UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from____________________ to ____________________
Commission file number 1-9876
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WEINGARTEN REALTY INVESTORS
---------------------------
(Exact name of registrant as specified in its charter)
Texas 74-1464203
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2600 Citadel Plaza Drive, P.O. Box 924133, Houston, Texas 77292-4133
- ---------------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 866-6000
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____________________________________________
(Former name, former address and former fiscal
year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----. ----.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes X No.
----. ----
As of July 30, 2004, there were 85,607,610 common shares of beneficial
interest of Weingarten Realty Investors, $.03 par value, outstanding.
PART 1
FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
WEINGARTEN REALTY INVESTORS
STATEMENTS OF CONSOLIDATED INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS THAT ARE REPORTED ON A
POST-SPLIT BASIS)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Revenues:
Rentals . . . . . . . . . . . . . . . . . . . . . . . $ 122,224 $ 99,826 $ 237,411 $ 195,411
Interest income . . . . . . . . . . . . . . . . . . . 383 551 659 797
Other . . . . . . . . . . . . . . . . . . . . . . . . 1,145 1,617 2,713 2,632
---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . 123,752 101,994 240,783 198,840
---------- ---------- ---------- ----------
Expenses:
Depreciation and amortization . . . . . . . . . . . . 29,215 22,312 55,707 43,195
Interest. . . . . . . . . . . . . . . . . . . . . . . 28,140 21,036 55,873 40,475
Operating . . . . . . . . . . . . . . . . . . . . . . 18,886 16,073 35,994 30,033
Ad valorem taxes. . . . . . . . . . . . . . . . . . . 14,697 11,312 29,112 22,614
General and administrative. . . . . . . . . . . . . . 3,936 3,414 7,962 6,471
Loss on early redemption of preferred shares. . . . . 3,566 3,566
---------- ---------- ---------- ----------
Total. . . . . . . . . . . . . . . . . . . . . . 98,440 74,147 188,214 142,788
---------- ---------- ---------- ----------
Operating Income. . . . . . . . . . . . . . . . . . . . 25,312 27,847 52,569 56,052
Equity in Earnings of Joint Ventures. . . . . . . . . . 1,651 998 2,937 2,036
Income Allocated to Minority Interests. . . . . . . . . (975) (837) (1,854) (1,732)
Impairment Loss on Land Held for Development. . . . . . (2,700) (2,700)
Gain (Loss) on Sale of Properties . . . . . . . . . . . 102 (17) 419 (8)
---------- ---------- ---------- ----------
Income Before Discontinued Operations . . . . . . . . . 23,390 27,991 51,371 56,348
---------- ---------- ---------- ----------
Operating Income from Discontinued Operations . . . . . 362 585 790 1,248
Gain (Loss) on Sale of Properties . . . . . . . . . . . 13,430 (108) 13,430 763
---------- ---------- ---------- ----------
Income From Discontinued Operations. . . . . . . 13,792 477 14,220 2,011
---------- ---------- ---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . . 37,182 28,468 65,591 58,359
Dividends on Preferred Shares . . . . . . . . . . . . . 1,265 4,920 2,531 9,842
Original Issuance Cost Associated with Series A
Preferred Shares. . . . . . . . . . . . . . . . . . . 2,488 2,488
---------- ---------- ---------- ----------
Net Income Available to Common Shareholders . . . . . . $ 35,917 $ 21,060 $ 63,060 $ 46,029
========== ========== ========== ==========
Net Income Per Common Share - Basic:
Income Before Discontinued Operations . . . . . . . . $ .26 $ .26 $ .58 $ .56
Income From Discontinued Operations . . . . . . . . . .16 .01 .17 .03
---------- ---------- ---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . $ .42 $ .27 $ .75 $ .59
========== ========== ========== ==========
Net Income Per Common Share - Diluted:
Income Before Discontinued Operations . . . . . . . . $ .26 $ .26 $ .58 $ .56
Income From Discontinued Operations . . . . . . . . . .16 .01 .16 .03
---------- ---------- ---------- ----------
Net Income. . . . . . . . . . . . . . . . . . . . . . $ .42 $ .27 $ .74 $ .59
========== ========== ========== ==========
Net Income. . . . . . . . . . . . . . . . . . . . . . . $ 37,182 $ 28,468 $ 65,591 $ 58,359
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss):
Unrealized derivative gain on interest rate swaps . . 2,389 590 939 1,119
Amortization of forward-starting interest rate swaps. 87 (40) 65 (80)
Unrealized derivative loss on forward-starting
interest rate swaps . . . . . . . . . . . . . . . . (720) (4,977)
---------- ---------- ---------- ----------
Other Comprehensive Income (Loss) . . . . . . . . . . . 1,756 550 (3,973) 1,039
---------- ---------- ---------- ----------
Comprehensive Income. . . . . . . . . . . . . . . . . . $ 38,938 $ 29,018 $ 61,618 $ 59,398
========== ========== ========== ==========
See Notes to Consolidated Financial Statements.
2
WEINGARTEN REALTY INVESTORS
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
June 30, December 31,
2004 2003
------------ ------------
ASSETS
Property. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,608,809 $ 3,200,091
Accumulated Depreciation. . . . . . . . . . . . . . . . . . . . . . . . . (573,048) (527,375)
------------ ------------
Property - net. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,035,761 2,672,716
Investment in Real Estate Joint Ventures. . . . . . . . . . . . . . . . . 48,939 35,085
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,084,700 2,707,801
Notes Receivable from Real Estate Joint Ventures and Partnerships . . . . 44,892 36,825
Unamortized Debt and Lease Costs. . . . . . . . . . . . . . . . . . . . . 82,935 70,895
Accrued Rent and Accounts Receivable (net of allowance for doubtful
accounts of $4,228 in 2004 and $4,066 in 2003). . . . . . . . . . . . . 38,571 40,325
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . 42,700 20,255
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54,228 46,993
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 3,348,026 $ 2,923,094
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,202,048 $ 1,810,706
Preferred Shares Subject to Mandatory Redemption, net . . . . . . . . . . 109,364
Accounts Payable and Accrued Expenses . . . . . . . . . . . . . . . . . . 82,278 78,986
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,058 52,671
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,363,384 2,051,727
------------ ------------
Minority Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,479 49,804
------------ ------------
Commitments and Contingencies
Shareholders' Equity:
Preferred Shares of Beneficial Interest - par value, $.03 per share;
shares authorized: 10,000;
6.75% Series D cumulative redeemable preferred shares of
beneficial interest; 100 shares issued and outstanding in 2004
and 2003; liquidation preference $75,000. . . . . . . . . . . . . 90 90
Common Shares of Beneficial Interest - par value, $.03 per share;
shares authorized: 150,000; shares issued and outstanding:
85,608 in 2004 and 81,889 in 2003 . . . . . . . . . . . . . . . . . 2,563 2,488
Capital Surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,111,113 993,570
Accumulated Dividends in Excess of Net Income . . . . . . . . . . . . . (182,279) (174,234)
Accumulated Other Comprehensive Loss. . . . . . . . . . . . . . . . . . (4,324) (351)
------------ ------------
Shareholders' Equity. . . . . . . . . . . . . . . . . . . . . . . . . 927,163 821,563
------------ ------------
Total . . . . . . . . . . . . . . . . . . . . . . . . $ 3,348,026 $ 2,923,094
============ ============
See Notes to Consolidated Financial Statements.
