateralized by five properties. In September 2009, we entered into a $57.5 million secured loan from a life insurance company. The loan is for 10 years at a fixed interest rate of 7.0% and is collateralized by 10 properties. The net proceeds received from both transactions were used to reduce amounts outstanding under our revolving credit facility.
In May 2009, we entered into a $103 million secured loan from a life insurance company. The loan is for approximately 8.5 years at a fixed interest rate of 7.49% and is collateralized by four properties. The net proceeds received were invested in short-term investments and subsequently used to settle the June tender offer discussed below.
In the second quarter of 2009, we repurchased and retired $82.3 million face value of our 3.95% convertible senior unsecured notes for $70.4 million, including accrued interest. Also in 2009, we completed a cash tender offer for $422.6 million face value on a series of unsecured notes and our convertible senior unsecured notes. We purchased at par $20.6 million of unsecured fixed-rate medium term notes, with a weighted average interest rate of 7.54% and a weighted average maturity of 1.6 years, and $82.3 million of 7% senior unsecured notes due in 2011. In addition, we purchased $319.7 million face value of our 3.95% convertible senior unsecured notes for $311.1 million, including accrued interest and expenses. During the year ended December 31, 2009, the repurchases of our 3.95% convertible senior unsecured notes resulted in gains of $25.3 million.
Various leases and properties, and current and future rentals from those lease and properties, collateralize certain debt. At December 31, 2010 and 2009, the carrying value of such property aggregated $1.8 billion and $2.0 billion, respectively.
Scheduled principal payments on our debt (excluding $80.0 million due under our revolving credit facilities, $21.0 million of certain capital leases, $7.1 million fair value of interest rate contracts, $3.9 million net premium/(discount) on debt, $12.3 million of non-cash debt-related items, and $97.0 million debt service guaranty liability) are due during the following years (in thousands):
| 2011 | | $ | 212,264 | |
| 2012 | | | 307,598 | |
| 2013 | | | 440,829 | |
| 2014 | | | 387,547 | |
| 2015 | | | 248,404 | |
| 2016 | | | 209,209 | |
| 2017 | | | 142,088 | |
| 2018 | | | 64,411 | |
| 2019 | | | 153,747 | |
| 2020 | | | 3,772 | |
Thereafter (1) | | | 198,177 | |
| Total | | $ | 2,368,046 | |
___________________
| | (1) | Includes $131.3 million of our 3.95% convertible senior unsecured notes outstanding due 2026; which have a call/put option feature beginning in 2011. |
Our various debt agreements contain restrictive covenants, including minimum interest and fixed charge coverage ratios, minimum unencumbered interest coverage ratios, minimum net worth requirements and maximum total debt levels. We believe we were in compliance with all restrictive covenants as of December 31, 2010.
Note 7. Preferred Shares
We issued $150 million and $200 million of depositary shares on June 6, 2008 and January 30, 2007, respectively. Each depositary share represents one-hundredth of a Series F Cumulative Redeemable Preferred Share. The depositary shares are redeemable, in whole or in part, on or after January 30, 2012 at our option, at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The depositary shares are not convertible or exchangeable for any of our other property or securities. The Series F Preferred Shares pay a 6.5% annual dividend and have a liquidation value of $2,500 per share. Series F Preferred Shares issued in June 2008 were issued at a discount, resulting in an effective rate of 8.25%.
In July 2004, we issued $72.5 million of depositary shares with each share representing one-hundredth of a Series E Cumulative Redeemable Preferred Share. The depositary shares are redeemable at our option, in whole or in part, for cash at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The depositary shares are not convertible or exchangeable for any of our other property or securities. The Series E preferred shares pay a 6.95% annual dividend and have a liquidation value of $2,500 per share.
In April 2003, we issued $75 million of depositary shares with each share representing one-thirtieth of a Series D Cumulative Redeemable Preferred Share. The depositary shares are currently redeemable at our option, in whole or in part, for cash at a redemption price of $25 per depositary share, plus any accrued and unpaid dividends thereon. The depositary shares are not convertible or exchangeable for any of our property or securities. The Series D preferred shares pay a 6.75% annual dividend and have a liquidation value of $750 per share.
Currently, we do not anticipate redeeming either the Series E or Series D preferred shares due to current market conditions; however, no assurance can be given if conditions change.
Note 8. Common Shares of Beneficial Interest
In May 2010, our shareholders approved an amendment to our declaration of trust increasing the number of our authorized common shares, $0.03 par value per share, from 150.0 million to 275.0 million.
The dividend rate for our common shares for each quarter of 2010 was $.26. The quarterly dividend rate for our common shares was $.525 for the first quarter of 2009 and $.25 from the remaining quarters of 2009. Subsequent to December 31, 2010, our Board of Trust Managers approved an increase to our quarterly dividend rate to $.275 per share.
In April 2009, we issued 32.2 million common shares at $14.25 per share. Net proceeds from this offering were $439.1 million and were used to repay indebtedness outstanding under our revolving credit facilities and for other general corporate purposes.
Note 9. Property
Our property consisted of the following (in thousands):
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Land | | $ | 925,497 | | | $ | 896,010 | |
| Land held for development | | | 170,213 | | | | 182,586 | |
| Land under development | | | 22,967 | | | | 32,709 | |
| Buildings and improvements | | | 3,610,889 | | | | 3,437,578 | |
| Construction in-progress | | | 48,228 | | | | 109,513 | |
| | | | | | | | | |
| Total | | $ | 4,777,794 | | | $ | 4,658,396 | |
The following carrying charges were capitalized (in thousands):
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Interest | | $ | 3,405 | | | $ | 8,716 | | | $ | 20,290 | |
| Real estate taxes | | | 344 | | | | 1,428 | | | | 2,730 | |
| | | | | | | | | | | | | |
| Total | | $ | 3,749 | | | $ | 10,144 | | | $ | 23,020 | |
Effective April 1, 2010, we assumed control of two 50%-owned unconsolidated joint ventures related to a development project in Sheridan, Colorado that we had previously accounted for under the equity method. This transaction resulted in the consolidation of the joint ventures, increasing property by $32.9 million.
During 2010, we invested $92.1 million in the acquisitions of operating properties and $19.6 million in new development projects. We sold two land parcels, a shopping center, and two retail buildings, with gross sales proceeds from these dispositions totaling $13.5 million. Also, we contributed the final two properties to an unconsolidated joint venture for $47.3 million, which included loan assumptions of $28.1 million.
Impairment charges, as described in Note 1, of $5.2 million, $38.8 million and $52.5 million were recognized for the year ended December 31, 2010, 2009 and 2008, respectively.
Note 10. Discontinued Operations
During 2010, we sold one shopping center located in Texas. During 2009, we sold 12 shopping centers and five industrial properties, of which 11 were located in Texas and two each in Arizona, New Mexico and North Carolina. The operating results of these properties, as well as any gains on the respective disposition, have been reclassified and reported as discontinued operations in the Statements of Consolidated Income and Comprehensive Income. Revenues recorded in operating income from discontinued operations totaled $.03 million in 2010, $17.0 million in 2009 and $30.1 million in 2008. Included in the Consolidated Balance Sheet at December 31, 2009 were $.3 million of property and $.2 million of accumulated depreciation related to the property sold during 2010.
In 2009, one sold property had outstanding debt of $9.1 million, which was assumed by the purchaser.
We do not allocate other consolidated interest to discontinued operations because the interest savings to be realized from the proceeds of the sale of these operations was not material.
No impairment associated with discontinued operations was recognized for the year ended December 31, 2010 and 2008. For the year ended December 31, 2009, an impairment loss of $3.8 million was reported in discontinued operations.
Note 11. Notes Receivable from Real Estate Joint Ventures and Partnerships
We have ownership interests in a number of real estate joint ventures and partnerships. Notes receivable from these entities bear interest ranging from 2.0% to 12.0% at December 31, 2010 and 2.1% to 12.0% at December 31, 2009. These notes are due at various dates through 2012 and are generally secured by real estate assets. We believe these notes are fully collectible, and no allowance has been recorded. We recognized interest income on these notes as follows, in millions: $4.3 in 2010, $4.8 in 2009 and $4.0 in 2008.
In December 2010, we issued a letter of default on a matured note receivable of $24.9 million. At year end, we were in negotiations to extend this note. Subsequent to year end, the default was remedied by an extension of the note.
Effective April 1, 2010, we assumed control of two 50%-owned unconsolidated joint ventures related to a development project in Sheridan, Colorado that we had previously accounted for under the equity method. This transaction resulted in the consolidation of the joint ventures, reducing notes receivable from real estate joint ventures and partnerships by $123.9 million.
Note 12. Related Parties
Through our management activities and transactions with our real estate joint venture and partnerships, we had accounts receivable of $2.7 million and $4.3 million outstanding as of December 31, 2010 and 2009, respectively. We also had accounts payable and accrued expenses of $9.6 million and $10.5 million outstanding as of December 31, 2010 and 2009, respectively. For the year ended December 31, 2010, 2009 and 2008, we recorded joint venture fee income of $5.8 million, $5.7 million and $5.9 million, respectively.
During 2010, we sold an unconsolidated real estate joint venture interest in a Texas property to our partner with gross sales proceeds totaling $1.4 million, which generated a gain of $1.3 million.
In October 2009, we entered into an agreement to contribute six retail properties located in Florida and Georgia, valued at approximately $160.8 million, to an unconsolidated real estate joint venture in which we will retain a 20% ownership interest. We closed on four properties with a total value of $114.3 million and received net proceeds of approximately $85.9 million. During the first quarter of 2010, we contributed the final two properties to this unconsolidated real estate joint venture for $47.3 million, which included loan assumptions of $28.1 million and the receipt of net proceeds totaling $14.0 million.
In April 2009, we sold an unconsolidated joint venture interest in a property located in Colorado to our partner with gross sales proceeds of approximately $15.0 million, which were reduced by the release of a debt obligation of $11.7 million and generated a gain of $4.0 million.