3
WEINGARTEN REALTY INVESTORS
STATEMENTS OF CONSOLIDATED CASH FLOWS
(UNAUDITED)
(AMOUNTS IN THOUSANDS)
Six Months Ended
June 30,
--------------------------
2004 2003
----------- -----------
Cash Flows from Operating Activities:
Net income. . . . . . . . . . . . . . . . . . . . . . . . . $ 65,591 $ 58,359
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization . . . . . . . . . . . . 56,045 43,859
Loss on early redemption of preferred shares. . . . . 3,566
Equity in earnings of joint ventures. . . . . . . . . (2,937) (2,036)
Income allocated to minority interests. . . . . . . . 1,854 1,732
Impairment loss on land held for development. . . . . 2,700
Gain on sale of properties. . . . . . . . . . . . . . (13,849) (755)
Changes in accrued rent and accounts receivable . . . 1,478 4,401
Changes in other assets . . . . . . . . . . . . . . . (23,014) (14,871)
Changes in accounts payable and accrued expenses. . . 754 (9,970)
Other, net. . . . . . . . . . . . . . . . . . . . . . 569 352
----------- -----------
Net cash provided by operating activities . . . 92,757 81,071
----------- -----------
Cash Flows from Investing Activities:
Investment in properties. . . . . . . . . . . . . . . . . . (292,987) (146,718)
Notes receivable:
Advances. . . . . . . . . . . . . . . . . . . . . . . (10,365) (9,930)
Collections . . . . . . . . . . . . . . . . . . . . . 2,238 255
Proceeds from sales and disposition of property . . . . . . 26,937 5,499
Real estate joint ventures and partnerships:
Investments . . . . . . . . . . . . . . . . . . . . . (22,741) (386)
Distributions . . . . . . . . . . . . . . . . . . . . 2,170 2,242
----------- -----------
Net cash used in investing activities . . . . . (294,748) (149,038)
----------- -----------
Cash Flows from Financing Activities:
Proceeds from issuance of:
Debt. . . . . . . . . . . . . . . . . . . . . . . . . 403,070 199,485
Common shares of beneficial interest. . . . . . . . . 119,351 1,849
Preferred shares of beneficial interest . . . . . . . 72,691
Redemption of preferred shares of beneficial interest (112,940) (75,000)
Principal payments of debt. . . . . . . . . . . . . . . . . (111,476) (63,387)
Common and preferred dividends paid . . . . . . . . . . . . (73,636) (70,825)
Other, net. . . . . . . . . . . . . . . . . . . . . . . . . 67 (89)
----------- -----------
Net cash provided by financing activities . . . 224,436 64,724
----------- -----------
Net increase (decrease) in cash and cash equivalents. . . . . . 22,445 (3,243)
Cash and cash equivalents at January 1. . . . . . . . . . . . . 20,255 27,420
----------- -----------
Cash and cash equivalents at June 30. . . . . . . . . . . . . . $ 42,700 $ 24,177
=========== ===========
See Notes to Consolidated Financial Statements.
4
WEINGARTEN REALTY INVESTORS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. INTERIM FINANCIAL STATEMENTS
The consolidated financial statements included in this report are
unaudited; however, amounts presented in the balance sheet as of December
31, 2003 are derived from our audited financial statements at that date. In
our opinion, all adjustments necessary for a fair presentation of such
financial statements have been included. Such adjustments consisted of
normal recurring items. Interim results are not necessarily indicative of
results for a full year.
The consolidated financial statements and notes are presented as permitted
by Form 10-Q and do not contain certain information included in our annual
financial statements and notes. These Consolidated Financial Statements
should be read in conjunction with our Annual Report on Form 10-K for the
year ended December 31, 2003.
Certain reclassifications of prior year's amounts have been made to conform
to the current year presentation.
2. STOCK-BASED COMPENSATION
On January 1, 2003, we adopted SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure - an amendment of FASB Statement
No. 123", and began recognizing stock-based employee compensation as new
shares were awarded. With respect to share options awarded prior to January
1, 2003, we accounted for stock-based employee compensation using the
intrinsic value method set forth in Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees", and related
interpretations. In accordance with APB Opinion No. 25, no stock-based
employee compensation had been recognized in our financial statements prior
to January 1, 2003.
5
The following table illustrates the effect on net income available to
common shareholders and net income per common share if the fair value-based
method had been applied to all outstanding and unvested awards in each
period (in thousands, except per share amounts):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Net income available to common shareholders. . . . . . . . $ 35,917 $ 21,060 $ 63,060 $ 46,029
Stock-based employee compensation included in
net income available to common shareholders. . . . . . . 46 5 93 5
Stock-based employee compensation determined
under the fair value-based method for all awards . . . . (140) (106) (280) (207)
--------- --------- --------- ---------
Pro forma net income available to
common shareholders. . . . . . . . . . . . . . . . . . . $ 35,823 $ 20,959 $ 62,873 $ 45,827
========= ========= ========= =========
Net income per common share:
Basic - as reported. . . . . . . . . . . . . . . . . $ .42 $ .27 $ .75 $ .59
========= ========= ========= =========
Basic - pro forma. . . . . . . . . . . . . . . . . . $ .42 $ .27 $ .75 $ .59
========= ========= ========= =========
Net income per common share:
Diluted - as reported. . . . . . . . . . . . . . . . $ .42 $ .27 $ .74 $ .59
========= ========= ========= =========
Diluted - pro forma. . . . . . . . . . . . . . . . . $ .41 $ .27 $ .74 $ .59
========= ========= ========= =========
3. PER SHARE DATA
Net income per common share - basic is computed using net income available
to common shareholders and the weighted average shares outstanding, which
have been adjusted for the three-for-two share split declared in February
2004 and described in Note 12. Net income per common share - diluted
includes the effect of potentially dilutive securities for the periods
indicated, as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2004 2003 2004 2003
--------- --------- --------- ---------
Numerator:
Net income available to common shareholders - basic. . . . $ 35,917 $ 21,060 $ 63,060 $ 46,029
Income attributable to operating partnership units . . . . 866 760 1,691 1,592
--------- --------- --------- ---------
Net income available to common shareholders - diluted. . . $ 36,783 $ 21,820 $ 64,751 $ 47,621
========= ========= ========= =========
Denominator:
Weighted average shares outstanding - basic. . . . . . . . 85,598 78,193 84,371 78,165
Effect of dilutive securities:
Share options and awards . . . . . . . . . . . . . . 787 771 869 680
Operating partnership units. . . . . . . . . . . . . 2,242 2,093 2,211 2,193
--------- --------- --------- ---------
Weighted average shares outstanding - diluted. . . . . . . 88,627 81,057 87,451 81,038
========= ========= ========= =========
Options to purchase 491,120 and 750 common shares for the second quarter
ended June 30, 2004 and 2003, 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. No common shares have been
excluded from the six months ended June 30, 2004 calculation of net
6
income per common share - diluted, while 1,350 common shares were excluded
from the six months ended June 30, 2003 calculation of net income per
common share - diluted.
4. NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities", which was reissued as Interpretation No. 46R
in December 2003. FIN 46R requires a variable interest entity to be
consolidated by a company if that company absorbs a majority of the
variable interest entity's expected losses, receives a majority of the
entity's expected residual returns, or both. It further requires
disclosures about variable interest entities that a company is not required
to consolidate, but in which it has a significant variable interest. We
have applied FIN 46R to our joint ventures and concluded that it did not
require consolidation of additional entities.
5. DISCONTINUED OPERATIONS
In 2004, two retail projects located in Webster and Kingwood, Texas were
sold. In 2003, we sold five retail projects located in San Antonio (1),
McKinney (1), Nacogdoches (1) and Houston (2), Texas. Also in 2003, a
warehouse building in Memphis, Tennessee and a retail building in Houston,
Texas were sold. The operating results and the gain on sale of these
properties have been reclassified and reported as discontinued operations
in the Statements of Consolidated Income and Comprehensive Income in
accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." Included in the Consolidated Balance Sheet at December
31, 2003 is $19.5 million of Property and $7.0 million of Accumulated
Depreciation associated with the two retail projects located in Texas,
which were sold in 2004.
The discontinued operations reported in 2004 and 2003 had no debt that was
required to be repaid upon their disposition. In addition, we elected not
to allocate other consolidated interest to discontinued operations since
the interest savings to be realized from the proceeds of the sale of these
operations was not material.
6. DERIVATIVES AND HEDGING
We 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 swaps with major financial institutions. In March 2004, we entered
into two interest rate swaps with an aggregate notional amount of $50
million that convert fixed interest rate payments to variable interest
payments. At June 30, 2004, we have ten interest rate swap contracts with
an aggregate notional amount of $132.5 million that convert fixed interest
payments at rates ranging from 4.2% to 7.4% to variable interest payments.
These contracts have been designated as fair value hedges. 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 June 2004, two interest rate swaps designated as cash
flow hedges and two interest rate swaps designated as fair value hedges
expired. The derivative instruments designated as fair value hedges on June
30, 2004 were reported at their fair values as Other Assets, net of accrued
interest, of $2.9 million and as Other Liabilities, net of accrued
interest, of $3.8 million.