Note 13. Investment in Real Estate Joint Ventures and Partnerships
We own interests in real estate joint ventures or limited partnerships and have tenancy-in-common interests in which we exercise significant influence, but do not have financial and operating control. We account for these investments using the equity method, and our interests range from 7.8% to 75%. Combined condensed financial information of these ventures (at 100%) is summarized as follows (in thousands):
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Combined Condensed Balance Sheets | | | | | | |
| | | | | | | |
| Property | | $ | 2,142,524 | | | $ | 2,082,316 | |
| Accumulated depreciation | | | (247,996 | ) | | | (191,478 | ) |
| Property, net | | | 1,894,528 | | | | 1,890,838 | |
| | | | | | | | | |
| Other assets, net | | | 168,091 | | | | 240,387 | |
| | | | | | | | | |
| Total | | $ | 2,062,619 | | | $ | 2,131,225 | |
| | | | | | | | | |
| Debt, net (primarily mortgages payable) | | $ | 552,552 | | | $ | 505,462 | |
| Amounts payable to Weingarten Realty Investors | | | 202,092 | | | | 335,622 | |
| Other liabilities, net | | | 45,331 | | | | 88,913 | |
| Total | | | 799,975 | | | | 929,997 | |
| | | | | | | | | |
| Accumulated equity | | | 1,262,644 | | | | 1,201,228 | |
| | | | | | | | | |
| Total | | $ | 2,062,619 | | | $ | 2,131,225 | |
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Combined Condensed Statements of Income | | | | | | | | | |
| | | | | | | | | | |
| Revenues, net | | $ | 193,649 | | | $ | 174,595 | | | $ | 162,737 | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Depreciation and amortization | | | 61,726 | | | | 56,018 | | | | 41,146 | |
| Interest, net | | | 36,270 | | | | 31,017 | | | | 20,424 | |
| Operating | | | 34,026 | | | | 33,385 | | | | 37,592 | |
| Real estate taxes, net | | | 24,288 | | | | 21,213 | | | | 18,739 | |
| General and administrative | | | 3,927 | | | | 5,187 | | | | 5,648 | |
| Provision for income taxes | | | 237 | | | | 170 | | | | 407 | |
| Impairment loss | | | 231 | | | | 6,923 | | | | 5,151 | |
| | | | | | | | | | | | | |
| Total | | | 160,705 | | | | 153,913 | | | | 129,107 | |
| | | | | | | | | | | | | |
| Gain on land and merchant development sales | | | 372 | | | | | | | | 933 | |
| (Loss) gain on sale of property | | | (3 | ) | | | 11 | | | | 13 | |
| Net income | | $ | 33,313 | | | $ | 20,693 | | | $ | 34,576 | |
Our investment in real estate joint ventures and partnerships, as reported on our Consolidated Balance Sheets, differs from our proportionate share of the entities' underlying net assets due to basis differentials, which arose upon the transfer of assets to the joint ventures. The net basis differentials, which totaled $8.8 million and $11.8 million at December 31, 2010 and 2009, respectively, are generally amortized over the useful lives of the related assets.
Our real estate joint ventures and partnerships determined that the carrying amount of certain properties was not recoverable and that the properties should be written down to fair value. For the year ended December 31, 2010, 2009 and 2008, our unconsolidated real estate joint ventures and partnerships recorded an impairment charge of $.2 million, $6.9 million and $5.2 million, respectively, related primarily to undeveloped land at new development properties.
Fees earned by us for the management of these real estate joint ventures and partnerships totaled $5.8 million in 2010, $5.7 million in 2009 and $5.9 million in 2008.
In November 2010, we sold an unconsolidated real estate joint venture interest in a property located in Houston, Texas to our partner with gross sales proceeds of approximately $1.4 million, which generated a gain of $1.3 million.
Effective April 1, 2010, we assumed control of two 50%-owned real estate unconsolidated joint ventures related to a development project in Sheridan, Colorado that we had previously accounted for under the equity method. This transaction resulted in the consolidation of the joint ventures in our consolidated financial statements.
During 2010, two unconsolidated joint ventures each sold a retail building located in California with aggregate gross sales proceeds totaling $4.4 million. Also, two unconsolidated real estate joint ventures each sold a land parcel located in Florida with gross sales proceeds of approximately $2.5 million.
Also, in 2010, we acquired a 67%-owned real estate unconsolidated joint venture interest in a retail shopping center located in Moreno Valley, California and we acquired a 58%-owned unconsolidated real estate joint venture interest in a retail shopping center located in Houston, Texas for approximately $35.8 million.
In October 2009, we entered into an agreement to contribute six retail properties located in Florida and Georgia, valued at approximately $160.8 million, to an unconsolidated joint venture in which we will retain a 20% ownership interest. In 2009, we closed on four properties with a total value of $114.3 million, and in December 2009, this joint venture entered into a $68.7 million secured loan. During the first quarter of 2010, we contributed the final two properties to this unconsolidated joint venture for $47.3 million, which included loan assumptions of $28.1 million.
In April 2009, we sold an unconsolidated joint venture interest in a property located in Colorado to our partner with gross sales proceeds of approximately $15.0 million, which were reduced by the release of a debt obligation of $11.7 million.
Note 14. Federal Income Tax Considerations
We qualify as a REIT under the provisions of the Internal Revenue Code, and therefore, no tax is imposed on our taxable income distributed to shareholders. To maintain our REIT status, we must distribute at least 90% of our ordinary taxable income to our shareholders and meet certain income source and investment restriction requirements. Our shareholders must report their share of income distributed in the form of dividends.
Taxable income differs from net income for financial reporting purposes principally because of differences in the timing of recognition of depreciation, rental revenue, compensation expense, impairment losses and gain from sales of property. As a result of these differences, the book value of our net fixed assets exceeds the tax basis by $38 million at December 31, 2010 and $119 million at December 31, 2009.
The following table reconciles net income to REIT taxable income for the year ended December 31, 2010, 2009 and 2008 (in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Net income adjusted for noncontrolling interests | | $ | 46,206 | | | $ | 171,102 | | | $ | 145,652 | |
| Net loss of taxable REIT subsidiaries included above | | | 22,450 | | | | 8,966 | | | | 34,803 | |
| Net income from REIT operations | | | 68,656 | | | | 180,068 | | | | 180,455 | |
| Book depreciation and amortization including discontinued operations | | | 151,108 | | | | 151,888 | | | | 157,893 | |
| Tax depreciation and amortization | | | (95,848 | ) | | | (133,537 | ) | | | (144,816 | ) |
| Book/tax difference on gains/losses from capital transactions | | | 1,233 | | | | (6,137 | ) | | | 35,891 | |
| Deferred/prepaid/above and below market rents, net | | | (5,076 | ) | | | (12,489 | ) | | | (20,113 | ) |
| Impairment loss from REIT operations | | | 28,376 | | | | 21,862 | | | | 31,461 | |
| Other book/tax differences, net | | | (22,785 | ) | | | 28,097 | | | | (25,238 | ) |
| REIT taxable income | | | 125,664 | | | | 229,752 | | | | 215,533 | |
| Dividends paid deduction | | | (125,664 | ) | | | (229,752 | ) | | | (215,533 | ) |
| Dividends paid in excess of taxable income | | $ | - | | | $ | - | | | $ | - | |
The dividends paid deduction in 2010, 2009 and 2008 includes designated dividends of $3.8 million from 2011, $61.2 million from 2010 and $4.7 million from 2009, respectively.
For federal income tax purposes, the cash dividends distributed to common shareholders are characterized as follows:
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Ordinary income | | | 79.1 | % | | | 68.1 | % | | | 45.5 | % |
| Capital gain distributions | | | 20.9 | % | | | 31.9 | % | | | 54.5 | % |
| | | | | | | | | | | | | |
| Total | | | 100.0 | % | | | 100.0 | % | | | 100.0 | % |
Our taxable REIT subsidiary is subject to federal, state and local income taxes. We have recorded a federal income tax (benefit) provision of $(1.2) million, $4.4 million and $(12.1) million for the year ended December 31, 2010, 2009 and 2008, respectively. We did not have a current tax obligation as of December 31, 2010 and 2009 in association with this tax; however, we had a current tax receivable of $2.8 million as of December 31, 2009.
Our deferred tax assets and liabilities, including a valuation allowance, consisted of the following (in thousands):
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Deferred tax assets: | | | | | | |
| Impairment loss | | $ | 13,584 | | | $ | 13,945 | |
| Allowance on other assets | | | 1,423 | | | | 1,428 | |
| Interest expense | | | 7,256 | | | | 3,643 | |
| Net operating loss carryforward | | | 4,684 | | | | 1,509 | |
| Other | | | 672 | | | | 447 | |
| Total deferred tax assets | | | 27,619 | | | | 20,972 | |
| Valuation allowance | | | (15,818 | ) | | | (9,605 | ) |
| Total deferred tax assets, net of allowance | | $ | 11,801 | | | $ | 11,367 | |
| | | | | | | | | |
| Deferred tax liabilities: | | | | | | | | |
| Straight-line rentals | | $ | 1,290 | | | $ | 506 | |
| Book-tax basis differential | | | 4,708 | | | | 6,346 | |
| Total deferred tax liabilities | | $ | 5,998 | | | $ | 6,852 | |
At December 31, 2010 and 2009, we have recorded a net deferred tax asset of $11.8 million and $11.4 million, respectively; including the benefit of $13.6 million and $13.9 million, respectively, of impairment losses, which will not be recognized until the related properties are sold. Realization is dependent on generating sufficient taxable income in the year the property is sold. Management believes it is more likely than not that a portion of these deferred tax assets, which primarily consists of impairment losses, will not be realized and established a valuation allowance totaling $15.8 million and $9.6 million as of December 31, 2010 and 2009, respectively. However, the amount of the deferred tax asset considered realizable could be reduced if estimates of future taxable income are reduced.
In addition, we are subject to the State of Texas business tax (“Texas Franchise Tax”), which is determined by applying a tax rate to a base that considers both revenues and expenses. Therefore, the Texas Franchise Tax is considered an income tax and is accounted for accordingly.
For the year ended December 31, 2010, 2009 and 2008, we recorded a provision for the Texas Franchise Tax of $1.4 million, $1.9 million and $2.2 million, respectively. The deferred tax assets associated with this tax each totaled $.1 million as of December 31, 2010 and 2009, and the deferred tax liabilities totaled $.2 million and $.1 million as of December 31, 2010 and 2009, respectively. Also, a current tax obligation of $1.6 million and $2.1 million has been recorded at December 31, 2010 and 2009, respectively, in association with this tax.
Note 15. Leasing Operations
The terms of our leases range from less than one year for smaller tenant spaces to over 25 years for larger tenant spaces. In addition to minimum lease payments, most of the leases provide for contingent rentals (payments for real estate taxes, maintenance and insurance by lessees and an amount based on a percentage of the tenants' sales). Future minimum rental income from non-cancelable tenant leases at December 31, 2010, in millions, is: $404.3 in 2011; $349.3 in 2012; $286.3 in 2013; $224.6 in 2014; $168.1 in 2015; and $572.7 thereafter. The future minimum rental amounts do not include estimates for contingent rentals. Such contingent rentals, in millions, aggregated $115.5 in 2010, $119.5 in 2009 and $131.7 in 2008.
Note 16. Commitments and Contingencies
We are engaged in the operation of shopping centers, which are either owned or, with respect to certain shopping centers, operated under long-term ground leases. These ground leases expire at various dates through 2069, with renewal options. Space in our shopping centers is leased to tenants pursuant to agreements that provide for terms ranging generally from one month to 25 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.
Scheduled minimum rental payments under the terms of all non-cancelable operating leases in which we are the lessee, principally for shopping center ground leases, for the subsequent five years and thereafter ending December 31, are as follows (in thousands):
| 2011 | | $ | 3,570 | |
| 2012 | | | 3,382 | |
| 2013 | | | 3,352 | |
| 2014 | | | 3,118 | |
| 2015 | | | 2,891 | |
| Thereafter | | | 123,870 | |
| Total | | $ | 140,183 | |
Rental expense for operating leases was, in millions: $5.3 in 2010; $5.0 in 2009 and $4.0 in 2008.