In December 2003, we entered into two forward-starting interest rate swaps
with an aggregate notional amount of $97.0 million in anticipation of the
issuance of fixed-rate medium term notes subsequent to year-end. These
contracts were designated as a cash flow hedge of forecasted interest
payments for $100 million of unsecured notes that were ultimately sold in
February 2004. Concurrent with the sale of these notes, we settled our
$97.0 million forward-starting interest rate swap contracts, resulting in a
loss of $.9 million, which is being amortized as a reduction to earnings
over the life of the notes. In January 2004, we entered into four
additional forward-starting interest rate swaps with an aggregate notional
amount of $194.0 million in anticipation of the issuance of fixed-rate
medium term notes. A medium term note totaling $50 million was issued in
January 2004, at which time one of the four forward-starting interest rate
swaps with a notional amount of $48.5 million was settled at a loss of $.7
million. This $.7 million loss is being amortized as a reduction to
7
earnings over the life of the related medium term note. An additional
medium term note totaling $50 million was issued in March 2004, at which
time the second of the four forward-starting interest rate swaps with a
notional amount of $48.5 million was settled at a loss of $2.7 million.
This $2.7 million loss is being amortized as a reduction to earnings over
the life of the related medium term note. In the second quarter of 2004,
the remaining two forward-starting interest rate swaps with an aggregate
notional amount of $97 million were settled concurrent with the issuance of
an additional $100 million of notes at a net loss of $.7 million. This loss
will be amortized as a reduction to earnings over the life of the related
medium term notes.
As of June 30, 2004, the balance in accumulated other comprehensive loss
relating to the derivatives was $3.7 million. Within the next twelve
months, we expect to reclassify to earnings as interest expense
approximately $0.3 million of that balance. With respect to fair value
hedges, both changes in fair market value of the derivative hedging
instrument and changes in the fair value of the hedged item will be
recorded in earnings each reporting period. These amounts should completely
offset with no impact to earnings, except for the portion of the hedge that
proves to be ineffective, if any.
7. DEBT
Our debt consists of the following (in thousands):
June 30, December 31,
2004 2003
------------ -------------
Fixed-rate debt payable to 2030 at 4.5% to 8.9%. . . . . . . . . $ 1,969,957 $ 1,510,294
Unsecured notes payable under revolving credit agreements . . . 190,820 259,050
Obligations under capital leases . . . . . . . . . . . . . . . . 33,458 33,458
Industrial revenue bonds payable to 2015 at 1.1% to 3.2% . . . . 7,813 7,904
------------ -------------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,202,048 $ 1,810,706
============ =============
As of June 30, 2004, we had a $400 million unsecured revolving credit
facility that matures in November 2006, of which $175.0 million was
outstanding. At June 30, 2004, the variable interest rate of the $400
million revolving credit facility was 1.5%. At June 30, 2004, we had $15.8
million outstanding under a $20 million revolving credit agreement at a
variable interest rate of 1.6%.
For the three months ended June 30, 2004, we issued an additional $175
million of unsecured fixed-rate medium term notes with a weighted average
life of 8.6 years at a weighted average interest rate of 5.3%, net of the
effect of related interest rate swaps. Proceeds received were used to pay
down amounts outstanding under our $400 million revolving credit facility.
8
Our debt can be summarized as follows (in thousands):
June 30, December 31,
2004 2003
------------ -----------
As to interest rate (including the effects of
interest rate swaps):
Fixed-rate debt . . . . . . . . . . . $ 1,853,878 $ 1,458,792
Variable-rate debt. . . . . . . . . . 348,170 351,914
------------ ------------
Total . . . . . . . . . . . . . . $ 2,202,048 $ 1,810,706
============ ============
As to collateralization:
Unsecured debt. . . . . . . . . . . . $ 1,507,611 $ 1,216,998
Secured debt. . . . . . . . . . . . . 694,437 593,708
------------ ------------
Total . . . . . . . . . . . . . . $ 2,202,048 $ 1,810,706
============ ============
Various debt agreements contain restrictive covenants, the most restrictive
of which requires us to maintain a pool of qualifying assets, as defined,
of not less than 160% of unsecured debt. Other restrictions include a
minimum interest coverage ratio of 2.25, a minimum fixed charge coverage
ratio of 1.75, a minimum net worth requirement, and both secured and total
debt to total asset value ratio limited to 30% and 55%, respectively.
Management believes that we are in compliance with all restrictive
covenants.
8. PREFERRED SHARES SUBJECT TO MANDATORY REDEMPTION
In 2003, we adopted SFAS No. 150 "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS No.
150 requires that certain financial instruments that incorporate an
obligation by the issuer to transfer assets or issue equity be reported as
liabilities. Financial instruments that fall within the scope of SFAS No.
150 include equity shares and non-controlling interests in subsidiaries
that are mandatorily redeemable. Our 7.0% Series C Cumulative Redeemable
Preferred Shares fell within the scope of SFAS No. 150, since they were
mandatorily redeemable and redemption was through transfer of cash or a
variable number of our common shares. These shares were redeemed on April
1, 2004.
Preferred Shares Subject to Mandatory Redemption reported at December 31,
2003 of $109.4 million represents the redemption value, net of unamortized
issuance costs totaling $3.6 million, of the 7.0% Series C Cumulative
Redeemable Preferred Shares. These shares were redeemed on April 1, 2004
resulting in the recognition of $3.6 million of unamortized issuance costs
as a loss on early redemption of preferred shares in arriving at Operating
Income.
9
9. PROPERTY
Our property consists of the following (in thousands):
June 30, December 31,
2004 2003
------------ --------------
Land. . . . . . . . . . . . . . . . $ 677,193 $ 603,972
Land held for development . . . . . 19,563 21,112
Land under development. . . . . . . 24,989 22,459
Buildings and improvements. . . . . 2,806,130 2,483,414
Construction in-progress. . . . . . 80,933 69,134
------------ --------------
Total . . . . . . . . . $ 3,608,808 $ 3,200,091
============ ==============
Interest and ad valorem taxes capitalized to land under development or
buildings under construction was $1.6 million and $1.8 million for the
quarters ended June 30, 2004 and 2003, respectively, and $3.2 million and
$3.9 million for the six months ended June 30, 2004 and 2003, respectively.
Acquisitions of properties are accounted for utilizing the purchase method
(as set forth in SFAS No. 141 and SFAS No. 142) and, accordingly, the
results of operations are included in our results of operations from the
respective dates of acquisition. We have used estimates of future cash
flows and other valuation techniques to allocate the purchase price of
acquired property among land, buildings on an "as if vacant" basis, and
other identifiable intangibles. Other identifiable intangibles include the
effect of out-of-market leases, the value of having leases in place and
out-of-market assumed mortgages. At June 30, 2004, deferred charges of $7.6
million for above-market leases are included in Other Assets, deferred
credits of $7.2 million for below-market leases and $29.6 million for
out-of-market assumed mortgages are included in Other Liabilities and
deferred charges of $22.6 million for lease origination costs are included
in Unamortized Debt and Lease Costs. These identifiable debit and credit
intangibles are amortized over the terms of the acquired leases or the
remaining lives of the mortgages.
During the first six months of 2004, we invested a total of $365.5 million
in the acquisition of consolidated operating properties. Of this, $363.4
million was invested in ten shopping centers as well as the purchase of our
partners' interest in four of our existing centers, and $2.1 million was
invested in one industrial project. An additional $24.5 million was
invested in four shopping centers, each through a new 50%-owned
unconsolidated joint venture as discussed in Note 10.
With respect to new development, we have ten shopping centers in various
stages of development in Arizona, Louisiana, Nevada, Texas and Utah, and we
anticipate that the majority of them will come on-line during the remainder
of 2004 and into 2005. Two projects in Texas and one in Colorado were
completed as of June 30, 2004.
In the second quarter of 2004, an impairment loss of $2.7 million was
recognized on a parcel of land held for development located in Houston,
Texas. During the second quarter of 2004, we determined that it was
probable that we would sell a portion of this land to a third party.
Accordingly, we revised the estimated holding period for this asset as well
as the estimates of future cash flows to be generated from the property,
resulting in the impairment loss.
10
10. INVESTMENTS IN REAL ESTATE JOINT VENTURES
We own interests in joint ventures or limited partnerships in which we do
not exercise financial and operating control. These partnerships are
accounted for under the equity method since we exercise significant
influence. Our interests in these joint ventures and limited partnerships
range from 20% to 75% and, with the exception of one partnership, which
owns seven industrial properties, each venture owns a single real estate
asset. Combined condensed unaudited financial information of these ventures
(at 100%) is summarized as follows (in thousands):
June 30, December 31,
2004 2003
---------- ------------
Combined Balance Sheets
Property. . . . . . . . . . . . $ 223,362 $ 229,285
Accumulated depreciation. . . . (22,288) (26,845)
---------- ------------
Property - net. . . . . . . 201,074 202,440
Other assets. . . . . . . . . . 14,359 15,088
---------- ------------
Total . . . . . . . $ 215,433 $ 217,528
=========== ============
Debt. . . . . . . . . . . . . . $ 66,258 $ 92,839
Amounts payable to WRI. . . . . 40,388 35,062
Other liabilities . . . . . . . 5,266 4,729
Accumulated equity. . . . . . . 103,521 84,898
---------- ------------
Total . . . . . . . $ 215,433 $ 217,528
=========== ============
Combined Statements of Income
Three Months Ended Six Months Ended
June 30, June 30,
------------------- ---------------------
2004 2003 2004 2003
-------- -------- -------- ---------
Revenues. . . . . . . . . . . . . . $ 8,039 $ 5,815 $ 15,705 $ 11,957
-------- -------- -------- ---------
Expenses:
Depreciation and amortization . . 1,592 1,152 3,151 2,210
Operating . . . . . . . . . . . . 1,029 861 2,146 1,639
Interest. . . . . . . . . . . . . 1,456 1,486 3,455 3,004
Ad valorem taxes. . . . . . . . . 942 799 1,934 1,581
General and administrative. . . . 43 18 107 56
-------- -------- -------- ---------
Total . . . . . . . . . 5,062 4,316 10,793 8,490
-------- -------- -------- ---------
Net Income. . . . . . . . . . . . . $ 2,977 $ 1,499 $ 4,912 $ 3,467
======== ======== ========= =========
Our investment in real estate joint ventures, as reported on the balance
sheets, differs from our proportionate share of the joint ventures'
underlying net assets due to basis differentials, which arose upon the
transfer of assets from us to the joint ventures. This basis differential,
which totaled $5.0 million and $4.8 million at June 30, 2004 and December
31, 2003, respectively, is depreciated over the useful lives of the related
assets.
11
Fees earned by us for the management of these joint ventures totaled $.1
million for the quarters ended June 30, 2004 and 2003, respectively, and
$.3 million for the six months ended June 30, 2004 and 2003, respectively.
In April 2004, we acquired our joint venture partners' interest in four of
our existing shopping centers, of which three are located in Texas and one
in New Mexico.
Also, in April 2004, three 50%-owned unconsolidated joint ventures acquired
an interest in three retail properties located in McAllen, Texas. Las
Tiendas Plaza, a 499,900 square foot center, is anchored by Target and
Mervyn's (both corporately-owned), as well as Ross Dress for Less,
Marshall's and Office Depot. Northcross is a 76,500 square foot center and
is anchored by Barnes & Noble and Blockbuster. The third property is HEB
South 10th Street, which is anchored by an HEB supermarket.
In June 2004, a 50%-owned unconsolidated joint venture acquired an interest
in a retail property located in Fenton, Missouri. Western Plaza is a 56,000
square foot center, which is anchored by Big Lots.
11. SEGMENT INFORMATION
The operating segments presented are the segments for which separate
financial information is available and operating performance is evaluated
regularly by senior management in deciding how to allocate resources and in
assessing performance. We evaluate the performance of our operating
segments based on net operating income that is defined as total revenues
less operating expenses and ad valorem taxes. Management does not consider
the effect of gains or losses from the sale of property in evaluating
ongoing operating performance.
The shopping center segment is engaged in the acquisition, development and
management of real estate, primarily neighborhood and community shopping
centers, located in Texas, California, Louisiana, Arizona, Nevada,
Arkansas, New Mexico, Oklahoma, Tennessee, Kansas, Colorado, Missouri,
Illinois, Florida, North Carolina, Mississippi, Georgia, Utah, Kentucky and
Maine. 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 currently located in Texas, Nevada, Georgia, Florida,
California and Tennessee, and the customer base is diverse. Included in
"Other" are corporate-related items, insignificant operations and costs
that are not allocated to the reportable segments.
12
Information concerning our reportable segments is as follows (in
thousands):
SHOPPING
CENTER INDUSTRIAL OTHER TOTAL
------------ ---------- --------- ------------
Three Months Ended
June 30, 2004:
Revenues . . . . . . . . . . . . . . . . . . . $ 111,772 $ 11,675 $ 305 $ 123,752
Net operating income . . . . . . . . . . . . . 81,978 8,185 6 90,169
Equity in earnings of joint ventures . . . . . 1,764 69 (182) 1,651
Investment in real estate joint ventures . . . 47,901 581 457 48,939
Total assets . . . . . . . . . . . . . . . . . 2,772,805 296,030 279,191 3,348,026
Three Months Ended
June 30, 2003:
Revenues . . . . . . . . . . . . . . . . . . . $ 91,601 $ 9,909 $ 484 $ 101,994
Net operating income . . . . . . . . . . . . . 67,163 7,271 175 74,609
Equity in earnings of joint ventures . . . . . 1,003 13 (18) 998
Investment in real estate joint ventures . . . 28,260 200 28,460
Total assets . . . . . . . . . . . . . . . . . 2,163,861 235,838 176,100 2,575,799
Six Months Ended
June 30, 2004:
Revenues . . . . . . . . . . . . . . . . . . . $ 216,518 $ 23,266 $ 999 $ 240,783
Net operating income . . . . . . . . . . . . . 158,830 16,433 414 175,677
Equity in earnings of joint ventures . . . . . 3,006 104 (173) 2,937
Six Months Ended
June 30, 2003:
Revenues . . . . . . . . . . . . . . . . . . . $ 178,245 $ 19,619 $ 976 $ 198,840
Net operating income . . . . . . . . . . . . . 131,712 14,158 323 146,193
Equity in earnings of joint ventures . . . . . 1,980 105 (49) 2,036
Net operating income reconciles to income before discontinued operations as
shown on the Statements of Consolidated Income and Comprehensive Income as
follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ------------------------
2004 2003 2004 2003
--------- --------- ---------- -----------
Total segment net operating income. . . . . . . . . . . $ 90,169 $ 74,609 $ 175,677 $ 146,193
Less:
Depreciation and amortization. . . . . . . . . . . 29,215 22,312 55,707 43,195
Interest . . . . . . . . . . . . . . . . . . . . . 28,140 21,036 55,873 40,475
General and administrative . . . . . . . . . . . . 3,936 3,414 7,962 6,471
Loss on early redemption of preferred shares . . . 3,566 3,566
Income allocated to minority interests . . . . . . 975 837 1,854 1,732
Impairment loss on land held for development . . . 2,700 2,700
Equity in earnings of joint ventures . . . . . . . (1,651) (998) (2,937) (2,036)
Gain (loss) on sale of properties. . . . . . . . . (102) 17 (419) 8
--------- --------- ---------- -----------
Income Before Discontinued Operations . . . . . . . . . $ 23,390 $ 27,991 $ 51,371 $ 56,348
========= ========= ========== ===========
13
12. COMMON SHARES OF BENEFICIAL INTEREST
In February 2004, a three-for-two share split, effected in the form of a
50% share dividend, was declared for shareholders of record on March 16,
2004, payable March 30, 2004. We issued 28.5 million common shares of
beneficial interest as a result of the share split. All references to the
number of shares and per share amounts have been restated to reflect the
share split, and an amount equal to the par value of the number of common
shares issued have been reclassified to common shares of beneficial
interest from accumulated dividends in excess of net income.
In March 2004, we issued an additional 3.6 million common shares of
beneficial interest. Net proceeds to us totaled $118.0 million based on a
price of $33.64 per share. The proceeds from this offering were used
primarily to redeem our 7.0% Series C Cumulative Redeemable Preferred
Shares on April 1, 2004.