The scheduled future minimum revenues under subleases, applicable to the ground lease rentals above, under the terms of all non-cancelable tenant leases, assuming no new or renegotiated leases or option extensions for the subsequent five years and thereafter ending December 31, are as follows (in thousands):
| 2011 | | $ | 36,882 | |
| 2012 | | | 33,538 | |
| 2013 | | | 29,579 | |
| 2014 | | | 23,836 | |
| 2015 | | | 18,677 | |
| Thereafter | | | 86,066 | |
| Total | | $ | 228,578 | |
Property under capital leases that is included in buildings and improvements consisted of two shopping centers totaling $16.8 million at December 31, 2010 and three shopping centers totaling $19.1 million at December 31, 2009. Amortization of property under capital leases is included in depreciation and amortization expense, and the balance of accumulated depreciation associated with these capital leases at December 31, 2010 and 2009 was $9.8 million and $11.0 million, respectively. Future minimum lease payments under these capital leases total $35.5 million, with annual payments due, in millions, $1.7 in 2011, $1.8 in each of 2012, 2013, 2014 and 2015; and $26.6 thereafter. The amount of these total payments representing interest is $14.5 million. Accordingly, the present value of the net mi nimum lease payments was $21.0 million at December 31, 2010.
As of December 31, 2010, we participate in five real estate ventures structured as DownREIT partnerships that have properties in Arkansas, California, Georgia, North Carolina, Texas and Utah. As a general partner, we have operating and financial control over these ventures and consolidate them in our consolidated financial statements. These ventures allow the outside limited partners to put their interest to the partnership for our common shares or an equivalent amount in cash. We may acquire any limited partnership interests that are put to the partnership, and we have the option to redeem the interest in cash or a fixed number of our common shares, at our discretion. We also participate in a real estate venture that has a property in Texas that allows its outside partner to put operating pa rtnership units to us. We have the option to redeem these units in cash or a fixed number of our common shares, at our discretion. In 2010 and 2009, we issued common shares valued at $.7 million and $14.3 million, respectively, in exchange for certain of these interests. The aggregate redemption value of these interests was approximately $39 million and $33 million as of December 31, 2010 and 2009, respectively.
In January 2007, we acquired two retail properties in Arizona. This purchase transaction includes an earnout provision of approximately $29 million that is contingent upon the subsequent development of space by the property seller. This contingency agreement expired in July 2010 and was settled for $6.4 million in January 2011. As of December 31, 2010 and 2009, the estimated obligation was $6.4 million and $4.7 million, respectively. Since inception of this obligation, $12.5 million had been paid through December 31, 2010. Amounts paid or accrued under such earnouts are treated as additional purchase price and capitalized to the related property.
We are subject to numerous federal, state and local environmental laws, ordinances and regulations in the areas where we own or operate properties. We are not aware of any material contamination which may have been caused by us or any of our tenants that would have a material adverse effect on our consolidated financial statements.
As part of our risk management activities, we have applied and been accepted into state sponsored environmental programs which will limit our expenses if contaminants need to be remediated. We also have an environmental insurance policy that covers us against third party liabilities and remediation costs.
While we believe that we do not have any material exposure to environmental remediation costs, we cannot give absolute assurance that changes in the law or new discoveries of contamination will not result in increased liabilities to us.
Related to our investment in a development project in Sheridan, Colorado that prior to April 1, 2010 was held in an unconsolidated real estate joint venture, we, our joint venture partner and the joint venture have each provided a guaranty for the payment of any debt service shortfalls on tax increment revenue bonds issued in connection with the project. The Sheridan Redevelopment Agency (“Agency”) issued $97 million of Series A bonds used for an urban renewal project. The bonds are to be repaid with incremental sales and property taxes and a PIF to be assessed on current and future retail sales, and, to the extent necessary, any amounts we may have to provide under a guaranty. The incremental taxes and PIF are to remain intact until the earlier of the bond liability has been paid in full or 2030 (unless such date is otherwise extended by the Agency).
In July 2009, we settled a lawsuit in connection with the above project. Among the obligations performed or to be performed by us under the terms of the settlement agreement was to cause the joint venture to purchase a portion of the bonds in the amount of $51.3 million at par, plus accrued and unpaid interest to the date of such purchase. We established a restricted cash collateral account of $47.6 million in lieu of a back-to-back letter of credit previously supporting additional bonds totaling $45.7 million. We replaced the restricted cash collateral account with a $46.3 million letter of credit in November 2010.
Also, in connection with the Sheridan, Colorado joint venture and the issuance of the related Series A bonds, we, our joint venture partner and the joint venture have also provided a performance guaranty on behalf of the Agency for the satisfaction of all obligations arising from two interest rate contracts for the combined notional amount of $97 million that matures in December 2029. We evaluated and determined that the fair value of the guaranty both at inception and December 31, 2010 was nominal.
We have evaluated the remaining outstanding guaranties and have determined that the fair value of these guaranties is nominal.
We are also involved in various matters of litigation arising in the normal course of business. While we are unable to predict with certainty the amounts involved, our management and counsel are of the opinion that, when such litigation is resolved, any additional liability, if any, will not have a material adverse effect on our consolidated financial statements.
Note 17. Identified Intangible Assets and Liabilities
Identified intangible assets and liabilities associated with our property acquisitions are as follows (in thousands):
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Identified Intangible Assets: | | | | | | |
| Above-Market Leases (included in Other Assets, net) | | $ | 16,825 | | | $ | 17,278 | |
| Above-Market Leases – Accumulated Amortization | | | (10,507 | ) | | | (11,471 | ) |
| Below-Market Assumed Mortgages (included in Debt, net) | | | 5,722 | | | | 2,072 | |
| Below-Market Assumed Mortgages – Accumulated Amortization | | | (1,157 | ) | | | (805 | ) |
| Valuation of In Place Leases (included in Unamortized Debt and Lease Cost, net) | | | 71,272 | | | | 57,610 | |
| Valuation of In Place Leases – Accumulated Amortization | | | (35,984 | ) | | | (32,361 | ) |
| | | | | | | | | |
| | | $ | 46,171 | | | $ | 32,323 | |
| | | | | | | | | |
| Identified Intangible Liabilities: | | | | | | | | |
| Below-Market Leases (included in Other Liabilities, net) | | $ | 37,668 | | | $ | 36,951 | |
| Below-Market Leases – Accumulated Amortization | | | (23,585 | ) | | | (21,794 | ) |
| Above-Market Assumed Mortgages (included in Debt, net) | | | 48,149 | | | | 52,171 | |
| Above-Market Assumed Mortgages – Accumulated Amortization | | | (31,288 | ) | | | (31,329 | ) |
| | | | | | | | | |
| | | $ | 30,944 | | | $ | 35,999 | |
These identified intangible assets and liabilities are amortized over the applicable lease terms or the remaining lives of the assumed mortgages, as applicable.
The net amortization of above-market and below-market leases increased rental revenues by $1.7 million, $2.5 million and $3.5 million in 2010, 2009 and 2008, respectively. The estimated net amortization of these intangible assets and liabilities will increase rental revenues for each of the next five years as follows (in thousands):
| 2011 | | $ | 1,331 | |
| 2012 | | | 801 | |
| 2013 | | | 714 | |
| 2014 | | | 694 | |
| 2015 | | | 676 | |
The amortization of the in place lease intangible assets recorded in depreciation and amortization, was $5.9 million, $8.2 million and $8.5 million in 2010, 2009 and 2008, respectively. The estimated amortization of this intangible asset will increase depreciation and amortization for each of the next five years as follows (in thousands):
| 2011 | | $ | 4,775 | |
| 2012 | | | 3,977 | |
| 2013 | | | 3,150 | |
| 2014 | | | 2,639 | |
| 2015 | | | 2,084 | |
The amortization of above-market and below-market assumed mortgages decreased net interest expense by $3.1 million, $4.4 million and $8.0 million in 2010, 2009 and 2008, respectively. The estimated amortization of these intangible assets and liabilities will decrease net interest expense for each of the next five years as follows (in thousands):
| 2011 | | $ | 1,949 | |
| 2012 | | | 916 | |
| 2013 | | | 472 | |
| 2014 | | | 500 | |
| 2015 | | | 513 | |
Note 18. Fair Value Measurements
Recurring Fair Value Measurements:
Investments held in grantor trusts
These assets are valued based on publicly quoted market prices for identical assets.
Tax Increment Revenue Bonds
These assets represent tax increment revenue bonds which were issued by the Agency in connection with our investment in a redevelopment project in Sheridan, Colorado. The senior tax increment revenue bonds are valued based on quoted prices for similar assets in an active market. As a result, we have determined that the senior tax increment revenue bonds are classified within Level 2 of the fair value hierarchy. The valuation of our subordinated tax increment revenue bonds is determined based on assumptions that management believes market participants would use in pricing using widely accepted valuation techniques including discounted cash flow analysis based on the expected future sales tax r evenues of the redevelopment project. This analysis reflects the contractual terms of the bonds, including the period to maturity, and uses observable market-based inputs, such as market discount rates and unobservable market-based inputs, such as future growth and inflation rates. Since the majority of our inputs are unobservable, we have determined that the subordinate tax increment revenue bonds fall within the Level 3 classification of the fair value hierarchy. At December 31, 2010, the carrying value of these bonds is equal to its fair value.
Derivative instruments
We use interest rate contracts with major financial institutions to manage our interest rate risk. The valuation of these instruments is determined based on assumptions that management believes market participants would use in pricing, using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. The fair values of our interest rate contracts have been determined using the market standard methodology of netting the discount ed future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.
We incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counter-party’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral, thresholds and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counter-parties. However, we have assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and have determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that the derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy.
Assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009, aggregated by the level in the fair value hierarchy in which those measurements fall, are as follows (in thousands):
| | | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | | | Significant Other Observable Inputs (Level 2) | | | Significant Unobservable Inputs (Level 3) | | | Fair Value at December 31, 2010 | |
| Assets: | | | | | | | | | | | | |
| Investments in grantor trusts | | $ | 15,055 | | | | | | | | | $ | 15,055 | |
| Tax increment revenue bonds | | | | | | $ | 51,255 | | | $ | 10,700 | | | | 61,955 | |
| Derivative instruments: | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | | 7,192 | | | | | | | | 7,192 | |
| Total | | $ | 15,055 | | | $ | 58,447 | | | $ | 10,700 | | | $ | 84,202 | |
| | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | $ | 108 | | | | | | | $ | 108 | |
| Deferred compensation plan obligations | | $ | 15,055 | | | | | | | | | | | | 15,055 | |
| Total | | $ | 15,055 | | | $ | 108 | | | | | | | $ | 15,163 | |
| | | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Fair Value at December 31, 2009 | |
| Assets: | | | | | | | | | | |
| Investments in grantor trusts | | $ | 13,894 | | | | | | | $ | 13,894 | |
| Derivative instruments: | | | | | | | | | | | | |
| Interest rate contracts | | | | | | $ | 2,601 | | | | | 2,601 | |
| Total | | $ | 13,894 | | | $ | 2,601 | | | | $ | 16,495 | |
| | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | |
| Derivative instruments: | | | | | | | | | | | | | |
| Interest rate contracts | | | | | | $ | 4,634 | | | | $ | 4,634 | |
| Deferred compensation plan obligations | | $ | 13,894 | | | | | | | | | 13,894 | |
| Total | | $ | 13,894 | | | $ | 4,634 | | | | $ | 18,528 | |
A reconciliation of the outstanding balance of the subordinate tax increment revenue bonds using significant unobservable inputs (Level 3) is as follows:
| | | Fair Value Measurements Using Significant Unobservable Inputs (Level 3) | |
| Outstanding, January 1, 2010 | | $ | - | |
| Additions (1) | | | 22,417 | |
| Loss included in earnings (2) | | | (11,717 | ) |
| Outstanding, December 31, 2010 | | $ | 10,700 | |
__________________
| | (1) | Additions represent an investment including accrued interest in a subordinate tax increment revenue bond that was classified as available for sale on December 31, 2010. |
| | (2) | Represents the change in unrealized losses recognized in impairment loss in the Statement of Consolidated Income and Comprehensive Income for the year ended December 31, 2010. |
Nonrecurring Fair Value Measurements:
Property Impairments
Property is reviewed for impairment if events or changes in circumstances indicate that the carrying amount of the property, including any identifiable intangible assets, site costs and capitalized interest, may not be recoverable. In such an event, a comparison is made of the current and projected operating cash flows of each such property into the foreseeable future on an undiscounted basis to the carrying amount of such property. If we conclude that an impairment may have occurred, fair values are determined by management utilizing cash flow models, market capitalization rates and market discount rates, or by obtaining third-party broker valuation estimates, appraisals, bona fide purchase offers or the expected sales price of an executed sales agreement in accordance with our fair value measurements accounting policy.