13. PREFERRED SHARES
In May 2003, we redeemed $75 million of 7.44% Series A Cumulative
Redeemable Preferred Shares. The redemption was financed through the
issuance of $75 million of depositary shares in April 2003. Each depositary
share represents one-thirtieth of a Series D Cumulative Redeemable
Preferred Share. The depositary shares are redeemable, in whole or in part,
for cash on or after April 30, 2008 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 D preferred shares pay a 6.75%
annual dividend and have a liquidation value of $750 per share.
On July 8, 2004, we issued $72.5 million of depositary shares. Each
depositary share represents one-hundredth of a Series E Cumulative
Redeemable Preferred Share. The depositary shares are redeemable, in whole
or in part, for cash at our election on or after July 8, 2009, 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. Net proceeds of $70.2 million were utilized to pay
down amounts outstanding under our $400 million revolving credit facility.
14. EMPLOYEE BENEFIT PLANS
In December 2003, FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirements Benefits" as amended. SFAS No. 132
revises employers' disclosures about pension plans and other postretirement
benefit plans to include disclosures of the amount of net periodic benefit
cost and the total amount of employers' contributions made.
The components of net periodic benefit cost are as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2004 2003 2004 2003
-------- ------- ------- --------
Service cost . . . . . . . . . . . . $ 151 $ 114 $ 302 $ 162
Interest cost. . . . . . . . . . . . 259 195 518 277
Expected return on plan assets . . . (240) (181) (480) (257)
Prior service cost . . . . . . . . . (38) (29) (76) (41)
Recognized loss. . . . . . . . . . . 67 50 134 71
-------- ------- ------- --------
Total . . . . . . . . . . . . . $ 199 $ 149 $ 398 $ 212
======== ======= ======= ========
We contributed $850,000 to the plan in the second quarter of 2004. We will
make no additional payments in 2004.
14
15. BANKRUPTCY REMOTE PROPERTIES
We had 48 properties, having a net book value of approximately $866.7
million at June 30, 2004 (collectively the "Bankruptcy Remote Properties",
and each a "Bankruptcy Remote Property"), which are wholly owned by various
"Bankruptcy Remote Entities". Each Bankruptcy Remote Entity is either a
direct or an indirect subsidiary of us. The assets of each Bankruptcy
Remote Entity, including the respective Bankruptcy Remote Property or
Properties owned by each, are owned by that Bankruptcy Remote Entity alone
and are not available to satisfy claims that any creditor may have against
us, our affiliates, or any other person or entity. No Bankruptcy Remote
Entity has agreed to pay or make its assets available to pay our creditors,
any of its affiliates, or any other person or entity. Neither we nor any of
our affiliates have agreed to pay or make its assets available to pay
creditors of any Bankruptcy Remote Entity (other than any agreement by a
Bankruptcy Remote Entity to pay its own creditors). No affiliate of any
Bankruptcy Remote Entity has agreed to pay or make its assets available to
pay creditors of any other Bankruptcy Remote Entity.
The accounts of the Bankruptcy Remote Entities are included in our
consolidated financial statements because we exercise financial and
operating control over each of these entities.
16. SUBSEQUENT EVENT
At June 30, 2004, we had mortgage bonds and notes receivable from WRI
Holdings, Inc. of $2.8 million, net of deferred gain of $3.0 million.
Unimproved land collateralized these receivables. We shared certain
directors and were under common management with WRI Holdings. On July 20,
2004, the shareholders of WRI Holdings adopted a Plan of Dissolution and
transferred 9.7 acres of land in Conroe, Texas, WRI Holdings' only
remaining asset, to us in satisfaction of its obligations under the bonds
and notes. The land will be recorded at the net carrying value of the
mortgage bonds and notes. The estimated fair market value of the land is in
excess of this carrying value.
*****
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and notes thereto and the comparative summary of selected
financial data appearing elsewhere in this Form 10-Q. Historical results and
trends which might appear should not be taken as indicative of future
operations. Our results of operations and financial condition, as reflected in
the accompanying statements and related footnotes, are subject to management's
evaluation and interpretation of business conditions, retailer performance,
changing capital market conditions and other factors which could affect the
ongoing viability of our tenants.
EXECUTIVE OVERVIEW
We focus on increasing Funds from Operations and dividend payments to our common
shareholders through hands-on leasing and management of the existing portfolio
of properties and through disciplined growth from selective acquisitions and new
developments. We are also committed to maintaining a conservative balance
sheet, a well-staggered debt maturity schedule and strong credit agency ratings.
At June 30, 2004, we owned or operated under long-term leases, either directly
or through our interests in joint ventures, 338 developed income-producing
properties and two properties that are currently under development, which are
located in 20 states that span the southern half of the United States from coast
to coast. Included in the portfolio are 278 shopping centers and 62 industrial
properties. We have approximately 6,800 leases and 5,000 different tenants.
Leases for our properties range from less than a year for smaller spaces to over
25 years for larger tenants. Leases generally include minimum lease payments
that often increase over the lease term, reimbursements of property operating
expenses, including ad valorem taxes, and additional rent payments based on a
percentage of the tenants' sales. The majority of our anchor tenants are
supermarkets, value-oriented apparel/discount stores and other retailers or
service providers who generally sell basic necessity-type goods and services.
The stability of our anchor tenants, combined with convenient locations,
attractive and well-maintained properties, high quality retailers and a strong
tenant mix, should ensure the long-term success of our merchants and the
viability of our portfolio. As of June 30, 2004, no single tenant accounted for
more than 2.8% of total rental revenues.
In assessing the performance of our properties, management carefully tracks the
occupancy of our portfolio. Occupancy for the total portfolio was 94.2% at June
30, 2004 compared to 92.2% at June 30, 2003. Another important indicator of
performance is the increase in rental rates on a same-space basis as we complete
new leases and renew existing leases. We completed 618 new leases or renewals
in the first six months of 2004 totaling 2.6 million square feet, increasing
rental rates an average of 6.2% on a same-space basis. Net of capital costs,
the average increase in rental rates was 3.4%.
With respect to external growth through acquisitions and new developments,
management closely monitors movements in returns relative to our blended
weighted average cost of capital, the amount of product in our acquisition and
new development pipelines and the geographic areas where opportunities are
present. We purchased ten shopping centers and one industrial project during
the first half of 2004. Also, we acquired four shopping centers, each through a
50% unconsolidated joint venture, and acquired our joint venture partners'
interest in four existing centers. These transactions added 2.6 million square
feet to our portfolio and represent a total investment of $390.0 million. These
purchases included two each in North Carolina, Florida and California, four in
Texas, three in Georgia and one each in Missouri and Kentucky. Kentucky
represents the 20th state in which we operate, and was a logical expansion given
our geographic footprint in the southern half of the United States.
Our new development activity includes two projects in Texas and one project in
Colorado that were completed as of June 30, 2004 adding 92,000 square feet to
our portfolio with an investment of $10.5 million. These properties are 89.6%
leased.
Our new development activity also includes ten shopping centers in various
stages of development in Arizona, Louisiana, Nevada, Texas and Utah. We
anticipate that the majority of these projects will come on-line during the
remainder of 2004 and into 2005.
Management is also committed to maintaining a strong, conservative capital
structure, which provides constant access to a variety of capital sources. The
strength of our balance sheet is evidenced by unsecured debt ratings of "A" by
16
Standard and Poor's and "A3" by Moody's rating services, the highest combined
ratings of any public REIT. We carefully balance obtaining low cost financing
with minimizing exposure to interest rate movements, matching long-term
liabilities with the long-term assets acquired or developed and maintaining
adequate debt to market capitalization, fixed charge coverage and other ratios
as necessary to retain our current credit ratings. In executing this strategy,
we redeemed our Series C Cumulative Redeemable Preferred Shares on April 1, 2004
and issued 3.6 million common shares of beneficial interest. We also issued
$200 million of ten-year unsecured fixed-rate medium term notes during the first
quarter of 2004 at a weighted average rate of 5.2%, net of the effect of related
interest rate swaps. In the second quarter of 2004, an additional $175 million
of unsecured fixed-rate medium term notes were issued with a weighted average
life of 8.6 years at a weighted average interest rate of 5.3%, net of the effect
of related interest rate swaps.
On July 8, 2004, we issued $72.5 million of depositary shares. Each depositary
share represents one-hundredth of a Series E Cumulative Redeemable Preferred
Share. The depositary shares are redeemable, in whole or in part, for cash at
our election on or after July 8, 2009, 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. Net proceeds of $70.2 million were
utilized to pay down amounts outstanding under our $400 million revolving credit
facility.
SUMMARY OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of financial condition and results of operations is
based on our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities
and contingencies as of the date of the financial statements and the reported
amounts of revenues and expenses during the reporting periods. We evaluate our
assumptions and estimates on an on-going basis. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our consolidated financial statements.
Valuation of Receivables
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 credit worthiness and current economic
trends. Balances outstanding include base rents, tenant reimbursements and
receivables attributable to the straight-lining of rental commitments.
Additionally, estimates of the expected recovery of pre-petition and
post-petition claims with respect to tenants in bankruptcy is considered in
assessing the collectibility of the related receivables.
Property
Real estate assets are stated at cost less accumulated depreciation, which, in
the opinion of management, is not in excess of the individual property's
estimated undiscounted future cash flows, including estimated proceeds from
disposition. Depreciation is computed using the straight-line method, generally
over estimated useful lives of 18-50 years for buildings and 10-20 years for
parking lot surfacing and equipment. Major replacements where the improvement
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.
Upon acquisitions of real estate, we assess the fair value of acquired assets
(including land, buildings on an "as if vacant" basis, acquired out-of-market
and in-place leases, and tenant relationships) and acquired liabilities, and
allocate the purchase price based on these assessments. We assess fair value
based on estimated cash flow projections that utilize appropriate discount and
capitalization rates and available market information. Estimates of future cash
flows are based on a number of factors including the historical operating
results, known trends, and specific market/economic conditions that may affect
the property.
17
Property also includes costs incurred in the development of new operating
properties. 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 benefits,
travel and other related costs that are clearly 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.
Our properties are reviewed for impairment if events or changes in circumstances
indicate that the carrying amount of the property 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. Such carrying amount would be
adjusted, if necessary, to estimated fair value to reflect an impairment in the
value of the asset. In the second quarter of 2004, we recognized a $2.7
impairment charge on a parcel of land held for development located in Houston,
Texas.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003
Revenues
Total revenues increased by $21.8 million or 21.4% in 2004 ($123.8 million in
2004 versus $102.0 million in 2003). This increase resulted primarily from the
increase in rental revenues of $22.4 million. Property acquisitions and new
development activity contributed $20.4 million of the rental income increase
with the remainder of $2.0 million due to the activity at our existing
properties, based on factors described below.
Occupancy (leased space) of the total portfolio increased as compared to the
prior year as follows:
JUNE 30,
----------------
2004 2003
------ ------
Shopping Centers . . . 94.7% 92.6%
Industrial . . . . . . 92.7% 91.0%
Total. . . . . . . . . 94.2% 92.2%
In the second quarter of 2004, we completed 354 renewals and new leases
comprising 1.6 million square feet at an average rental rate increase of 4.7%.
Net of the amortized portion of capital costs for tenant improvements, the
increase averaged 1.4%.
Expenses
Total expenses increased by $24.3 million or 32.8% in 2004 ($98.4 million in
2004 versus $74.1 million in 2003).
The increases in 2004 for depreciation and amortization expense ($6.9 million),
operating expenses ($2.8 million) and ad valorem taxes ($3.4 million) are
primarily a result of growth in the portfolio due to properties acquired and
developed. Overall, direct operating costs and expenses (operating and ad
valorem tax expense) of operating our properties as a percentage of rental
revenues were 27% in both 2004 and 2003.
Interest expense as reported represents primarily the gross interest expense on
our indebtedness less interest that is capitalized for properties under
development and over-market interest adjustments on mortgages assumed through
acquisitions. Interest expense as reported in 2004 increased by $7.1 million,
which is due primarily to an increase in gross interest expense offset by a
higher benefit from over-market interest adjustments. Gross interest expense
increased by $8.2 million in 2004 due to an increase in the average debt
outstanding from $1.4 billion in 2003 to $2.1 billion in 2004. This was offset
by a decrease in the weighted-average interest rate between the two periods from
6.3% in 2003 to 5.9% in 2004. The interest benefit from our over-market
mortgage adjustment increased from zero in 2003 to $1.2 million in 2004.
18
General and administrative expenses increased by $.5 million or 14.7% in 2004
($3.9 million in 2004 versus $3.4 million in 2003). This increase results
primarily from normal compensation increases as well as increases in staffing
necessitated by the growth in the portfolio. General and administrative expense
as a percentage of rental revenues was 3% in both 2004 and 2003.
Loss on early redemption of preferred shares of $3.6 million represents the
unamortized original issuance costs related to the Series C Cumulative
Redeemable Preferred Shares redeemed in April 2004.
Other
Equity in earnings of joint ventures increased by $.7 million or 70.0% ($1.7
million in 2004 versus $1.0 million in 2003). This increase is due primarily to
the acquisition of four retail properties, each through a 50%-owned
unconsolidated joint venture.
Impairment loss on land held for development represents the $2.7 million charge
related to a parcel of land held for development in Houston, Texas. During the
second quarter of 2004, we determined that it was probable that we would sell a
portion of this land to a third party. Accordingly, we revised the estimated
holding period for this asset as well as the estimates of future cash flows to
be generated from the property, resulting in the impairment loss.
Income from discontinued operations increased $13.3 million in 2004 ($13.8
million in 2004 versus $.5 million in 2003). Included in this caption for 2004
are the operating results and gain from disposition of two retail properties
totaling 271,000 square feet of gross leasable area. Included in this caption
for 2003 are the operating results of properties disposed in 2004 and 2003 as
well as any gain or loss on dispositions during the three months ended June 30,
2003.
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE
30, 2003
Revenues
Total revenues increased by $42.0 million or 21.1% in 2004 ($240.8 million in
2004 versus $198.8 million in 2003). This increase resulted primarily from the
increase in rental revenues of $42.0 million. Property acquisitions and new
development activity contributed $38.1 million of the rental income increase
with the remainder of $3.9 million due to the activity at our existing
properties, based on factors described below.
Occupancy (leased space) of the total portfolio increased as compared to the
prior year as follows:
JUNE 30,
----------------
2004 2003
------ ------
Shopping Centers . . . 94.7% 92.6%
Industrial . . . . . . 92.7% 91.0%
Total. . . . . . . . . 94.2% 92.2%
In 2004, we completed 618 renewals and new leases comprising 2.6 million square
feet at an average rental rate increase of 6.2%. Net of the amortized portion
of capital costs for tenant improvements, the increase averaged 3.4%.
Expenses
Total expenses increased by $45.4 million or 31.8% in 2004 ($188.2 million in
2004 versus $142.8 million in 2003).
The increases in 2004 for depreciation and amortization expense ($12.5 million),
operating expenses ($6.0 million) and ad valorem taxes ($6.5 million) are
primarily a result of growth in the portfolio due to properties acquired and
developed. Overall, direct operating costs and expenses (operating and ad
valorem tax expense) of operating our properties as a percentage of rental
revenues were 27% in both 2004 and 2003.
19
Interest expense as reported represents primarily the gross interest expense on
our indebtedness and the interest associated with our preferred shares less
interest that is capitalized for properties under development and over-market
interest adjustments on mortgages assumed through acquisitions. Interest
expense as reported in 2004 increased by $15.4 million due primarily to an
increase in gross interest expense on our indebtedness and the interest
associated with our mandatorily redeemable preferred shares, offset by a higher
benefit from over-market interest adjustments. Gross interest expense increased
by $15.1 million in 2004 due to an increase in the average debt outstanding from
$1.4 billion in 2003 to $2.0 billion in 2004. This was offset by a decrease in
the weighted-average interest rate between the two periods from 6.3% in 2003 to
6.0% in 2004. As a result of the adoption of SFAS No. 150, dividends paid or
accrued on our Series C Preferred Shares are reported as interest expense,
causing interest expense to increase by $2.0 million. The interest benefit from
our over-market mortgage adjustment increased from zero in 2003 to $2.3 million
in 2004.
General and administrative expenses increased by $1.5 million or 23.1% in 2004
($8.0 million in 2004 versus $6.5 million in 2003). This increase results
primarily from normal compensation increases as well as increases in staffing
necessitated by the growth in the portfolio. General and administrative expense
as a percentage of rental revenues was 3% in both 2004 and 2003.