Subordinate Tax Increment Revenue Bonds and Subordinate Tax Increment Revenue Note Impairments
Investments in tax increment revenue bonds and tax increment revenue notes are reviewed for impairment if changes in circumstances or forecasts indicate that the carrying amount may not be recoverable and in the case of the bonds, if it is uncertain if the investment will be held to maturity. In such an event, a comparison is made of the projected recoverability of cash flows from the tax increment revenue bonds and note to the carrying amount of each investment. If we conclude that an impairment may have occurred, fair values are determined by management utilizing third-party sales revenue projections until the maturity of the bonds and notes and discounted cash flow models.
Assets measured at fair value on a nonrecurring basis during 2010, aggregated by the level in the fair value hierarchy in which those measurements fall, are as follows (in thousands):
| | Quoted Prices in Active Markets for Identical Assets and Liabilities (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | | Fair Value | | | Total Gains (Losses) | |
| Property | | | | | $ | 2,325 | | | $ | 2,325 | | | $ | (2,827 | ) |
| Subordinate tax increment revenue bonds | | | | | | 10,700 | | | | 10,700 | | | | (11,717 | ) |
| Subordinate tax increment revenue note | | | | | | | | | | | | | | (598 | ) |
| Total | | | | | $ | 13,025 | | | $ | 13,025 | | | $ | (15,142 | ) |
In accordance with our policy of evaluating and recording impairments on the disposal of long-lived assets, a property with a total carrying amount of $5.1 million was written down to its fair value of $2.3 million, resulting in a loss of $2.8 million, which was included in earnings for the period. Management’s estimate of the fair value of this property was determined using third party broker valuations for the Level 3 inputs.
In addition, our subordinate tax increment revenue investments, the bonds issued by the Agency with a carrying value of $22.4 million, were written down to their fair value of $10.7 million as they are no longer classified as held to maturity. Also, our note with a carrying value of $.6 million was written down to its fair value of zero. Management’s estimates of the fair value of these investments were determined using third-party sales revenue projections and future growth and inflations rates for the Level 3 inputs.
Fair Value Disclosures:
Unless otherwise described below, short-term financial instruments and receivables are carried at amounts which approximate their fair values based on their highly-liquid nature, short-term maturities and/or expected interest rates for similar instruments.
Notes Receivable from Real Estate Joint Ventures and Partnerships
We estimated the fair value of our notes receivables from real estate joint ventures and partnerships based on quoted market prices for publicly-traded notes and on the discounted estimated future cash receipts. The discount rates used approximate current lending rates for a note or groups of notes with similar maturities and credit quality, assumes the note is outstanding through maturity and considers the note’s collateral (if applicable). We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. Notes with a carrying value of $184.8 million and $317.8 million at December 31, 2010 and 2009, respectively, have a fair value of approximately $188.0 million and $317.8 million, respectively.
Debt
We estimated the fair value of our debt based on quoted market prices for publicly-traded debt and on the discounted estimated future cash payments to be made for other debt. The discount rates used approximate current lending rates for loans or groups of loans with similar maturities and credit quality, assumes the debt is outstanding through maturity and considers the debt’s collateral (if applicable). We have utilized market information as available or present value techniques to estimate the amounts required to be disclosed. Since such amounts are estimates that are based on limited available market information for similar transactions, there can be no assurance that the disclosed value of any financial instrument could be realized by immediate settlement of the instrument. Fixed-ra te debt with a carrying value of $2.3 billion and $2.1 billion at December 31, 2010 and 2009, respectively has a fair value of approximately $2.4 billion and $2.0 billion, respectively. Variable-rate debt with carrying values of $239.6 million and $385.7 million as of December 31, 2010 and 2009, respectively, has fair values of approximately $252.2 million and $373.4 million, respectively.
Note 19. Share Options and Awards
We have a Long-Term Incentive Plan for the issuance of options and share awards, of which .01 million is available for the future grant of options or awards at December 31, 2010. This plan expires in April 2011. The share options granted to non-officers vest over a three-year period beginning after the grant date, and share options and restricted shares for officers vest over a five-year period after the grant date. Restricted shares granted to trust managers and share options or awards granted to retirement eligible employees are expensed immediately.
In May 2010, our shareholders approved the adoption of the Amended and Restated 2010 Long-Term Incentive Plan, under which 3.0 million of our common shares were reserved for issuance, and 2.8 million is available for the future grant of options or awards at December 31, 2010. This plan expires in May 2020. Currently, these share options granted to non-officers vest ratably over a three-year period beginning after the grant date, and share options and restricted shares for officers vest ratably over a five-year period after the grant date. Restricted shares granted to trust managers and share options or awards granted to retirement eligible employees are expensed immediately. Restricted shares have the same rights of a shareholder, including the right to vote and receive dividends, except as o therwise provided by our Management Development and Executive Compensation Committee.
The grant price for both the Long-Term Incentive Plan and the Amended and Restated 2010 Long-Term Incentive Plan (collectively, the “Plans”) is calculated as an average of the high and low of the quoted fair value of our common shares on the date of grant. In the Plans, these options expire upon the earlier of termination of employment or 10 years from the date of grant, and restricted shares for officers and trust managers are granted at no purchase price. Our policy is to recognize compensation expense for equity awards ratably over the vesting period, except for retirement eligible amounts. Compensation expense, net of forfeitures, associated with share options and restricted shares totaled $4.9 million in 2010, $4.2 million in 2009 and $4.9 million in 2008, of which $1.2 million in both 2010 and 2009 and $1.3 million in 2008, was capitalized.
The fair value of share options and restricted shares is estimated on the date of grant using the Black-Scholes option pricing method based on the expected weighted average assumptions in the following table. The dividend yield is an average of the historical yields at each record date over the estimated expected life. We estimate volatility using our historical volatility data for a period of 10 years, and the expected life is based on historical data from an option valuation model of employee exercises and terminations. The risk-free rate is based on the U.S. Treasury yield curve. The fair value and weighted average assumptions are as follows:
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Fair value per share option | | $ | 5.42 | | | $ | 1.99 | | | $ | 3.07 | |
| Dividend yield | | | 5.3 | % | | | 5.2 | % | | | 5.1 | % |
| Expected volatility | | | 38.8 | % | | | 31.3 | % | | | 18.8 | % |
| Expected life (in years) | | | 6.2 | | | | 6.2 | | | | 6.2 | |
| Risk-free interest rate | | | 2.9 | % | | | 1.7 | % | | | 2.8 | % |
Following is a summary of the option activity for the three years ended December 31, 2010:
| | | | | | Weighted | |
| | | Shares | | | Average | |
| | | Under | | | Exercise | |
| | | Option | | | Price | |
| | | | | | | |
| Outstanding, January 1, 2008 | | | 2,840,290 | | | $ | 32.66 | |
| Granted | | | 832,106 | | | | 32.22 | |
| Forfeited or expired | | | (174,376 | ) | | | 35.85 | |
| Exercised | | | (180,365 | ) | | | 21.99 | |
| Outstanding, December 31, 2008 | | | 3,317,655 | | | | 32.96 | |
| Granted | | | 1,182,252 | | | | 11.85 | |
| Forfeited or expired | | | (54,364 | ) | | | 26.90 | |
| Exercised | | | (9,400 | ) | | | 18.05 | |
| Outstanding, December 31, 2009 | | | 4,436,143 | | | | 27.44 | |
| Granted | | | 504,781 | | | | 22.68 | |
| Forfeited or expired | | | (22,973 | ) | | | 21.29 | |
| Exercised | | | (303,679 | ) | | | 17.32 | |
| Outstanding, December 31, 2010 | | | 4,614,272 | | | $ | 27.62 | |
The total intrinsic value of options exercised was $1.8 million in 2010, $0.02 million in 2009 and $2.2 million in 2008. As of December 31, 2010 and 2009, there was approximately $3.8 million and $3.2 million, respectively, of total unrecognized compensation cost related to unvested share options, which is expected to be amortized over a weighted average of 2.5 years for both periods.
The following table summarizes information about share options outstanding and exercisable at December 31, 2010:
| | | | Outstanding | | | Exercisable | |
| | | | | | Weighted | | | | | | | | | | | | | Weighted | | | |
| | | | | | Average | | Weighted | | | Aggregate | | | | | | Weighted | | Average | | Aggregate | |
| | | | | | Remaining | | Average | | | Intrinsic | | | | | | Average | | Remaining | | Intrinsic | |
| Range of | | | | | Contractual | | Exercise | | | Value | | | | | | Exercise | | Contractual | | Value | |
| Exercise Prices | | | Number | | Life | | Price | | | (000’s) | | | Number | | | Price | | Life | | | (000’s) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 11.85 - $17.78 | | | | 1,076,520 | | 8.2 years | | $ | 11.85 | | | | | | | | 243,529 | | | $ | 11.85 | | 8.2 years | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 17.79 - $26.69 | | | | 1,143,273 | | 5.0 years | | $ | 23.03 | | | | | | | | 640,585 | | | $ | 23.31 | | 1.5 years | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 26.70 - $40.05 | | | | 1,914,766 | | 5.3 years | | $ | 34.25 | | | | | | | | 1,486,801 | | | $ | 34.83 | | 4.7 years | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ | 40.06 - $49.62 | | | | 479,713 | | 5.9 years | | $ | 47.46 | | | | | | | | 395,837 | | | $ | 47.46 | | 5.9 years | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Total | | | | 4,614,272 | | 5.9 years | | $ | 27.62 | | | $ | - | | | | 2,766,752 | | | $ | 31.95 | | 4.4 years | | $ | - | |
A summary of the status of unvested restricted shares for the year ended December 31, 2010 is as follows:
| | | Unvested | | | | |
| | | Restricted | | | Weighted | |
| | | Share | | | Average Grant | |
| | | Awards | | | Date Fair Value | |
| | | | | | | |
| Outstanding, January 1, 2010 | | | 363,236 | | | $ | 19.40 | |
| Granted | | | 160,353 | | | | 22.93 | |
| Vested | | | (126,387 | ) | | | 24.14 | |
| Forfeited | | | (405 | ) | | | 11.85 | |
| Outstanding, December 31, 2010 | | | 396,797 | | | $ | 19.32 | |
As of December 31, 2010 and 2009, there was approximately $5.1 million and $4.6 million, respectively, of total unrecognized compensation cost related to unvested restricted shares, which is expected to be amortized over a weighted average of 2.8 years and 2.7 years, respectively.