Loss on early redemption of preferred shares of $3.6 million represents the
unamortized original issuance costs related to the Series C Cumulative
Redeemable Preferred Shares redeemed in April 2004.
Other
Equity in earnings of joint ventures increased by $.9 million or 45.0% ($2.9
million in 2004 versus $2.0 million in 2003). This increase is due primarily to
the acquisition of four retail properties, each through a 50%-owned
unconsolidated joint venture.
Impairment loss on land held for development represents the $2.7 million charge
related to a parcel of land held for development in Houston, Texas. During the
second quarter of 2004, we determined that it was probable that we would sell a
portion of this land to a third party. Accordingly, we revised the estimated
holding period for this asset as well as the estimates of future cash flows to
be generated from the property, resulting in the impairment loss.
Income from discontinued operations increased $12.2 million in 2004 ($14.2
million in 2004 from $2.0 million in 2003). Included in this caption for 2004
are the operating results and gain from disposition of two retail properties
totaling 271,000 square feet of gross leasable area. Included in this caption
for 2003 are the operating results of properties disposed in 2004 and 2003 as
well as any gain or loss on dispositions during the first six months of 2003.
CAPITAL RESOURCES AND LIQUIDITY
We anticipate that cash flows from operating activities will continue to provide
adequate capital for all dividend payments in accordance with REIT requirements.
Cash on hand, internally-generated cash flow, borrowings under our existing
credit facilities, issuance of secured and unsecured debt, as well as other debt
and equity alternatives, should provide the necessary capital to maintain and
operate our properties, refinance debt maturities and achieve planned growth,
which together with our dividend payments, are our primary liquidity needs. We
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 swaps with
major financial institutions. We generally have the right to sell or otherwise
dispose of our assets except in certain cases where we are required to obtain a
third party consent, such as for assets held in entities in which we have less
than 100% ownership.
Investing Activities - Acquisitions
During the first six months of 2004, we invested $365.5 million in the
acquisition of operating properties of which $363.4 million was invested in ten
shopping centers as well as the purchase of our partners' interest in four of
our existing centers, and $2.1 million was invested in one industrial project.
We invested an additional $24.5 million in four retail properties, each through
a 50%-owned unconsolidated joint venture. These combined acquisitions added 2.6
million square feet to our portfolio.
In January 2004, we acquired three supermarket-anchored shopping centers.
Greenhouse Marketplace located in San Leandro, California; Leesville Town Centre
located in Raleigh, North Carolina and Harrison Pointe Center located in Cary,
20
North Carolina, a suburb of Raleigh. All of these acquisitions were acquired in
limited partnerships utilizing a DownREIT structure and are included in our
consolidated financial statements because we exercise financial and operating
control.
In March 2004, we completed the acquisition of a portfolio of four shopping
centers; First Colony Commons located in Sugar Land, Texas, a suburb of Houston;
T.J. Maxx Plaza located in Kendall, Florida, a suburb of Miami; Largo Mall
located near St. Petersburg, Florida and Tates Creek located in Lexington,
Kentucky.
In April 2004, three 50%-owned unconsolidated joint ventures acquired an
interest in three retail properties located in McAllen, Texas. Las Tiendas
Plaza, a 499,900 square foot center, is anchored by Target and Mervyn's (both
corporately-owned), as well as Ross Dress for Less, Marshall's and Office Depot.
Northcross is a 76,500 square foot center and is anchored by Barnes & Noble and
Blockbuster. The third property is HEB South 10th Street, which is anchored by
an HEB supermarket. In April 2004, we also acquired our joint venture partners'
interests in four of our existing shopping centers, of which three are located
in Texas and one in New Mexico.
In May 2004, we acquired an industrial project and two retail centers.
Southside Industrial Parkway is a 72,000 square foot industrial center located
in Atlanta, Georgia. El Camino Promenade is an 111,000 square foot shopping
center that is anchored by TJ Maxx, AMC Theater and Beverages & More, and is
located in Encinitas, California. Village Shoppes of Sugarloaf is a 148,000
square foot shopping center, which is located in Lawrenceville, Georgia, a
suburb of Atlanta. Publix anchors this retail center.
In June 2004, we acquired Roswell Corners, a 137,000 square foot shopping
center, which is located in Roswell, Georgia and is anchored by Staples, TJ Maxx
and Super Target (corporately-owned). In June 2004, we also acquired an interest
in a retail property through a 50%-owned unconsolidated joint venture. Western
Plaza is a 56,000 square foot center, which is anchored by Big Lots and located
in Fenton, Missouri.
Investing Activities - New Development and Capital Expenditures
Our new development activity includes two projects in Texas and one project in
Colorado that were completed as of June 30, 2004 adding 92,000 square feet to
our portfolio with an investment of $10.5 million. These properties are 89.6%
leased. We also have ten shopping centers in various stages of development in
Arizona, Louisiana, Nevada, Texas and Utah. These projects, upon completion,
will represent an investment of approximately $116 million and will add .8
million square feet to the portfolio. We invested $13.5 million in the first
half of 2004 in these properties and expect to invest approximately $9.0 million
during the remainder of 2004. These projects will continue to come on-line
during the remainder of 2004 and into 2005.
Financing Activities - Debt
Total debt outstanding increased to $2.2 billion at June 30, 2004 from $1.8
billion at December 31, 2003. This increase was primarily due to the funding of
acquisitions and ongoing development and redevelopment efforts. Included in
total debt outstanding of $2.2 billion at June 30, 2004 is variable-rate debt of
$348.2 million, after recognizing the net effect of $132.5 million of interest
rate swaps.
In December 2003, we entered into two forward-starting interest rate swaps with
an aggregate notional amount of $97.0 million in anticipation of the issuance of
fixed-rate medium term notes subsequent to year-end. These contracts were
designated as a cash flow hedge of forecasted interest payments for $100 million
of unsecured notes that were ultimately sold in February 2004. Concurrent with
the sale of these notes, we settled our $97.0 million forward-starting interest
rate swap contracts, resulting in a loss of $.9 million, which is being
amortized as a reduction to earnings over the life of the notes. In January
2004, we entered into four additional forward-starting interest rate swaps with
an aggregate notional amount of $194.0 million in anticipation of the issuance
of fixed-rate medium term notes. A medium term note totaling $50 million was
issued in January 2004, at which time one of the four forward-starting interest
rate swaps with a notional amount of $48.5 million was settled at a loss of $.7
million. This $.7 million loss is being amortized as a reduction to earnings
over the life of the related medium term note. An additional medium term note
totaling $50 million was issued in March 2004, at which time the second of the
four forward-starting interest rate swaps with a notional amount of $48.5
million was settled at a loss of $2.7 million. This $2.7 million loss is being
amortized as a reduction to earnings over the life of the related medium term
note. In the second quarter of 2004, the remaining two forward-starting
21
interest rate swaps with an aggregate notional amount of $97 million were
settled concurrent with the issuance of an additional $100 million of notes at a
net loss of $.7 million. This loss will be amortized as a reduction to earnings
over the life of the related medium term notes.
For the three months ended March 31, 2004, we issued a total of $200 million of
ten-year unsecured fixed-rate medium term notes at a weighted average interest
rate of 5.2%, net of the effect of related interest rate swaps. Proceeds
received were used to pay down amounts outstanding under our $400 million
revolving credit facility.
For the three months ended June 30, 2004, we issued an additional $175 million
of unsecured fixed-rate medium term notes with a weighted average life of 8.6
years at a weighted average interest rate of 5.3%, net of the effect of related
interest rate swaps. Proceeds received were used to pay down amounts
outstanding under our $400 million revolving credit facility.
In March 2004, we entered into two interest rate swaps with an aggregate
notional amount of $50 million that convert fixed interest rate payments to
variable interest payments. At June 30, 2004, we have ten interest rate swap
contracts with an aggregate notional amount of $132.5 million that convert fixed
interest payments at rates ranging from 4.2% to 7.4% to variable interest
payments. These contracts have been designated as fair value hedges. 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 June 2004, two interest rate swaps designated as cash flow hedges and
two interest rate swaps designated as fair value hedges expired.
In April 2003, the SEC declared effective our $1 billion shelf registration
statement, of which $330.9 million was available as of June 30, 2004. We will
continue to closely monitor both the debt and equity markets and carefully
consider our available financing alternatives, including both public and private
placements.