Note 20. Employee Benefit Plans
Effective April 1, 2002, we converted a noncontributory pension plan to a noncontributory cash balance retirement plan ("Retirement Plan") under which each participant received an actuarially determined opening balance. Annual additions to each participant's account include a service credit ranging from 3-5% of compensation, depending on years of service, and an interest credit based on the ten-year US Treasury Bill rate not to be less than 2.05%. Vesting generally occurs after three years of service. Certain participants were grandfathered under the prior pension plan formula. In addition to the plan described above, effective September 1, 2002, we established two separate and independent nonqualified supplemental retirement plans ("SRP") for certain employees. These unfunded plan s provide benefits in excess of the statutory limits of our noncontributory cash balance retirement plan. Annual additions to each participant's account include a service credit ranging from 3-5% of compensation, depending on years of service, and an interest credit of 7.5%. Vesting generally occurs after three years of service. We have elected to use the actuarial present value of the vested benefits to which the participant is entitled if the participant separates immediately from the SRP, as permitted by GAAP.
The estimated net loss, prior service cost, and transition obligation that will be amortized from accumulated other comprehensive loss into net periodic benefit cost over the next fiscal year are $720,000, ($117,000) and zero, respectively.
The following tables summarize changes in the benefit obligation, the plan assets and the funded status of our pension plans as well as the components of net periodic benefit costs, including key assumptions. The measurement dates for plan assets and obligations were December 31, 2010 and 2009.
| | | Fiscal Year End | |
| | | 2010 | | | 2009 | |
| Change in Projected Benefit Obligation: | | | | | | |
| Benefit obligation at beginning of year | | $ | 51,333 | | | $ | 46,148 | |
| Service cost | | | 3,325 | | | | 3,571 | |
| Interest cost | | | 3,212 | | | | 2,931 | |
| Actuarial loss | | | 1,769 | | | | 422 | |
| Benefit payments | | | (1,764 | ) | | | (1,739 | ) |
| Benefit obligation at end of year | | $ | 57,875 | | | $ | 51,333 | |
| | | | | | | | | |
| Change in Plan Assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | | $ | 23,509 | | | $ | 15,472 | |
| Actual return on plan assets | | | 2,600 | | | | 4,219 | |
| Employer contributions | | | 2,681 | | | | 5,557 | |
| Benefit payments | | | (1,764 | ) | | | (1,739 | ) |
| Fair value of plan assets at end of year | | $ | 27,026 | | | $ | 23,509 | |
| | | | | | | | | |
| Unfunded Status at End of Year: | | $ | 30,849 | | | $ | 27,824 | |
| | | | | | | | | |
| Accumulated benefit obligation | | $ | 57,418 | | | $ | 50,732 | |
| | | | | | | | | |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | | |
| Net loss | | $ | 10,296 | | | $ | 9,908 | |
| Prior service credit | | | (235 | ) | | | (352 | ) |
| Total amount recognized | | $ | 10,061 | | | $ | 9,556 | |
The following is the required information for other changes in plan assets and benefit obligations recognized in other comprehensive income:
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Net loss (gain) | | $ | 1,132 | | | $ | (2,407 | ) | | $ | 9,231 | |
| Amortization of net gain | | | (744 | ) | | | (947 | ) | | | (256 | ) |
| Amortization of prior service cost | | | 117 | | | | 117 | | | | 117 | |
| Total recognized in other comprehensive income | | $ | 505 | | | $ | (3,237 | ) | | $ | 9,092 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total recognized in net periodic benefit costs and other comprehensive income | | $ | 5,704 | | | $ | 2,705 | | | $ | 12,093 | |
The following is the required information for plans with an accumulated benefit obligation in excess of plan assets at each year end:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Projected benefit obligation | | $ | 57,875 | | | $ | 51,333 | |
| Accumulated benefit obligation | | | 57,418 | | | | 50,732 | |
| Fair value of plan assets | | | 27,026 | | | | 23,509 | |
At December 31, 2010 and 2009, the Retirement Plan was underfunded by $4.5 million and $4.6 million, respectively, and is included in accounts payable and accrued expenses. The SRP was underfunded by $26.3 million and $23.2 million, respectively, and is included in other net liabilities.
The components of net periodic benefit cost for both plans are as follows (in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Service cost | | $ | 3,325 | | | $ | 3,571 | | | $ | 2,414 | |
| Interest cost | | | 3,212 | | | | 2,931 | | | | 2,639 | |
| Expected return on plan assets | | | (1,965 | ) | | | (1,391 | ) | | | (1,832 | ) |
| Prior service cost | | | (117 | ) | | | (117 | ) | | | (117 | ) |
| Recognized loss (gain) | | | 744 | | | | 947 | | | | (104 | ) |
| | | | | | | | | | | | | |
| Total | | $ | 5,199 | | | $ | 5,941 | | | $ | 3,000 | |
The assumptions used to develop periodic expense for both plans are shown below:
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Discount rate – Retirement Plan and SRP | | | 5.82 | % | | | 6.00 | % | | | 6.25 | % |
| Salary scale increases – Retirement Plan | | | 4.00 | % | | | 4.00 | % | | | 4.00 | % |
| Salary scale increases – SRP | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
| Long-term rate of return on assets – Retirement Plan | | | 8.00 | % | | | 8.00 | % | | | 8.50 | % |
The selection of the discount rate is made annually after comparison to yields based on high quality fixed-income investments. The salary scale is the composite rate which reflects anticipated inflation, merit increases, and promotions for the group of covered participants. The long-term rate of return is a composite rate for the trust. It is derived as the sum of the percentages invested in each principal asset class included in the portfolio multiplied by their respective expected rates of return. We considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. This analysis resulted in the selection of 8.00% as the long-term rate of return assumption for 2010.
The assumptions used to develop the actuarial present value of the benefit obligations at year-end for both plans are shown below:
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Discount rate – Retirement Plan and SRP | | | 5.30 | % | | | 5.82 | % | | | 6.00 | % |
| Salary scale increases – Retirement Plan | | | 4.00 | % | | | 4.00 | % | | | 4.00 | % |
| Salary scale increases – SRP | | | 5.00 | % | | | 5.00 | % | | | 5.00 | % |
The expected contribution to be paid for the Retirement Plan by us during 2011 is approximately $2.3 million. The expected benefit payments for the next ten years for both plans are as follows, in millions: $1.9 in 2011, $4.6 in 2012; $2.1 in 2013; $2.8 in 2014, $4.8 in 2015 and $27.0 in 2016 through 2020.
The participant data used in determining the liabilities and costs for the Retirement Plan was collected as of January 1, 2010, and no significant changes have occurred through December 31, 2010. The participant data used in determining the liabilities and costs for the SRP was collected as of December 31, 2010.
Our investment policy for our plan assets has been to set forth to determine the objectives for structuring a retirement savings program suitable to the long-term needs and risk tolerances of participants, to select appropriate investments to be offered by the plan and to establish procedures for monitoring and evaluating the performance of the investments of the plan. Our overall plan objectives for selecting and monitoring investment options are to promote and optimize retirement wealth accumulation; to provide a full range of asset classes and investment options that are intended to help diversify the portfolio to maximize return within reasonable and prudent levels of risk; to control costs of administering the plan; and to manage the investments held by the plan.
The selection of investment options is determined using criteria based on the following characteristics: fund history, relative performance, investment style, portfolio structure, manager tenure, minimum assets, expenses and operation considerations. Investment options selected for use in the plan are reviewed on at least a semi-annual basis in order to evaluate material changes from the selection criteria. Asset allocation is used to determine how the investment portfolio should be split between stocks, bonds and cash. The asset allocation decision is influenced by time horizon; risk tolerance and investment return objectives. The primary factor for consideration of asset allocation is demographics of the plan, including, attained age and future service. The allocation is ba sed on a broad market diversification model and the percentage allocation to each investment category will vary depending upon market conditions. Rebalancing of the allocation of plan assets occurs semi-annually.
At December 31, 2010, our investment asset allocation compared to our benchmarking allocation model was as follows:
| | | Portfolio % | | | Benchmark % | |
| | | | | | | |
| Cash | | | 7 | % | | | 4 | % |
| US Stocks | | | 40 | % | | | 54 | % |
| Non-US Stocks | | | 20 | % | | | 9 | % |
| Bonds | | | 32 | % | | | 33 | % |
| Other | | | 1 | % | | | | |
| Total | | | 100 | % | | | 100 | % |
The fair value of plan assets was determined based on publicly quoted market prices for identical assets which are classified as Level 1 observable inputs. The allocation of the fair value of plan assets was as follows (in thousands):
| | | December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Cash and short-term investments | | | 3 | % | | | 3 | % |
| Mutual funds – equity | | | 63 | % | | | 61 | % |
| Mutual funds – fixed income | | | 34 | % | | | 36 | % |
| | | | | | | | | |
| Total | | | 100 | % | | | 100 | % |
Concentrations of risk within our equity portfolio are investments classified within the financial services sector, the industrial materials sector, the healthcare sector and the consumer goods sector representing approximately 16%, 13%, 13% and 11%, of total equity investments, respectively.
We also have a deferred compensation plan for eligible employees allowing them to defer portions of their current cash salary or share-based compensation. Deferred amounts are deposited in a grantor trust, which are included in other net assets, and are reported as compensation expense in the year service is rendered. Cash deferrals are invested based on the employee’s investment selections from a mix of assets based on a broad market diversification model. Deferred share-based compensation cannot be diversified, and distributions from this plan are made in the same form as the original deferral. See Note 18 for the disclosures associated with the fair value of the deferred compensation plan.
Note 21. Segment Information
The reportable segments presented are the segments for which separate financial information is available, and for which operating performance is evaluated regularly by senior management in deciding how to allocate resources and in assessing performance. We evaluate the performance of the reportable segments based on net operating income, defined as total revenues less operating expenses and real estate taxes. Management does not consider the effect of gains or losses from the sale of property in evaluating segment operating performance.
The shopping center segment is engaged in the acquisition, development and management of real estate, primarily anchored neighborhood and community shopping centers located in Arizona, Arkansas, California, Colorado, Florida, Georgia, Illinois, Kansas, Kentucky, Louisiana, Maine, Missouri, Nevada, New Mexico, North Carolina, Oklahoma, Oregon, South Carolina, Tennessee, Texas, Utah and Washington. The customer base includes supermarkets, discount retailers, drugstores and other retailers who generally sell basic necessity-type commodities. The industrial segment is engaged in the acquisition, development and management of bulk warehouses and office/service centers. Its properties are located in California, Florida, Georgia, Tennessee, Texas and Virginia, and the customer base is diverse. Inclu ded in "Other" are corporate-related items, insignificant operations and costs that are not allocated to the reportable segments.
Information concerning our reportable segments is as follows (in thousands):
| | | Shopping | | | | | | | | | | |
| | | Center | | | Industrial | | | Other | | | Total | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Year Ended December 31, 2010: | | | | | | | | | | | | |
| Revenues | | $ | 493,890 | | | $ | 51,961 | | | $ | 8,816 | | | $ | 554,667 | |
| Net Operating Income | | | 347,838 | | | | 35,544 | | | | 619 | | | | 384,001 | |
| Equity in Earnings (Loss) of Real Estate Joint Ventures and Partnerships, net | | | 12,222 | | | | 1,053 | | | | (386 | ) | | | 12,889 | |
| Capital Expenditures | | | 144,196 | | | | 23,892 | | | | 27,411 | | | | 195,499 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2009: | | | | | | | | | | | | | | | | |
| Revenues | | $ | 511,421 | | | $ | 53,070 | | | $ | 7,497 | | | $ | 571,988 | |
| Net Operating Income (Loss) | | | 362,065 | | | | 36,917 | | | | (598 | ) | | | 398,384 | |
| Equity in Earnings (Loss) of Real Estate Joint Ventures and Partnerships, net | | | 4,949 | | | | 967 | | | | (368 | ) | | | 5,548 | |
| Capital Expenditures | | | 84,252 | | | | 9,388 | | | | 3,917 | | | | 97,557 | |
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2008: | | | | | | | | | | | | | | | | |
| Revenues | | $ | 529,527 | | | $ | 54,314 | | | $ | 8,806 | | | $ | 592,647 | |
| Net Operating Income (Loss) | | | 370,099 | | | | 38,611 | | | | (143 | ) | | | 408,567 | |
| Equity in Earnings (Loss) of Real Estate Joint Ventures and Partnerships, net | | | 15,012 | | | | 1,428 | | | | (4,244 | ) | | | 12,196 | |
| Capital Expenditures | | | 247,723 | | | | 22,315 | | | | 29,052 | | | | 299,090 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2010: | | | | | | | | | | | | | | | | |
| Investment in Real Estate Joint Ventures and Partnerships, net | | $ | 309,171 | | | $ | 38,355 | | | $ | - | | | $ | 347,526 | |
| Total Assets | | | 3,469,694 | | | | 363,153 | | | | 975,008 | | | | 4,807,855 | |
| | | | | | | | | | | | | | | | | |
| As of December 31, 2009: | | | | | | | | | | | | | | | | |
| Investment in Real Estate Joint Ventures and Partnerships, net | | $ | 277,130 | | | $ | 38,118 | | | $ | - | | | $ | 315,248 | |
| Total Assets | | | 3,335,198 | | | | 353,736 | | | | 1,201,451 | | | | 4,890,385 | |
Segment net operating income reconciles to income from continuing operations as shown on the Statements of Consolidated Income and Comprehensive Income as follows (in thousands):
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Total Segment Net Operating Income | | $ | 384,001 | | | $ | 398,384 | | | $ | 408,567 | |
| Depreciation and Amortization | | | (151,101 | ) | | | (147,877 | ) | | | (149,795 | ) |
| Impairment Loss | | | (33,317 | ) | | | (34,983 | ) | | | (52,539 | ) |
| General and Administrative | | | (25,000 | ) | | | (25,930 | ) | | | (25,761 | ) |
| Interest Expense, net | | | (148,794 | ) | | | (153,207 | ) | | | (156,318 | ) |
| Interest and Other Income, net | | | 9,825 | | | | 11,427 | | | | 4,333 | |
| (Loss) Gain on Redemption of Convertible Senior Unsecured Notes | | | (135 | ) | | | 25,311 | | | | 12,961 | |
Equity in Earnings of Real Estate Joint Ventures and Partnerships, net | | | 12,889 | | | | 5,548 | | | | 12,196 | |
| Gain on Land and Merchant Development Sales | | | | | | | 18,688 | | | | 8,342 | |
| (Provision) Benefit for Income Taxes | | | (240 | ) | | | (6,337 | ) | | | 10,220 | |
| Income from Continuing Operations | | $ | 48,128 | | | $ | 91,024 | | | $ | 72,206 | |
Note 22. Noncontrolling Interests
The following table summarizes the effect of changes in our ownership interest in subsidiaries on the equity attributable to us as follows (in thousands):
| | | Year Ended December 31, | |
| | | 2010 | | | 2009 | | | 2008 | |
| | | | | | | | | | |
| Net income adjusted for noncontrolling interests | | $ | 46,206 | | | $ | 171,102 | | | $ | 145,652 | |
| Transfers from the noncontrolling interests: | | | | | | | | | | | | |
| Increase in equity for operating partnership units | | | 746 | | | | 14,251 | | | | 1,094 | |
| Decrease in equity for the acquisition of noncontrolling interests | | | (879 | ) | | | | | | | | |
| Change from net income adjusted for noncontrolling interests and transfers from the noncontrolling interests | | $ | 46,073 | | | $ | 185,353 | | | $ | 146,746 | |
Note 23. Quarterly Financial Data (Unaudited)
Summarized quarterly financial data is as follows (in thousands):
| | | First | | | | Second | | | | Third | | | | Fourth | | |
| 2010: | | | | | | | | | | | | | | | | |
| Revenues (1) | | $ | 137,136 | | | | $ | 138,761 | | | | $ | 139,039 | | | | $ | 139,731 | | |
| Net income (loss) attributable to common shareholders | | | 10,239 | | | | | (5,566 | ) | (2) | | | 8,660 | | | | | (2,603 | ) | (2) |
| Earnings per common share – basic | | | 0.09 | | | | | (0.05 | ) | (2) | | | 0.07 | | | | | (0.02 | ) | (2) |
| Earnings per common share – diluted | | | 0.08 | | | | | (0.05 | ) | (2) | | | 0.07 | | | | | (0.02 | ) | (2) |
| | | | | | | | | | | | | | | | | | | | | |
| 2009: | | | | | | | | | | | | | | | | | | | | |
| Revenues (1) | | $ | 144,334 | | | | $ | 142,415 | | | | $ | 143,073 | | | | $ | 142,166 | | |
| Net income (loss) attributable to common shareholders | | | 33,146 | | | | | 39,238 | | | | | (9,384 | ) | (2) | | | 72,626 | | (3) |
| Earnings per common share – basic | | | 0.38 | | | | | 0.35 | | | | | (0.08 | ) | (2) | | | 0.61 | | (3) |
| Earnings per common share – diluted | | | 0.38 | | | | | 0.35 | | | | | (0.08 | ) | (2) | | | 0.60 | | (3) |
| | | | | | | | | | | | | | | | | | | | | |
_______________
| (1) | Revenues from the sale of operating properties have been reclassified and reported in discontinued operations for all periods presented. |
| (2) | The quarter results include significant impairment charges. |
| (3) | The quarter results include significant gains on the sale of properties. |
* * * * *
Not applicable.
Under the supervision and with the participation of our principal executive officer and principal financial officer, management has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of December 31, 2010. Based on that evaluation, our principal executive officer and our principal financial officer have concluded that our disclosure controls and procedures were effective as of December 31, 2010.
There has been no change to our internal control over financial reporting during the quarter ended December 31, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Weingarten Realty Investors and its subsidiaries ("WRI") maintain a system of internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act, which is a process designed under the supervision of WRI's principal executive officer and principal financial officer and effected by WRI's Board of Trust Managers, management and other personnel, 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.
WRI's internal control over financial reporting includes those policies and procedures that:
§ Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of WRI's assets;
§ 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 WRI are being made only in accordance with authorizations of management and trust managers of WRI; and
§ Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of WRI's assets that could have a material effect on the financial statements.
WRI's management has responsibility for establishing and maintaining adequate internal control over financial reporting for WRI. Management, with the participation of WRI's Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of WRI's internal control over financial reporting as of December 31, 2010 based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on their evaluation of WRI's internal control over financial reporting, WRI's management along with the Chief Executive and Chief Financial Officers believe that WRI's internal control over financial reporting is effective as of December 31, 2010.
Deloitte & Touche LLP, WRI's independent registered public accounting firm that audited the consolidated financial statements and financial statement schedules included in this Form 10-K, has issued an attestation report on the effectiveness of WRI's internal control over financial reporting.
March 1, 2011
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Trust Managers and Shareholders of
Weingarten Realty Investors
Houston, Texas
We have audited the internal control over financial reporting of Weingarten Realty Investors and subsidiaries (the "Company") as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report On Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of trust managers, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are record ed 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 trust managers of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended December 31, 2010, of the Company and our report dated March 1, 2011, expressed an unqualified opinion on those financial statements and financial statement schedules.
/s/Deloitte & Touche LLP
Houston, Texas
March 1, 2011
Not applicable.
PART III
Information with respect to our trust managers and executive officers is incorporated herein by reference to the "Proposal One - Election of Trust Managers - Nominees," "Executive Officers" and “Share Ownership of Certain Beneficial Owners and Management—Section 16(a) Beneficial Ownership Reporting Compliance” sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2011.
Code of Conduct and Ethics
We have adopted a code of business and ethics for trust managers, officers and employees, known as the Code of Conduct and Ethics. The Code of Conduct and Ethics is available on our website at www.weingarten.com. Shareholders may request a free copy of the Code of Conduct and Ethics from:
| | Weingarten Realty Investors |
| | Attention: Investor Relations |
| | 2600 Citadel Plaza Drive, Suite 125 |
| | Houston, Texas 77008 |
| | (713) 866-6000 |
| | www.weingarten.com |
We have also adopted a Code of Conduct for Officers and Senior Financial Associates setting forth a code of ethics applicable to our principal executive officer, principal financial officer, chief accounting officer and financial associates, which is available on our website at www.weingarten.com. Shareholders may request a free copy of the Code of Conduct for Officers and Senior Financial Associates from the address and phone number set forth above.
Governance Guidelines
We have adopted Governance Guidelines, which are available on our website at www.weingarten.com. Shareholders may request a free copy of the Governance Guidelines from the address and phone number set forth above under "Code of Conduct and Ethics."
Information with respect to executive compensation is incorporated herein by reference to the “Executive Compensation,” “Proposal One - Election of Trust Managers,” “Compensation Committee Report,” “Summary Compensation Table” and “Trust Manager Compensation Table” sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2011.
The "Share Ownership of Certain Beneficial Owners and Management" section of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2011 is incorporated herein by reference.
The following table summarizes the equity compensation plans under which our common shares of beneficial interest may be issued as of December 31, 2010:
| | | Number of shares to | | Weighted average | | |
| | | be issued upon exercise | | exercise price of | | Number of shares |
| | | of outstanding options, | | outstanding options, | | remaining available |
| Plan category | | warrants and rights | | warrants and rights | | for future issuance |
| | | | | | | |
| Equity compensation plans approved by shareholders | | 4,614,272 | | $ 27.62 | | 2,766,273 |
| | | | | | | |
| Equity compensation plans not approved by shareholders | | ― | | ― | | ― |
| | | | | | | |
| Total | | 4,614,272 | | $ 27.62 | | 2,766,273 |
The “Governance of Our Company,” “Compensation Committee Interlocks and Insider Participation" and “Certain Transactions” sections of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2011 are incorporated herein by reference.
The "Independent Registered Public Accounting Firm Fees" section within “Proposal Two – Ratification of Independent Registered Public Accounting Firm” of our definitive Proxy Statement for the Annual Meeting of Shareholders to be held May 4, 2011 is incorporated herein by reference.