Financing Activities - Equity
Our Board of Trust Managers approved a quarterly dividend of $.415 per common
share for the second quarter of 2004. Our dividend payout ratio on common
equity for the second quarter of 2004 and 2003 was 71% and 72%, respectively,
based on funds from operations for the applicable period.
In February 2004, a three-for-two share split, effected in the form of a 50%
share dividend, was declared for shareholders of record on March 16, 2004,
payable March 30, 2004. We issued 28.5 million common shares of beneficial
interest as a result of the share split. All references to the number of shares
and per share amounts have been restated to reflect the share split, and an
amount equal to the par value of the number of common shares issued have been
reclassified to common shares of beneficial interest from accumulated dividends
in excess of net income.
In March 2004, we issued an additional 3.6 million common shares of beneficial
interest. Net proceeds to us totaled $118.0 million based on a price of $33.64
per share. The proceeds from this offering were used primarily to redeem our
7.0% Series C Cumulative Redeemable Preferred Shares on April 1, 2004. The
unamortized original issuance costs of $3.6 million for these shares were
reported as a loss in arriving at Operating Income.
On July 8, 2004, we issued $72.5 million of depositary shares. Each depositary
share represents one-hundredth of a Series E Cumulative Redeemable Preferred
Share. The depositary shares are redeemable, in whole or in part, for cash at
our election on or after July 8, 2009, 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. Net proceeds of $70.2 million were
utilized to pay down amounts outstanding under our $400 million revolving credit
facility.
22
CONTRACTUAL OBLIGATIONS
The following table summarizes our principal contractual obligations as of June
30, 2004 (in thousands):
Remainder
of
2004 2005 2006 2007 2008 Thereafter Total
--------- -------- --------- --------- --------- ----------- ----------
Unsecured Debt: (1)
Medium Term Notes. . . . . . . . . $ 7,100 $ 52,500 $ 37,000 $ 79,000 $ 36,000 $ 908,400 $1,120,000
7% 2011 Bonds. . . . . . . . . . . 200,000 200,000
Revolving Credit Facilities. . . . 15,820 175,000 190,820
Secured Debt . . . . . . . . . . . . . . 37,461 31,589 21,907 20,245 164,540 418,695 694,437
Ground Lease Payments. . . . . . . . . . 811 1,464 1,230 1,059 1,029 25,426 31,019
Obligations to Acquire/
Develop Properties . . . . . . . . . . 15,264 15,264
--------- -------- --------- --------- --------- ----------- ----------
Total Contractual Obligations. . . . . . $ 76,456 $ 85,553 $ 235,137 $ 100,304 $ 201,569 $ 1,552,521 $2,251,540
========= ======== ========= ========= ========= =========== ==========
<FN>
- --------------------------------------------------------------------------------------------------------------
(1) Total unsecured debt obligations as shown above are $3.2 million more than total unsecured debt as
reported due to amortization of the discount on medium term notes and the fair value of interest rate swaps.
As of June 30, 2004 and 2003, we did not have any off-balance sheet
arrangements.
FUNDS FROM OPERATIONS
The National Association of Real Estate Investment Trusts (NAREIT) defines funds
from operations (FFO) as net income (loss) computed in accordance with generally
accepted accounting principles, excluding gains or losses from sales of
property, plus real estate related depreciation and amortization, and after
adjustments for unconsolidated partnerships and joint ventures. In addition,
NAREIT recommends that extraordinary items not be considered in arriving at FFO.
We calculate FFO in a manner consistent with the NAREIT definition. We believe
FFO is an appropriate supplemental measure of operating performance because it
helps investors compare the operating performance to similarly titled measures
of other REITs. There can be no assurance that FFO presented by us is
comparable to similarly titled measures of other REITs. FFO should not be
considered as an alternative to net income or other measurements under GAAP as
an indicator of our operating performance or to cash flows from operating,
investing, or financing activities as a measure of liquidity. FFO does not
reflect working capital changes, cash expenditures for capital improvements or
principal payments on indebtedness.
23
Funds from operations is calculated as follows (in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------- ----------------------
2004 2003 2004 2003
---------- --------- ---------- ---------
Net income available to common shareholders. . . . $ 35,917 $ 21,060 $ 63,060 $ 46,029
Depreciation and amortization. . . . . . . . . . . 27,027 20,786 51,781 40,178
Depreciation and amortization of
unconsolidated joint ventures. . . . . . . . . . 701 463 1,358 897
(Gain) loss on sale of properties. . . . . . . . . (13,508) 115 (13,825) (765)
---------- --------- ---------- ---------
Funds from operations. . . . . . . . 50,137 42,424 102,374 86,339
Funds from operations attributable to
operating partnership units. . . . . . . . . . . 1,508 1,091 2,838 2,355
---------- --------- ---------- ---------
Funds from operations assuming
conversion of OP units . . . . . . $ 51,645 $ 43,515 $ 105,212 $ 88,694
========== ========= ========== =========
Weighted average shares outstanding - basic. . . . 85,598 78,193 84,371 78,165
Effect of dilutive securities:
Share options and awards . . . . . . . . . . 787 771 869 680
Operating partnership units. . . . . . . . . 2,242 2,093 2,211 2,193
---------- --------- ---------- ---------
Weighted average shares outstanding -
diluted. . . . . . . . . . . . . . . . . . . . . 88,627 81,057 87,451 81,038
========== ========= ========== =========
NEWLY ADOPTED ACCOUNTING PRONOUNCEMENTS
In January 2003, FASB issued Interpretation No. 46, "Consolidation of Variable
Interest Entities", which was reissued as Interpretation No. 46R in December
2003. FIN 46R requires a variable interest entity to be consolidated by a
company if that company absorbs a majority of the variable interest entity's
expected losses, receives a majority of the entity's expected residual returns,
or both. It further requires disclosures about variable interest entities that
a company is not required to consolidate, but in which it has a significant
variable interest. We have applied FIN 46R to our joint ventures and concluded
that it did not require consolidation of additional entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We use fixed and floating-rate debt to finance our capital requirements. These
transactions expose us to market risk related to changes in interest rates.
Derivative financial instruments are used to manage a portion of this risk,
primarily interest rate swap agreements with major financial institutions.
These swap agreements expose us to credit risk in the event of non-performance
by the counter-parties to the swaps. We do not engage in the trading of
derivative financial instruments in the normal course of business. At June 30,
2004, we had fixed-rate debt of $1.9 billion and variable-rate debt of $348.2
million, after adjusting for the net effect of $132.5 million of interest rate
swaps.
ITEM 4. DISCLOSURE CONTROLS AND PROCEDURES
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 June 30, 2004. 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 June 30, 2004.
24
There has been no change to our internal control over financial reporting during
the quarter ended June 30, 2004 that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
25
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 A statement of computation of ratios of earnings and
funds from operations to combined fixed charges and
preferred dividends.
31.1 Certification pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002 (Chief Executive Officer).
31.2 Certification pursuant to Section 302(a) of the
Sarbanes-Oxley Act of 2002 (Chief Financial Officer).
32.1 Certification pursuant to 18 U.S.C. Sec. 1350, as
adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act
of 2002 (Chief Executive Officer).
32.2 Certification pursuant to 18 U.S.C. Sec. 1350, as
adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act
of 2002 (Chief Financial Officer).
(b) Reports on Form 8-K
A Form 8-K, dated April 27, 2004, was filed in response to Item
7. Exhibits and Item 12. Results of Operation and Financial
Condition.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WEINGARTEN REALTY INVESTORS
-----------------------------
(Registrant)
BY: /s/ Andrew M. Alexander
-----------------------------------
Andrew M. Alexander
President/Chief Executive Officer
(Principal Executive Officer)
BY: /s/ Joe D. Shafer
-----------------------------------
Joe D. Shafer
Vice President/Controller
(Principal Accounting Officer)
DATE: August 6, 2004
27
EXHIBIT INDEX
EXHIBIT
NUMBER
- -------
12.1 A statement of computation of ratios of earnings and funds from
operations to combined fixed charges and preferred dividends.
31.1 Certification pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002 (Chief Executive Officer).
31.2 Certification pursuant to Section 302(a) of the Sarbanes-Oxley
Act of 2002 (Chief Financial Officer).
32.1 Certification pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant
to Sec. 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive
Officer).
32.2 Certification pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant
to Sec. 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial
Officer).
28