PART IV
| (a) | | Financial Statements and Financial Statement Schedules: | Page |
| | | | | |
| | | (A) | Report of Independent Registered Public Accounting Firm | 51 |
| | | (B) | Financial Statements | |
| | | | (i) | Statements of Consolidated Income and Comprehensive Income for the year ended December 31, 2010, 2009 and 2008 | 52 |
| | | | (ii) | Consolidated Balance Sheets as of December 31, 2010 and 2009 | 53 |
| | | | (iii) | Statements of Consolidated Cash Flows for the year ended December 31, 2010, 2009 and 2008 | 54 |
| | | | (iv) | Statements of Consolidated Equity for the year ended December 31, 2010, 2009 and 2008 | 55 |
| | | | (v) | Notes to Consolidated Financial Statements | 56 |
| | | (C) | Financial Statement Schedules: | |
| | | | II | Valuation and Qualifying Accounts | 104 |
| | | | III | Real Estate and Accumulated Depreciation | 105 |
| | | | IV | Mortgage Loans on Real Estate | 114 |
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedule or because the information required is included in the consolidated financial statements and notes thereto.
| (b) | | Exhibits: |
| | | |
| 3.1 | — | Restated Declaration of Trust (filed as Exhibit 3.1 to WRI's Form 8-A dated January 19, 1999 and incorporated herein by reference). |
| 3.2 | — | Amendment of the Restated Declaration of Trust (filed as Exhibit 3.2 to WRI's Form 8-A dated January 19, 1999 and incorporated herein by reference). |
| 3.3 | — | Second Amendment of the Restated Declaration of Trust (filed as Exhibit 3.3 to WRI's Form 8-A dated January 19, 1999 and incorporated herein by reference). |
| 3.4 | — | Third Amendment of the Restated Declaration of Trust (filed as Exhibit 3.4 to WRI's Form 8-A dated January 19, 1999 and incorporated herein by reference). |
| 3.5 | — | Fourth Amendment of the Restated Declaration of Trust dated April 28, 1999 (filed as Exhibit 3.5 to WRI's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). |
| 3.6 | — | Fifth Amendment of the Restated Declaration of Trust dated April 20, 2001 (filed as Exhibit 3.6 to WRI's Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). |
| 3.7 | — | Amended and Restated Bylaws of WRI (filed as Exhibit 99.2 to WRI's Form 8-A dated February 23, 1998 and incorporated herein by reference). |
| 3.8 | — | Amendment of Bylaws-Direct Registration System, Section 7.2(a) dated May 3, 2007 (filed as Exhibit 3.8 to WRI’s Form 10-Q for the quarter ended June 30, 2007 and incorporated herein by reference). |
| 3.9 | — | Second Amended and Restated Bylaws of Weingarten Realty Investors (filed as Exhibit 3.1 to WRI’s Form 8-K on February 26, 2010 and incorporated herein by reference). |
| 3.10 | — | Sixth Amendment of the Restated Declaration of Trust dated April 20, 2001 (filed as Exhibit 3.1 to WRI's Form 8-K dated May 6, 2010 and incorporated herein by reference). |
| 4.1 | — | Form of Indenture between Weingarten Realty Investors and The Bank of New York Mellon Trust Company, N.A. (successor in interest to JPMorgan Chase Bank, National Association, formerly and Texas Commerce Bank National Association) (filed as Exhibit 4(a) to WRI's Registration Statement on Form S-3 (No. 33-57659) dated February 10, 1995 and incorporated herein by reference). |
| 4.2 | — | Form of Indenture between Weingarten Realty Investors and The Bank of New York Mellon Trust Company, N.A. (successor in interest to JPMorgan Chase Bank, National Association, formerly and Texas Commerce Bank National Association) (filed as Exhibit 4(b) to WRI's Registration Statement on Form S-3 (No. 33-57659) and incorporated herein by reference). |
| 4.3 | — | Form of Fixed Rate Senior Medium Term Note (filed as Exhibit 4.19 to WRI’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
| 4.4 | — | Form of Floating Rate Senior Medium Term Note (filed as Exhibit 4.20 to WRI’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
| 4.5 | — | Form of Fixed Rate Subordinated Medium Term Note (filed as Exhibit 4.21 to WRI’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
| 4.6 | — | Form of Floating Rate Subordinated Medium Term Note (filed as Exhibit 4.22 to WRI’s Annual Report on Form 10-K for the year ended December 31, 1998 and incorporated herein by reference). |
| 4.7 | — | Statement of Designation of 6.75% Series D Cumulative Redeemable Preferred Shares (filed as Exhibit 3.1 to WRI’s Form 8-A dated April 17, 2003 and incorporated herein by reference). |
| 4.8 | — | Statement of Designation of 6.95% Series E Cumulative Redeemable Preferred Shares (filed as Exhibit 3.1 to WRI’s Form 8-A dated July 8, 2004 and incorporated herein by reference). |
| 4.9 | — | Statement of Designation of 6.50% Series F Cumulative Redeemable Preferred Shares (filed as Exhibit 3.1 to WRI’s Form 8-A dated January 29, 2007 and incorporated herein by reference). |
| 4.10 | — | 6.75% Series D Cumulative Redeemable Preferred Share Certificate (filed as Exhibit 4.2 to WRI’s Form 8-A dated April 17, 2003 and incorporated herein by reference). |
| 4.11 | — | 6.95% Series E Cumulative Redeemable Preferred Share Certificate (filed as Exhibit 4.2 to WRI’s Form 8-A dated July 8, 2004 and incorporated herein by reference). |
| 4.12 | — | 6.50% Series F Cumulative Redeemable Preferred Share Certificate (filed as Exhibit 4.2 to WRI’s Form 8-A dated January 29, 2007 and incorporated herein by reference). |
| 4.13 | — | Form of Receipt for Depositary Shares, each representing 1/30 of a share of 6.75% Series D Cumulative Redeemable Preferred Shares, par value $.03 per share (filed as Exhibit 4.3 to WRI’s Form 8-A dated April 17, 2003 and incorporated herein by reference). |
| 4.14 | — | Form of Receipt for Depositary Shares, each representing 1/100 of a share of 6.95% Series E Cumulative Redeemable Preferred Shares, par value $.03 per share (filed as Exhibit 4.3 to WRI’s Form 8-A dated July 8, 2004 and incorporated herein by reference). |
| 4.15 | — | Form of Receipt for Depositary Shares, each representing 1/100 of a share of 6.50% Series F Cumulative Redeemable Preferred Shares, par value $.03 per share (filed as Exhibit 4.3 to WRI’s Form 8-A dated January 29, 2007 and incorporated herein by reference). |
| 4.16 | — | Form of 7% Notes due 2011 (filed as Exhibit 4.17 to WRI’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). |
| 4.17 | — | Form of 3.95% Convertible Senior Notes due 2026 (filed as Exhibit 4.2 to WRI’s Form 8-K on August 2, 2006 and incorporated herein by reference). |
| 4.18 | — | Form of 8.10% Note due 2019 (filed as Exhibit 4.1 to WRI’s Current Report on Form 8-K dated August 14, 2009 and incorporated herein by reference). |
| 10.1† | — | The 1993 Incentive Share Plan of WRI (filed as Exhibit 4.1 to WRI’s Registration Statement on Form S-8 (No. 33-52473) and incorporated herein by reference). |
| 10.2† | — | 2001 Long Term Incentive Plan (filed as Exhibit 10.7 to WRI’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference). |
| 10.3† | — | Weingarten Realty Retirement Plan restated effective April 1, 2002 (filed as Exhibit 10.29 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
| 10.4† | — | First Amendment to the Weingarten Realty Retirement Plan, dated December 31, 2003 (filed as Exhibit 10.33 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
| 10.5† | — | First Amendment to the Weingarten Realty Pension Plan, dated August 1, 2005 (filed as Exhibit 10.27 on WRI’s Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference). |
| 10.6† | — | Mandatory Distribution Amendment for the Weingarten Realty Retirement Plan dated August 1, 2005 (filed as Exhibit 10.28 on WRI’s Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference). |
| 10.7† | — | Weingarten Realty Investors Supplemental Executive Retirement Plan amended and restated effective September 1, 2002 (filed as Exhibit 10.10 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.8† | — | First Amendment to the Weingarten Realty Investors Supplemental Executive Retirement Plan amended on November 3, 2003 (filed as Exhibit 10.11 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.9† | — | Second Amendment to the Weingarten Realty Investors Supplemental Executive Retirement Plan amended October 22, 2004 (filed as Exhibit 10.12 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.10† | — | Third Amendment to the Weingarten Realty Investors Supplemental Executive Retirement Plan amended October 22, 2004 (filed as Exhibit 10.13 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.11† | — | Weingarten Realty Investors Retirement Benefit Restoration Plan adopted effective September 1, 2002 (filed as Exhibit 10.14 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.12† | — | First Amendment to the Weingarten Realty Investors Retirement Benefit Restoration Plan amended on November 3, 2003 (filed as Exhibit 10.15 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.13† | — | Second Amendment to the Weingarten Realty Investors Retirement Benefit Restoration Plan amended October 22, 2004 (filed as Exhibit 10.16 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.14† | — | Third Amendment to the Weingarten Realty Pension Plan dated December 23, 2005 (filed as Exhibit 10.30 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
| 10.15† | — | Weingarten Realty Investors Deferred Compensation Plan amended and restated as a separate and independent plan effective September 1, 2002 (filed as Exhibit 10.17 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.16† | — | Supplement to the Weingarten Realty Investors Deferred Compensation Plan amended on April 25, 2003 (filed as Exhibit 10.18 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.17† | — | First Amendment to the Weingarten Realty Investors Deferred Compensation Plan amended on November 3, 2003 (filed as Exhibit 10.19 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.18† | — | Second Amendment to the Weingarten Realty Investors Deferred Compensation Plan, as amended, dated October 13, 2005 (filed as Exhibit 10.29 on WRI’s Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference). |
| 10.19† | — | Trust Under the Weingarten Realty Investors Deferred Compensation Plan amended and restated effective October 21, 2003 (filed as Exhibit 10.21 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.20† | — | Fourth Amendment to the Weingarten Realty Investors Deferred Compensation Plan, dated December 23, 2005 (filed as Exhibit 10.31 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
| 10.21† | — | Trust Under the Weingarten Realty Investors Retirement Benefit Restoration Plan amended and restated effective October 21, 2003 (filed as Exhibit 10.22 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.22† | — | Trust Under the Weingarten Realty Investors Supplemental Executive Retirement Plan amended and restated effective October 21, 2003 (filed as Exhibit 10.23 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.23† | — | First Amendment to the Trust Under the Weingarten Realty Investors Deferred Compensation Plan, Supplemental Executive Retirement Plan, and Retirement Benefit Restoration Plan amended on March 16, 2004 (filed as Exhibit 10.24 on WRI’s Form 10-Q for the quarter ended June 30, 2005 and incorporated herein by reference). |
| 10.24† | — | Third Amendment to the Weingarten Realty Investors Deferred Compensation Plan dated August 1, 2005 (filed as Exhibit 10.30 on WRI’s Form 10-Q for the quarter ended September 30, 2005 and incorporated herein by reference). | |
| 10.25 | — | Amended and Restated Credit Agreement dated February 22, 2006 among Weingarten Realty Investors, the Lenders Party Thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.32 on WRI’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference). |
| 10.26 | — | Amendment Agreement dated November 7, 2007 to the Amended and Restated Credit Agreement (filed as Exhibit 10.34 on WRI’s Form 10-Q for the quarter ended September 30, 2007 and incorporated herein by reference). |
| 10.27† | — | Fifth Amendment to the Weingarten Realty Investors Deferred Compensation Plan (filed as Exhibit 10.34 to WRI’s Form 10-Q for quarter ended June 30, 2006 and incorporated herein by reference). |
| 10.28† | — | Restatement of the Weingarten Realty Investors Supplemental Executive Retirement Plan dated August 4, 2006 (filed as Exhibit 10.35 to WRI’s Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference). |
| 10.29† | — | Restatement of the Weingarten Realty Investors Deferred Compensation Plan dated August 4, 2006 (filed as Exhibit 10.36 to WRI’s Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference). |
| 10.30† | — | Restatement of the Weingarten Realty Investors Retirement Benefit Restoration Plan dated August 4, 2006 (filed as Exhibit 10.37 to WRI’s Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference). |
| 10.31† | — | Amendment No. 1 to the Weingarten Realty Investors Supplemental Executive Retirement Plan dated December 15, 2006 (filed as Exhibit 10.38 on WRI’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference). |
| 10.32† | — | Amendment No. 1 to the Weingarten Realty Investors Retirement Benefit Restoration Plan dated December 15, 2006 (filed as Exhibit 10.39 on WRI’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference). |
| 10.33† | — | Amendment No. 1 to the Weingarten Realty Investors Deferred Compensation Plan dated December 15, 2006 (filed as Exhibit 10.40 on WRI’s Form 10-K for the year ended December 31, 2006 and incorporated herein by reference). |
| 10.34† | — | Amendment No. 2 to the Weingarten Realty Investors Retirement Benefit Restoration Plan dated November 9, 2007 (filed as Exhibit 10.43 on WRI’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference). |
| 10.35† | — | Amendment No. 2 to the Weingarten Realty Investors Deferred Compensation Plan dated November 9, 2007 (filed as Exhibit 10.44 on WRI’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference). |
| 10.36† | — | Amendment No. 2 to the Weingarten Realty Investors Supplemental Executive Retirement Plan dated November 9, 2007 (filed as Exhibit 10.45 on WRI’s Form 10-K for the year ended December 31, 2007 and incorporated herein by reference). |
| 10.37† | — | Fifth Amendment to the Weingarten Realty Retirement Plan, dated August 1, 2008 (filed as Exhibit 10.48 on WRI’s Form 10-Q for the quarter ended September 30, 2008 and incorporated herein by reference). | |
| 10.38† | — | Amendment No. 3 to the Weingarten Realty Investors Retirement Benefit Restoration Plan dated November 17, 2008 (filed as Exhibit 10.1 on WRI’s Form 8-K on December 4, 2008 and incorporated herein by reference). | |
| 10.39† | — | Amendment No. 3 to the Weingarten Realty Investors Deferred Compensation Plan dated November 17, 2008 (filed as Exhibit 10.2 on WRI’s Form 8-K on December 4, 2008 and incorporated herein by reference). | |
| 10.40† | — | Amendment No. 3 to the Weingarten Realty Investors Supplemental Executive Retirement Plan dated November 17, 2008 (filed as Exhibit 10.3 on WRI’s Form 8-K on December 4, 2008 and incorporated herein by reference). | |
| 10.41† | — | Amendment No. 1 to the Weingarten Realty Investors 2001 Long Term Incentive Plan dated November 17, 2008 (filed as Exhibit 10.4 on WRI’s Form 8-K on December 4, 2008 and incorporated herein by reference). | |
| 10.42† | — | Severance and Change to Control Agreement for Johnny Hendrix dated November 11, 1998 (filed as Exhibit 10.54 on WRI’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). | |
| 10.43† | — | Severance and Change to Control Agreement for Stephen C. Richter dated November 11, 1998 (filed as Exhibit 10.54 on WRI’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). |
| 10.44† | — | Amendment No. 1 to Severance and Change to Control Agreement for Johnny Hendrix dated December 20, 2008 (filed as Exhibit 10.54 on WRI’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). |
| 10.45† | — | Amendment No. 1 to Severance and Change to Control Agreement for Stephen Richter dated December 31, 2008 (filed as Exhibit 10.54 on WRI’s Form 10-K for the year ended December 31, 2008 and incorporated herein by reference). |
| 10.46 | — | Promissory Note with Reliance Trust Company, Trustee of the Trust under the Weingarten Realty Investors Deferred Compensation Plan, Supplemental Executive Retirement Plan and Retirement Benefit Restoration Plan dated March 12, 2009 (filed as Exhibit 10.57 on WRI’s Form 10-Q for the quarter ended March 31, 2009 and incorporated herein by reference). |
| 10.47† | — | First Amendment to the Weingarten Realty Retirement Plan, amended and restated, dated December 2, 2009 (filed as Exhibit 10.51 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference). |
| 10.48 | — | Amended and Restated Credit Agreement dated February 11, 2010 among Weingarten Realty Investors, the Lenders Party Thereto and JPMorgan Chase Bank, N.A., as Administrative Agent (filed as Exhibit 10.1 on WRI’s Form 8-K on February 16, 2010 and incorporated herein by reference). |
| 10.49† | — | First Amendment to the Master Nonqualified Plan Trust Agreement dated March 12, 2009 (filed as Exhibit 10.53 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference). |
| 10.50† | — | Second Amendment to the Master Nonqualified Plan Trust Agreement dated August 4, 2009 (filed as Exhibit 10.54 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference). |
| 10.51† | — | Non-Qualified Plan Trust Agreement for Recordkept Plans dated September 1, 2009 (filed as Exhibit 10.55 on WRI’s Annual Report on Form 10-K for the year ended December 31, 2009 and incorporated herein by reference). |
| 10.52† | — | Amended and Restated 2010 Long-Term Incentive Plan (filed as Exhibit 99.1 to WRI’s Form 8-K dated April 26, 2010 and incorporated herein by reference). |
| 10.53† | — | Amendment No. 4 to the Weingarten Realty Investors Deferred Compensation Plan dated February 26, 2010 (filed as Exhibit 10.57 on WRI’s Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference). |
| 10.54† | — | Amendment No. 4 to the Weingarten Realty Investors Supplemental Executive Retirement Plan dated May 6, 2010 (filed as Exhibit 10.58 on WRI’s Form 10-Q for the quarter ended March 31, 2010 and incorporated herein by reference). |
| 10.55† | — | First Amendment to Promissory Note with Reliance Trust Company, Trustee of the Trust under the Weingarten Realty Investors Deferred Compensation Plan, Supplemental Executive Retirement Plan and Retirement Benefit Restoration Plan dated March 11, 2010 (filed as Exhibit 10.59 on WRI’s Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference). |
| 10.56† | — | 2002 WRI Employee Share Purchase Plan dated May 6, 2003 (filed as Exhibit 10.60 on WRI’s Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference). |
| 10.57† | — | Amended and Restated 2002 WRI Employee Share Purchase Plan dated May 10, 2010 (filed as Exhibit 10.61 on WRI’s Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference). |
| 10.58 | — | Fixed Rate Promissory Note with JPMorgan Chase Bank, National Association dated May 11, 2010 (filed as Exhibit 10.62 on WRI’s Form 10-Q for the quarter ended June 30, 2010 and incorporated herein by reference). |
| 10.59†* | — | |
| 12.1* | — | |
| 14.1 | — | Code of Conduct and Ethics for Employees, Officers and Trust Managers (http://www.weingarten.com). |
| 14.2 | — | Code of Ethical Conduct for Officers and Senior Financial Associates (http://www.weingarten.com). |
| 21.1* | — | |
| 23.1* | — | |
| 31.1* | — | |
| 31.2* | — | |
| 32.1** | — | |
| 32.2** | — | |
| 101.INS** | — | XBRL Instance Document |
| 101.SCH** | — | XBRL Taxonomy Extension Schema Document |
| 101.CAL** | — | XBRL Taxonomy Extension Calculation Linkbase Document |
| 101.DEF** | — | XBRL Taxonomy Extension Definition Linkbase Document |
| 101.LAB** | — | XBRL Taxonomy Extension Labels Linkbase Document |
| 101.PRE** | — | XBRL Taxonomy Extension Presentation Linkbase Document |
_______________
| ** | Furnished with this report. |
| † | Management contract or compensation plan or arrangement. |
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | WEINGARTEN REALTY INVESTORS |
| | | |
| | | |
| | By: | /s/ Andrew M. Alexander |
| | | Andrew M. Alexander |
| | | Chief Executive Officer |
Date: March 1, 2011
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS that each of Weingarten Realty Investors, a real estate investment trust organized under the Texas Business Organizations Code, and the undersigned trust managers and officers of Weingarten Realty Investors hereby constitute and appoint Andrew M. Alexander, Stanford Alexander, Stephen C. Richter and Joe D. Shafer or any one of them, its or his true and lawful attorney-in-fact and agent, for it or him and in its or his name, place and stead, in any and all capacities, with full power to act alone, to sign any and all amendments to this Report, and to file each such amendment to the Report, with all exhibits thereto, and any and all other documents in connection therewith, with the Securities and Exchange Commission, hereby granting unto said attorney-in-fa ct and agent full power and authority to do and perform any and all acts and things requisite and necessary to be done in and about the premises as fully to all intents and purposes as it or he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirement of the Securities and Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
| | Signature | | Title | | Date |
| | | | | | |
| | | | | | |
| | | | | | |
| By: | /s/ Stanford Alexander | | Chairman | | March 1, 2011 |
| | Stanford Alexander | | and Trust Manager | | |
| | | | | | |
| By: | /s/ Andrew M. Alexander | | Chief Executive Officer, | | March 1, 2011 |
| | Andrew M. Alexander | | President and Trust Manager | | |
| | | | | | |
| By: | /s/ James W. Crownover | | Trust Manager | | March 1, 2011 |
| | James W. Crownover | | | | |
| | | | | | |
| By: | /s/ Robert J. Cruikshank | | Trust Manager | | March 1, 2011 |
| | Robert J. Cruikshank | | | | |
| | | | | | |
| By: | /s/ Melvin Dow | | Trust Manager | | March 1, 2011 |
| | Melvin Dow | | | | |
| | | | | | |
| By: | /s/ Stephen A. Lasher | | Trust Manager | | March 1, 2011 |
| | Stephen A. Lasher | | | | |
| | | | | | |
| By: | /s/ Stephen C. Richter | | Executive Vice President and | | March 1, 2011 |
| | Stephen C. Richter | | Chief Financial Officer | | |
| | | | | | |
| By: | /s/ Douglas W. Schnitzer | Trust Manager | March 1, 2011 |
| | Douglas W. Schnitzer | | |
| | | | |
| By: | /s/ Joe D. Shafer | Senior Vice President/Chief Accounting Officer | March 1, 2011 |
| | Joe D. Shafer | (Principal Accounting Officer) | |
| | | | |
| By: | | Trust Manager | |
| | C. Park Shaper | | |
| | | | |
| By: | /s/ Marc J. Shapiro | Trust Manager | March 1, 2011 |
| | Marc J. Shapiro | | |
| | | | |
Note A - Write-offs of accounts receivable previously reserved.
